A recent report from Pantera Capital said moves in the debt market and the Fed’s shifting monetary policy could be the fodder that fuels Bitcoin’s next monster rally.
There has been a lot of focus on the performance of the stock and cryptocurrency markets over the past year or two as the trillions of dollars that have been printed into existence since the start of the COVID pandemic have driven new all-time highs, but analysts are now increasingly sounding the alarm over warning signs coming from the debt market.
Despite holding interest rates at record low levels, the cracks in the system have become more prominent as yields for U.S. Treasury Bonds “have been rising dramatically” according to markets analyst Dylan LeClair, who posted the following chart showing the rise.
U.S. Treasury bond yields across duration. Source: Twitter
“Since November yields have been rising dramatically — bond investors begun to realize that w/ inflation at 40-year highs, they are sitting in contracts programmed to decline in purchasing power.”
This development marks a first for the U.S. debt markets as noted in the February letter to investors released by Pantera Capital, which stated “there has never been a time in history with year-over-year inflation at 7.5% and Fed funds at ZERO.”
Matters get even worse when looking at real rates, or the interest rate one gest after inflation, which Panteral Capital indicated is “at negative 5.52%, a 50-year low.”
Pantera Capital said,
“The Fed’s manipulation of the U.S. Treasury and mortgage bond market is so extreme that is it now $15 TRILLION overvalued (relative to the 50-year average real rate).”Treasure and mortgage bonds overvaluation. Source: Pantera Capital
At the same time as treasury bond yields have been rising, Bitcoin (BTC) and altcoin prices have steadily fallen, with BTC now down more than 45% since Nov. 10.
BTC/USDT 1-day chart. Source: TradingView
The declines in the crypto market have thus far been highly correlated with the traditional markets as noted by Pantera Capital, but that could soon change as “crypto tends to be correlated with them for a period of roughly 70 days, so a bit over two months, and then it begins to break its correlation.”
According to Pantera’s report,
“And so we think over the next number of weeks, crypto is basically going to decouple from traditional markets and begin to trade on its own again.”
Rising rates will be good for Bitcoin
Despite the weakness seen in BTC since the talk of rising interest rates began, the situation could soon improve according to Pantera Capital, which warned that “10-year interest rates are going to triple — from 1.34% to something like 4%–5%.”
Based on the well known saying to “be fearful when others are greedy, and greedy when others are fearful,” this might be the opportune time to accumulate BTC because its “four-year-on-year return is at the lowest end of its historical range” according to Dan Morehead, CEO of Pantera Capital, who posted the following chart suggesting that Bitcoin “seems cheap” and “doesn’t look overvalued.”
Bitcoin price trend vs. 4-year returns.
“Once people do have a little bit of time to think this through, they’re going to realize that if you look at all the different asset classes, blockchain is the best relative asset class in a rising rate environment.”
When it comes to a timeline to recovery, Morehead suggested that the turnaround could come sooner than many expect and only be a matter of “weeks or a couple of months until we’re rallying very strongly.”
“We are quite bullish on the market, and we think prices are at a relatively inexpensive place.”
The overall cryptocurrency market cap now stands at $1.722 trillion and Bitcoin’s dominance rate is 41.6%.
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