Bitcoin’s 22% Surge: Will Demand Keep the Momentum Alive?

The recent surge in Bitcoin appears to have been triggered by a change in liquidity within the U.S. Treasury market, but analysts suggest its longevity will largely rely on whether investment from ETFs and demand for spot trades can sustain this initial momentum.

Bitcoin’s value climbed approximately 22% during its breakout week, spurred by declining long-term Treasury yields and a weakening dollar following the U.S. Treasury’s announcement of an increase in buybacks for longer-duration government securities.

On August 19, the Treasury announced its plan to double the maximum funding for liquidity-support buybacks of nominal Treasuries in the 10-20 year and 20-30 year ranges, raising the cap from $2 billion to at least $4 billion per operation, set to commence on September 9 through the ongoing refunding quarter.

According to Fabian Dori, the chief investment officer at the regulated digital asset bank Sygnum, Bitcoin’s movements alongside other markets suggest that the rally’s initial phase had significant macroeconomic influences.

“The most evident indicator is the interplay of various asset behaviors along with the structural aspects of the crypto market.”

Dori highlighted how the Treasury’s announcement momentarily lowered long-term yields and weakened the dollar, boosting both gold and Bitcoin prices. He believes this trend indicates that investors are gravitating towards hard assets in light of renewed concerns over currency debasement, rather than purely a crypto-driven rally.

Martin Lee, Market Insights Lead at DWF Labs, noted a similar trend across different markets. While AI and tech stocks remained under pressure, gold and Bitcoin ETFs saw an influx of capital as debasement fears resurfaced, Lee informed crypto.news.

As reported earlier by crypto.news, U.S. spot Bitcoin ETFs recorded inflows of roughly $1.92 billion during the surge week, marking their highest weekly total in 10 months.

Simultaneously, the price rise pushed traders who had anticipated further declines out of the market. Lee observed that a record $2.7 billion in short positions were liquidated as Bitcoin surpassed its earlier trading range, indicating some of the apparent spot demand stemmed from traders covering their bearish bets.

Bitcoin’s Rally Indicates Mixed Demand Dynamics

Data from derivatives markets offers additional insights into the nature of the surge.

Dori pointed out that Bitcoin open interest fell during the upswing while funding rates remained stable. The open interest in Bitcoin futures recently dropped to around 587,584 BTC, the lowest in almost five months, down from 645,760 BTC on August 14.

This pattern does not suggest that traders are aggressively leveraging long positions; instead, it indicates that forced short covering has played a substantial role.

Nevertheless, Dori does not view the entire rally as purely a macro affair.

“The proper interpretation is likely one of a mixed influence.”

Dori explained that the initial impulse saw Bitcoin act similarly to gold, propelled by lower yields, a declining dollar, and concerns over currency debasement. A subsequent, crypto-specific surge was influenced by ETF inflows and recent regulatory developments in Washington, such as the SEC’s proposed regulation for crypto and renewed calls from the White House for action on the CLARITY Act.

ETF flows indicate that demand has persisted beyond the initial shock from Treasury announcements. U.S. spot Bitcoin ETFs enjoyed eight consecutive days of inflows leading up to Wednesday, totaling approximately $2.8 billion during that streak.

These ongoing inflows are significant because the initial market reactions to the bond market have already softened. BNY Markets reported that the decrease in term premiums following the Treasury announcement has largely reversed, with long-term yields approaching levels observed prior to August 19.

Consequently, Bitcoin now finds itself at a crossroads where sustained crypto-specific buying may need to prop up the rally if the impact of the initial interest rate changes continues to diminish.

September 9 Marks a Key Liquidity Assessment

The significant Treasury buybacks won’t commence until September 9, raising questions about how much of their anticipated effect has already been accounted for in the markets.

Dori noted that markets typically react upon the announcement of such policies, rather than waiting for the operations to begin. In his opinion, the signal indicating that the Treasury is prepared to act when long-term borrowing costs become excessively high is more critical than the immediate size of the purchases.

Whether this support endures remains to be seen, particularly after the impact of the announcement subsides.

Dori indicated that increasing long-end yields would imply that the buybacks are not providing the anticipated support, while a replenishment of the Treasury General Account could remove liquidity. Rapid increases in funding rates and open interest would also suggest that leverage, rather than genuine market demand, is driving Bitcoin’s price upward.

Declining ETF flows or tightening dollar funding conditions would further erode this potential source of demand.

Lee echoed the sentiment that mere anticipation cannot sustain the rally indefinitely.

“A rally based solely on anticipation will only last as long as the actual demand that follows it.”

He pinpointed ETF flows, futures market dynamics, and Bitcoin’s previous trading range as pivotal factors to monitor prior to September 9.

If Bitcoin remains stable while experiencing a week of negative ETF creations, it could indicate that the anticipation trade is unwinding, Lee noted. Moreover, he added that the three-month futures basis surpassed the yield on 10-year Treasuries during the rally; a drop below that benchmark would indicate a failure to sustain the cash-and-carry appeal.

A bearish scenario could arise if Bitcoin reverts back to its pre-surge trading range while ETF flows turn negative, as Lee suggested this would imply that leverage was predominantly driving the rally without any enduring structural support.

Liquidity Dynamics Extend Beyond Fed Interest Rates

Both analysts contend that investors focusing solely on the Federal Reserve’s policy rates may overlook crucial factors affecting crypto prices.

Dori emphasized that Treasury cash management, particularly fluctuations in the Treasury General Account alongside issuance and buyback strategies, has recently emerged as an important contributor to liquidity dynamics. Changes at the long end of the Treasury yield curve subsequently transmit effects into risk assets.

Additional channels include the capacity of bank balance sheets, creation of private credit, expansion of stablecoins, and global dollar funding conditions, while the Federal Reserve’s balance sheet remains a significant factor over the long term.

Lee similarly prioritized dollar funding conditions and real yields over the policy rate for short-term cryptocurrency market activity, followed by the term premium. Treasury balances and reserve dynamics also influence liquidity within these markets, with issuance impacting long-term yields.

For Lee, Bitcoin’s response to the Treasury buyback announcement demonstrated how swiftly a shift at the long end of the yield curve can influence cryptocurrencies, even in the absence of a change in the Fed’s interest rate outlook.

Anticipation Centers on Warsh’s Address in Jackson Hole

The liquidity discussion now transitions to Federal Reserve Chair Kevin Warsh’s keynote at Jackson Hole on Friday.

Recent inflation data presents a complex situation for the Fed. The Bureau of Economic Analysis reported that headline inflation measured by Personal Consumption Expenditures rose by 0.2% in July and by 3.7% compared to the same month last year. Core PCE also increased by 0.2% month over month and by 3.3% annually.

Real consumer spending showed little change in July, while the personal savings rate stood at 3%.

Dori mentioned that Warsh could influence expectations regarding short-term rates by clarifying how the Fed perceives the ongoing inflationary pressures, particularly those related to the oil market dynamics. While the Treasury is seeking to manipulate the longer end of the yield curve through its buyback initiatives, the Fed retains more direct control over short-term rates.

“If both entities align, it would be a significant support for risk assets.”

However, Dori cautioned that merely shifting expectations for the September Federal Open Market Committee meeting may not suffice to significantly reshape institutional positions in the crypto market.

Investors should pay attention for any signs that could modify the overarching liquidity landscape, such as an increased tolerance for inflation linked to oil prices, modifications in the balance between inflation and economic growth risks, or comments that could realign the Treasury’s term premium.

Lee advised that institutions should remain cautious if conflicting signals emerge concerning inflation, bond yields, and the Fed’s policy outlook. Bitcoin’s performance alongside gold could further enlighten investors regarding how the asset is perceived.

Should Bitcoin ascend alongside gold while long-duration bonds experience a sell-off, it would reinforce the notion of BTC being viewed as a safeguard against fiscal and currency issues. Conversely, if Bitcoin were to drop together with gold, it would indicate that interest rate sensitivity continues to dominate, prompting institutions to re-evaluate their exposure.

For both analysts, the future trajectory of Bitcoin’s rally will depend less on any individual inflation data point or September’s rate decision, and more on the sustainability of the liquidity circumstances driving initial momentum. Equally vital is whether ongoing ETF and spot market demand can sustain the momentum as the initial influence from Treasury activities recedes.