Discover the historical relationship of how bitcoin has been accompanied by status of broad level financial conditions or whether there is a dynamic association, through the lens of the Chicago Fed’s National Financial Conditions Index (NFCI) Read more to find out why easier financial conditions could provide a boost for gains in the cryptocurrency.
Realizing the Potential for Crypto
As an influential financial conditions indicator in the US, the NFCI (National Financial Conditions Index) from Chicago Fed has recently fallen as low as –0.56, which is similar to see when bitcoin last reached its cycle high on 2021. This is the bread and butter of a risk-on, easy liquidity — less restrictive access to capital — environment.
According to analysis by Fejau, host of the Forward Guidance Podcast, there is a clearly inverse relationship between the NFCI and bitcoin’s performance. The main reason why bitcoin is rallying is that when financial conditions ease, it is a good environment for speculative assets to perform well. Alternatively, looser financial conditions can cause both traditional risk assets and the crypto market to crash — as we saw during the COVID-19 pandemic.
We have seen this happen numerous times in market cycles throughout history. In 2013, as the NFCI bottomed out around -0.80 which shows extremely loose financial conditions, bitcoin appreciated above $100 in July to crack over $1,000 by November. In the same way, the global risk on regime that accompanied each rally in US equities of 15% or more is similar to how bitcoin finally blurped to $20 thousand right after its rise to prominence from just under two thousand six months before.
Factors to Balance for the Bitcoin Road ahead
Given that the interdependence between financial conditions and long-term bitcoin returns is interesting it’s also worth noting that: (i) The US Dollar — as measured by DXY index — has its own momentum effects on bitcoin.
Bitcoin is negatively impacted by a rising DXY as speculative assets like bitcoin are less attractive when the dollar is strong. This dynamic underscores the requirement to look at a wider variety of economic parameters when predicting how the coin will actually fare going forward.
However, the sunscreen may need to be reapplied again sooner if such factors as DXY were to improve and the other supporting elements that allowed bitcoin — among other speculative assets — to surge are sustained. The risk-on tape that appears to be setting up, reflected by the present financial conditions easing not observed since November 2021 may bode well for bitcoin and a number of other digital assets in coming months.
Conclusion
The relationship between how bitcoin is doing and whether or not financial conditions are easing, as measured by the Chicago Fed’s National Financial Conditions Index (NFCI) tells us quite a bit about which way the cryptocurrency winds may blow. Bitcoin is a risk-on asset, so while the direction of Fed policy is far from the only consideration (the U.S. dollar has been rising this year and strong USD is bad news for BTC), inflation expectations are nothing to sneeze at; dovishness makes a headwind into a tailwind for gold 2. If that wider economic setting remains supportive, then the stage may be set for a bitcoin surge in 2019 as investors and industry watchers watch these crtical signs.
