H2 2024 Bitcoin Outlook: Cycle and Policy Backdrop Support Bullish Bias

Bitcoin Q2 2024 in Review

Our Q2 Bitcoin Outlook report was titled “Reasons for Retreat Before Recovery,” and while we were correct that the cryptocurrency was due for a breather, we haven’t quite seen the 30-50% mid-bull market drawdown that we’ve seen around previous Bitcoin halvings. After retesting record highs at $73K in early April, Bitcoin fell to a low under $57K by the end of the month, a -23% drawdown (so far).

As we head into the second of the year, the key question for traders will be whether we’ve seen the worst of the pullback or if we could see a deeper retracement toward $50K.

Bitcoin H2 2024 Outlook: Cycle and Policy Backdrop Support Bullish Bias

So, what’s the outlook for Bitcoin and other cryptoassets heading into the second quarter?

Unsurprisingly to anyone who read our Q2 outlook report, April’s much-ballyhooed Bitcoin Halving did not lead to an immediate surge in Bitcoin’s value. For the uninitiated, the Bitcoin Halving is when the reward for mining new bitcoins is cut in half. This reduces the rate at which new bitcoins are created and thus, lowers the total supply of new bitcoins coming into the market. The halving tends to increase scarcity and historically has led to an increase in the price of bitcoin, though of course it's not guaranteed to do so in the future. As any Bitcoin bull will tell you, the 2024 halving took the “inflation rate” of Bitcoin’s supply to below 1% per year, less than half of gold’s annual inflation rate.

Looking at my favorite chart, which I colloquially call “The Only Bitcoin Chart You'll Ever Need™”, previous Bitcoin halvings have marked the transition from the (yellow) post-bottom recovery rally stage to the (green) full-blown bull market stage. As Bitcoin continues to mature as an asset class, we’re likely to see smaller percentage moves in each stage (i.e. a 29X rally like we saw in 2016-17 would take Bitcoin over $2,000,000 for an absurd market capitalization of $40T), but the time-based projection for a ~1.5-year bull cycle to late 2025 may still be a possibility:

Source: TradingView, StoneX. Past performance is no guarantee of future returns.

Beyond pure cyclical analysis, there are both macroeconomic and “fundamental” bullish arguments for Bitcoin. From a macroeconomic perspective, the monetary policy backdrop is turning less restrictive, with major banks like the European Central Bank (ECB) and Bank of Canada (BOC) starting apparent interest rate cutting cycles in Q2; the Bank of England (BOE) and Federal Reserve are expected to follow suit by the end of the year as inflation falls toward central bank targets across the developed world. If it plays out as expected, the potential easing of monetary policy could serve as support for Bitcoin.

Likewise, the amount of fiat money in the system is also turning to a more stimulative direction. So called “M2” is the Fed’s estimate of the total money supply, including all the cash people have on hand, plus all the money deposited in checking accounts, savings accounts, and other short-term saving vehicles such as certificates of deposit (CDs). For the first time in 16 months, the year-over-year growth in M2 has turned positive, bolstering Bitcoin’s “hard money”/hedge against US dollar debasement narrative:

Source: Bloomberg

In the US in particular, the political backdrop will take center stage ahead of November’s election. After a short-lived pivot in support of cryptoassets, culminating in the approval of spot Ether ETFs in late May, the Biden Administration has seemingly flipped back to skepticism toward the asset class. On the last day of May, President Biden vetoed SAB121, a proposed ruleset for formally regulating cryptoassets, with the President proclaiming, “My administration will not support measures that jeopardize the well-being of consumers and investors.”

By contrast, former President Trump has come out in favor of the industry, announcing in his typical bombastic fashion that “We want all the remaining Bitcoin to be MADE IN THE USA!!! It will help us be ENERGY DOMINANT!!!” In what is shaping up to be a(nother) closely-fought election, the small-but-growing block of crypto “single issue” voters has come into focus, and a Trump victory in November would likely be seen as supportive for Bitcoin and other cryptoassets.

Meanwhile, the highly-anticipated arrival of “TradFi” institutional capital appears to be proceeding apace, albeit with a caveat. At first glance, the ongoing inflows into spot Bitcoin ETFs is a bullish signal for the oldest cryptocurrency:

Source: Farside Investors

However, some analysts believe these flows may be artificially inflated by investors capitalizing on a “basis trade,” wherein they buy spot ETFs and sell an equivalent amount of Bitcoin futures to take advantage of the convergence of spot and futures prices with low to minimal direct price exposure. The recent growth in open interest in CME Bitcoin futures, much of which is on the short side, supports this perspective.

Source: TradingView, StoneX

Ultimately, Bitcoin bulls will want to see future ETF inflows that are not offset by equivalent short futures volume to conclude that Satoshi Nakamoto’s invention is gaining the widespread investment adoption that is key to the long-term bullish thesis.

Why Bitcoin Likely Has Not Reached a Cycle Top Yet

Over a longer-term horizon though, there are plenty of indicators that suggest we may still be a decent distance, in both time and price, from a cycle top in Bitcoin.

The MVRV (Market Value to Realized Value) Z-score, which compares the current price to the aggregate cost paid for all outstanding Bitcoin, has moved up from the < 1 level that has historically marked bear market bottoms in early 2023 to the mid-2 range today. However, as the chart above shows, previous cycle tops haven’t formed until this indicator reaches levels above 7, suggesting that we may be far from a long-term top (though given Bitcoin’s limited historic record, it’s important to remember that the current cycle may not match previous patterns):

Source: Glassnode. Past performance is not indicative of future returns.

A final consideration is the behavior of long-term holders. As we’ve noted in previous outlooks, those who have held their Bitcoin for more than a year, almost tautologically, are not trying to make a “quick buck” off the cryptocurrency; rather they are more likely to be “true believers” or “HODLers” who are unlikely to sell unless they’re sitting on a truly massive gain.

As the chart below shows, the proportion of Bitcoin that has been held for at least a year started 2024 at record highs above 70%, and has seen a notable decline to below 66% as of writing in late June. While a 4% drop may seem relatively small, it represents nearly 800K in marginal Bitcoin supply. As long as this cohort keeps selling down its holdings, it will limit Bitcoin’s potential for a more substantial rally in the second half of the year:

Source: MacroMicro.me

Of course, the catalysts we highlight in this report may not play out as expected – and to some extent, they may already be priced in so readers should always exercise caution when trading Bitcoin and other cryptoassets. As ever, it will be critical to monitor a broad swath of macroeconomic and crypto-specific metrics as the year develops.

Bitcoin Technical Analysis – BTC/USD Weekly Chart

Source: TradingView, StoneX.

Looking at the longer-term chart, Bitcoin appears to be consolidating in a bullish flag pattern as of writing. As the name implies, the patterns is a bullish continuation setup made up of a “pole” (the large vertical rise from Q1 2023 to Q2 2024), followed by a “flag” (the Q2 consolidation so far).

Candidly, the exact name of the pattern is not as important as the underlying psychology behind the price action: Despite a prolonged up move, Bitcoin has refused to pull back appreciably as step in to limit any short-term dips. The breakout from a flag, if seen, often results in a powerful continuation move higher, potentially measuring the length of the prior flag pole.

As a result, traders will be closely watching for a confirmed break above $70K to signal a continuation toward $100K+ this cycle, whereas a more substantial drop below the Q2 low around $56K would call the setup into question and point to a deeper retracement toward the 50-week EMA near $50K or lower.

-- Written by Matt Weller, Global Head of Research

Follow Matt on Twitter: @MWellerFX