Seismic events often act as catalysts for transitions within the crypto-asset market cycle. The previous cycles, particularly the 2016-2017 and 2020-2021 phases, exhibited unique characteristics driven by different factors. The 2016-2017 cycle witnessed significant industry-driven growth, expanding the reach of cryptocurrencies beyond their early adopters into mainstream financial discussions. This marked a pivotal moment for the crypto market as it began to attract attention from institutional investors and the general public.
Conversely, the 2020-2021 surge was largely fueled by extraordinary monetary policies initiated in response to the COVID-19 pandemic. Central banks around the world implemented unprecedented interest rate cuts and aggressive quantitative easing measures, which drove investors toward alternative assets like cryptocurrencies in search of higher returns.
Currently, we find ourselves at a crossroads with two powerful catalysts converging: the impending 2024 U.S. elections and the emergence of a new global liquidity cycle aimed at risk assets. This combination has the potential to disrupt bitcoin’s trading range, which has remained largely between $58,000 and $70,000 since late March, possibly igniting the next major market movement.
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The 2024 U.S. Elections: A New Chapter for Crypto
The upcoming election cycle is significant for several reasons, particularly how the crypto industry has evolved into a relevant topic in political discourse and campaign financing. The integration of cryptocurrency into political fundraising is a testament to its growing influence. Furthermore, platforms like Polymarket, which is a pioneering crypto application, now offer real-time estimates on election results, with over $1 billion in stakes influencing market perceptions.
The chart below illustrates the relationship between two factors over 3-day periods: changes in Republican win odds on Polymarket and fluctuations in bitcoin prices, which serve as a proxy for overall crypto market performance. Different phases of the election cycle are color-coded for clarity:
Election Phase | Color Code |
---|---|
Initial Phase (before June 26) | Gray |
Republican Momentum (end of June to end of July) | Red |
Democratic Gains (end of July to mid-August) | Blue |
Final Stretch (since mid-August) | Black |
If we were to assume a direct correlation between crypto prices and Republican win odds, we would expect a clear upward trajectory in the data points. Conversely, a direct link to Democratic win odds would likely result in a downward trend. However, the actual data presents a scattered cloud of points, indicating a lack of clear, consistent trends between election outcomes and crypto prices, especially in the highlighted phases.
It’s worth noting that while the relationship is stronger during the Republican momentum phase, it still accounts for less than 20% of bitcoin price movements. This suggests that, although elections play a role in shaping market sentiment, they are not the sole determinants of crypto price action. As we approach Election Day, which is now less than a month away, it is plausible that this relationship may strengthen; however, it also implies that other significant factors are simultaneously at play in influencing market dynamics.
The Interest Rate Outlook: A New Regime for Crypto Prices
Recent shifts in global liquidity have had profound effects on markets across the board, including the crypto sector. The Federal Reserve’s proactive approach to initiating a rate-cut cycle, combined with China’s unexpected market-supporting measures, has likely contributed to the recent upsurge in crypto prices.
Unlike traditional equities, the crypto market lacks a wealth of historical data to analyze returns across varying interest rate environments. Nevertheless, examining the relationship between crypto prices and interest rates remains a vital exercise. The accompanying chart displays the effective federal funds rate alongside Treasury constant-maturity yields ranging from 1-year to 30-year tenors. For context, the lower section of the chart illustrates bitcoin’s USD price (in log scale), with distinct color-coded market cycles: green for the bullish phases of 2016-2017 and 2020-2021, and red for the bearish cycles of 2018 and 2022.
This analysis indicates that a favorable macroeconomic backdrop, characterized by lower interest rates and a soft landing, would present an unprecedented environment for crypto assets. This scenario diverges from both the industry-driven growth observed in the 2016-2017 cycle and the COVID-era, rate-cut-induced rally of 2020-2021. The implications of such a backdrop could reshape investor sentiment and strategies within the crypto market.
Looking Ahead: Market Trends and Directions
The low liquidity in the crypto market following the Labor Day holiday suggests a state of cautious optimism among investors, as they await clearer signals regarding market direction. While external factors such as geopolitical tensions and supply/demand imbalances can still exert influence, the two primary drivers likely to shape market trajectories into 2025 are the upcoming elections and evolving global liquidity conditions.
The next one to three months will be critical in determining how these trends will unfold. As we navigate this complex landscape, staying informed and adaptable will be essential for investors aiming to leverage opportunities within the dynamic crypto market.
Note: The views expressed in this column are those of the author and do not necessarily reflect those of CoinDesk, Inc. or its owners and affiliates.