Is the Bear Market Back? Data Says Yes

Research contradicts the consensus opinion that ETFs, the Bitcoin halving, and Fed policy have been driving the asset’s price action.

By: Pedro Solimano Loading...

Bitcoin symbols with fluctuating arrows in neon colors

In 2024, the consensus in crypto is that Bitcoin’s price has been influenced mostly by the emergence of Bitcoin ETFs, the protocol’s halving, and the Fed’s monetary policy, but data shows otherwise.

According to research by André Dragosch, head of research at ETC Group, more than 80% of the asset’s price action can be explained by changes in global growth expectations over the past six months.

Bitcoin Macro Correlation
Bitcoin Macro Correlation

Another key observation Dragosch made is that global crypto hedge funds have reduced their BTC exposure to the lowest level since October 2020. This “significant reduction in net long exposure,” he said, coincides with an acceleration in net outflows from global crypto Exchange Traded Products (ETPs).

For instance, CoinShares reported that outflows from institutions in the past week reached a whopping $600 million. That does come after five consecutive weeks of net purchases by large entities, however.

What’s the bottom line? “Because of increasing macro risks, and U.S. recession risks in particular, Bitcoin and cryptocurrencies might be facing further downside in the short term,” Dragosch told The Defiant.

Macro Outlook Looks Grim

According to Dragosch, the macroeconomic environment doesn’t look compelling.

He explained that, in general, U.S. economic data have continued to underwhelm market expectations, and the market is now catching up with what he calls “this worse reality in macro data.” Dragosch added that the Bloomberg “surprise index,” which measures whether market participants are more optimistic or pessimistic about the real economy than indicated by data is at its lowest point since 2019.

In other words, pessimism is at its highest level in five years.

Bloomberg Economic Surprise Index chart
Bloomberg Economic Surprise Index

Additionally, a report by the U.S. House of Representatives budget committee shows that fears of a looming recession continue to grow as consumer confidence continues to wane for the second month in a row.

The report showed that the Expectations Index—based on consumers’ short-term outlook for income, business, and labor market conditions – is below 80, a level that suggests a recession is ahead.

For riskier assets like cryptocurrencies, this type of sentiment could dampen crypto investors' eagerness to recapture the upward trajectory the market has experienced since Bitcoin ETFs launched on Jan. 11.

Angel investor Jason Choi echoes the bearish sentiment. On June 21, Choi explained on Twitter that his investment firm, Tangent, had liquidated all its ETH positions and had taken a “defensive stance” on the market.

According to Choi, we are back in the early innings of a bear market – which he categorizes as a three-month general downtrend, no new highs, and shrinking volatility – and crypto is “at the mercy of macro influences.”

Others Point Fingers at the Fed

James Butterfill, head of research at CoinShares, disagrees with Dragosch.

Butterfill, who writes a weekly institutional report, told The Defiant that the lack of price appreciation is actually due to the Fed. “It remains stubbornly hawkish” which appears to be offsetting potential gains from inflows, he said. He expects the Fed to cut interest rates by 50 basis points instead of 25. In other words, “the Fed reacting late,” Butterfill said.

Until that happens, and despite all the macro factors that Dragosch points to, there will be a lid kept on Bitcoin prices.

Expect “Chopsolidation”

As the summer months get underway, investors should prepare for mostly sideways volatility, sprinkled with some further downside.

“The ‘chopsolidation’ perfectly dovetails the standard seasonality of BTC: below-average returns during June, July, August and especially September; above-average performance during Q4 towards the end of the year,” said Dragosch.

But even though Dragosch might come off as a bear, he has a positive outlook for the rest of the year. He points to three main reasons: the halving effect, which usually moves the needle around the 100-day mark after it takes place and Donald Trump’s possible re-election. Trump has been unabashedly pro-crypto on the campaign trail, which might translate to an auspicious future for crypto investors.

Lastly, he pointed to the likely continuation of inflows into Bitcoin ETFs and the imminent launch of Ethereum ETFs. Although Dragosch predicts that ETH ETFs will receive just 12.5% of the flows that Bitcoin instruments attracted – he bases his number off Bloomberg ETF expert Eric Balchunas’ predictions – he believes this should also sway the price positively.

Significant Background Selling

While 2024 kicked off to a roaring start, enthusiasm for ETFs has fizzled out, at least in terms of price appreciation.

According to CoinShares, May and June were marked by an important degree of accumulation from large entities. But that hasn’t translated into the type of soaring prices we saw earlier in the year, when Bitcoin reached an all-time high of $73,000, pulling the broader market higher.

Instead, net buying volumes on spot exchanges went negative, which implies significant selling in the background. As data from ETC Group and Glassnode shows, Bitcoin spot intraday buying has gone negative in recent months and has trended to the downside.

BTC Spot Net Volume chart
BTC Spot Net Volume

Butterfill points out that even though large entities have been selling in the short term, likely due to the FOMC, net inflows year-to-date for ETFs remain at historic highs of $15.6 billion. Some of the top Bitcoin ETFs drive the majority of capital flow in the institutions that provide the instrument.

Nonetheless, Dragosch is tentatively bullish. “I am a bit cautious in the short term because of increasing macro risks and declining risk appetite but still very bullish in the medium to long term,” he concluded.