Is “liquidity” the catalyst the market has been waiting for this cycle?
Technically speaking, this looks to be a crucial week for Bitcoin. BTC broke back above its 6-day downtrend with force last week, and the new week has begun with a further 1.7% increase. This has many analysts beginning to believe BTC could finally see a move above $65k this week, with this week’s close being a crucial level to watch.
However, it will not be easy. As shown in the chart below, the BTC/XAU ratio has decreased 7.22% this month, wiping out most of the progress BTC made over July. Put simply, this means that investors have been rotating out of Bitcoin and back into gold, with risk appetite remaining firmly tied to the yellow metal.
Notably, this rotation is not limited to the spot market.
According to Token Terminal, tokenized commodity market cap growth over the last 30-days has clearly favored XAUT, with gold-backed stablecoins seeing an increase of $237.1 million and PAXG adding another $125.3 million. In other words, it appears investors are rotating into gold, both in the traditional and crypto spaces, with demand for tokenized gold outpacing demand for tokenized BTC.
This has resulted in a situation where a sizable amount of dry powder is currently located within the macro asset class. However, a move above $65k resistance this week won’t be that easy. Notably, this is where the Fed’s latest move could come at the perfect time, with the Fed set to inject $17 billion in liquidity that starts flowing into risk assets beginning next week. If this liquidity were to flow directly into Bitcoin, it would propel the price well above $65k.
However, it may not be enough on its own.
The liquidity backdrop is changing, but Bitcoin needs more flows
There is a crucial detail behind the recent liquidity injections from the Fed.
From a technical lens, Bitcoin’s breakout from the six-day downtrend has sparked frenzy. At the same time, gold flows remain strong, suggesting that the safe-haven demand is still in place. Thus, the question of whether liquidity injections will be able to drive the BTC price higher becomes even more relevant.
The chart below shows why the answer to this question is probably not. According to DeFiLlama data, the stablecoin market cap continues to witness deposit outflows, with over $5 billion leaving the market so far this Q3, extending the outflow trend from the past two quarters. In total, more than $10 billion was withdrawn from stablecoins during this period.
In this regard, the chart above highlights what the crypto market needs for Bitcoin to breakout and rise above $70k. Liquidity needs to come back into the fold, and it appears that the inflows should be on-chain for the BTC price to actually respond.
Crucially, this is where the inflows into gold become relevant.
The safe-haven asset has been witnessing substantial on-chain and off-chain flows. Thus, while the recent liquidity injections from the Fed are undeniably bullish, they may not be enough for Bitcoin to breakout if investors continue to rotate their assets into gold. And this development would probably make it even harder for the BTC price to overcome the $70k barrier.
Final Summary
- Fed liquidity is a positive signal, but stablecoin outflows show money is still leaving crypto.
- With investors still favoring gold, Bitcoin could struggle to break into the $70k range.