Bitcoin push + pull factors

After a jubilant November post election, crypto moved into a sideways structure from December till now. BTC pierced through the 100K level in early December before making the all-time-high of 108K in mid December. But by late December, BTC was back at around 93K, which is where it is trading currently. Despite that the up and downs constitutes very normal volatility for the crypto asset, we can still dissect the underpinning drivers of volatility as two opposing forces from the bulls and the bears.

On the bullish side, positive fundamental developments such as Trump’s pro-crypto cabinet picks combined with easing monetary conditions led to record BTC ETF inflows. The one-two punch pushed BTC through 100K and higher. However, on the bearish side, which started to rear its head towards the 2nd half of Dec is the increasingly tightening liquidity conditions. This was confirmed by the Fed on Dec 19th. The Federal Reserve cut its benchmark interest rate by 25 basis points but indicated a more conservative approach moving forward, projecting only two additional quarter-point cuts in 2025 compared to previous expectations of four cuts. This was a major shift in market micro-structure. And from a price level, Dec 18-19 marked the local tops of many growth assets such as Nasdaq, BTC, Tesla etc. These opposing bullish and bearish forces will continue to playout throughout 2025 and will create a lot of volatility and corresponding opportunities in the markets.

Looking forward in the short term, Trump’s inauguration on the 20th and subsequent actions will be the most important event in January. We mentioned in our last note that a BTC level between 90-100k is the perfect range before Trump’s inauguration. If the price and expectation is too high, then it’ll inevitably lead to execution disappointments. But if the price is too low then it would indicate lack of interest by the public and politicians may distance themselves away.

Crypto should benefit from Trump’s inauguration, as long as liquidity conditions does not tighten meaningfully. Hence, this Friday’s job numbers is hugely important for short term direction.

The Setup

The current consensus forecast for crypto goes something like this: in 2025 crypto will receive mainstream adoption backed by the President of the United States along with tailwinds of interest rate cuts releasing liquidity into markets that would elevate crypto prices. The price increase will induce FOMO upon retail and trigger inflows of both new users and capital. The new capital would then fund new crypto startups, creating new innovative products, attract new users, and create a positive feedback loop.

It sounds like a nice thesis. A little bit too nice. So if we were to stress test it a little bit, then we would consider the following factors:

Driver 1: Trump’s actual support of crypto: timing is important

• We know from Trump’s last presidency that he usually delivers on his campaign promises so it is with high degree of certainty that he will do positive actions for crypto
• However, crypto market is not patient. If Trump only gets around to it by end of 2025, then it might be too late.
• On the other hand, Trump doesn’t really need to do anything other than keep on promising to do something to keep the market hopeful and engaged
• Bull case: In Trump’s last presidency, he issued 220 executive orders. The most executive orders for a single term since Jimmy Carter. In Trump’s 2nd term, he will probably be even more liberal with executive orders. The most bullish near term action for crypto is the Trump inauguration followed by a executive order to stop selling of the recently confiscated Silk Road BTC of USD6.5bn. This would be inline with Trump’s promise of a Bitcoin Strategic Reserve
• Bear case: We know that Trump has his hands full with deficit ceiling, immigration reform, deregulation, and universal tariffs. These are arguably more important agendas for the United States. The bear case is if Trump is too swamped to deal with crypto for a few month
• News source indicates that DOJ has the approval to sell the US6.5bn of BTC (link). So it’ll be interesting to monitor US Gov’s Silk Road BTC Wallet here to see if it does get moved before Jan 20th

Driver 2: Liquidity

• Fed rate cut expectations have changed dramatically in the past 1 month. The probability of no change in January fed rate has gone from 50%, a month ago, to 94% currently. This is a significant shift in expectations, which had its corresponding impact on rates and dollar strength, draining liquidity from markets causing a turn in growth assets marked by the top created by the Fed announcement on Dec 19th.

• Crypto is impacted by liquidity because 1 it’s a long duration asset and 2 we can see fund flows into ETF is sensitive to global liquidity conditions. As soon as liquidity tightens, there begins outflows from BTC ETFs

• Of course, the tightening liquidity is caused by a renewed fear of rising inflation. But why is the FED so adamant at targeting 2% inflation rate? It was simply an arbitrary number established in 2012, and the world accepted it as is without much questioning, until now. There is a growing chorus of voices in economic circles that argue a 3% inflation target would be even more effective at creating full productivity in the US
• Bull Case: We know that Trump wants higher stock market based on his last presidency. Yet, his policies such as tariffs and immigration restrictions are naturally inflationary, which would trigger tightening of liquidity that would cause asset prices to fall. But is there a way for Trump to have his policies and a higher stock market? The answer is if the Fed increases their inflation target level. This is not a consensus view for 2025, but it’s one of the easiest way for Trump to keep the party going, which would of course be favorable for crypto.
• Bear Case: The bear case is a straight forward one. Inflation goes out of control and Fed has to hike aggressively, squeezing liquidity out of the system

Driver 3: Retail and Corporate Buying

• Retail has been relatively tame compared to the 2021 cycles. This is understandable given that retail was enjoying helicopter money in 2021 due to covid. That’s likely not happening in this cycle. From the funding rate heat chart over the past year, we can see that there is retail FOMO from time to time but it quickly dissipates after some time

• And exchange trading volume also has not reached 2021 levels despite the higher market caps

• However a new major buyer are corporations like Microstrategy and its copycats. Referencing the below chart, Microstrategy has more than doubled it’s holdings of BTC over the past few month. In 2024, MSTR spent USD22 billion on buying BTC. This makes these corporations a much bigger player than retail in this cycle, hence we need to track their actions closely

• Bull case: Microstrategy continues to be able to raise capital to buy Bitcoin. It is also joined by other companies pursuing the same strategy. A positive feedback loop is created where capital is raised to buy BTC, BTC prices goes up, stock price goes up, raise additional capital to buy BTC.
• Bear case: Microstrategy and copy cats see their stock price decline, dampening their ability to buy BTC, and it becomes a negative feedback loop of lower BTC prices causing lower stock prices.

In summary, it’ll be a very volatile year where the above factors will interact with each other and create opportunities for people following closely. For example, if there are no more expectations of rate cuts in January combined with higher chances of a Trump talking point on crypto upon inauguration, then it could create a large price action. We’re waiting for such setups to appear this year very frequently. 

Disclaimer: The content of this post is solely for entertainment and not investment advice. Any views expressed in the below are the personal views of the author and should not form the basis for making investment decisions, nor be construed as a recommendation or advice to engage in investment transactions