Bitcoin Shifts from Fed Beta to Treasury Hedge

Bitcoin's price has been on a tear, rising 30% from its August low and breaking above $85,000 for the first time in eight months. But this rally is not just about the Federal Reserve's rate hikes or inflation concerns, it's a sign that bitcoin is starting to trade more like US Treasury bonds.

Historically, bitcoin has been an asset class unto itself, with its price driven by events within its own ecosystem. However, over the past few years, it has increasingly become correlated with traditional macro assets like the S&P 500 and gold.

The turning point came in March 2020, when bitcoin's correlation with the Nasdaq rose to around 50% as the asset rallied on zero rates, quantitative easing, and fiscal stimulus. From then on, bitcoin began to trade more like a high-beta stock, sensitive to changes in the discount rate.

But there are signs that this 'duration regime' is coming to an end. The 2022 collapse of Terra, Three Arrows, and FTX amplified the decline, but they were amplifiers of a macro trade, not the trade itself. And now, bitcoin's internal drivers, like the halving, seem to be losing relevance.

Instead, it's the ETF flow clock that's setting the price. BlackRock's IBIT alone holds about 730,000 bitcoin, and US spot ETFs combined hold well over 1.2 million, roughly seven years of current issuance. Their daily creations and redemptions are now the marginal price-setter in dollar terms.