Bitcoin Price Jumps on Positive Economic Data and Potential Rate Cuts

Bitcoin (BTC) saw a 4.6% price increase on May 3rd, despite remaining below the $62,000 mark. This uptick coincided with the release of new economic data from the U.S. that signaled a potentially more lenient Federal Reserve monetary policy and a decline in outflows from U.S. spot Bitcoin exchange-traded funds (ETFs).

Favorable Macroeconomic Indicators for Riskier Assets

A significant portion of Bitcoin’s gains came after 12:30 UTC on May 3rd. This timeframe aligned with the U.S. Department of Labor’s announcement that jobless claims held steady at 208,000 for the week ending April 27th. This figure represents the lowest level since mid-February and suggests continued strength in the labor market.

The positive employment data complements the most recent Employment Cost Index, a comprehensive measure of labor expenses, which showed a 4.2% year-over-year increase in the first quarter. This combined data has bolstered investor confidence in the possibility of the Fed lowering interest rates by the end of 2024. Historically, such rate cuts favor risk-on assets, including cryptocurrencies.

According to the CME Group’s FedWatch Tool, market participants now assign a 61% chance of the Fed reducing rates below 5.00% by December 18th, a significant increase from 40% the prior week. Should this trend continue, with fixed-income investment yields declining, investors are likely to seek higher returns in alternative asset classes like stocks, commodities, and cryptocurrencies.

Potential for Increased Capital Inflow Would Boost Bitcoin Price

For the first time since November 2022, the U.S. M2 money supply, encompassing cash, savings deposits, and short-term bank deposits, turned positive in May. Historically, periods of rising M2 have correlated with the outperformance of cryptocurrency markets compared to traditional financial markets, as evidenced by the bull runs witnessed in 2014, 2017, and 2021.

While stocks might be considered the primary beneficiary of a potential capital shift away from fixed-income securities, Bitcoin’s current market capitalization of $1.2 trillion stands in contrast to the estimated $6 trillion sitting idle in money market funds. Even a modest 1% allocation from these funds towards Bitcoin would translate into a $60 billion influx into the cryptocurrency market.

This potential influx is further supported by data from Farside Investors, indicating total net inflows exceeding $11.2 billion since the introduction of U.S. spot ETFs in January. Additionally, reports surfaced on May 2nd suggesting renewed discussions about Bitcoin amongst sovereign wealth funds and endowments, with Robert Mitchnick, head of digital assets at BlackRock, the world’s largest asset manager, playing a key role.

Moderation in Stock Market Growth and Reduced ETF Outflows

The recent surge in Bitcoin price  andin tech stocks, particularly after Apple announced a record-breaking $110 billion stock buyback program, is raising questions about its sustainability. This move by Apple’s management suggests a lack of confidence in near-future demand growth, potentially opting not to invest in new product lines or expand sales channels.

The combination of macroeconomic indicators suggesting potential interest rate cuts and a slowdown in stock market growth, alongside the decrease in outflows from U.S. spot Bitcoin ETFs, may have instilled confidence in investors. Unlike the previous day, with $564 million withdrawn from various U.S. spot Bitcoin ETF funds managed by BlackRock, Fidelity, and ARK 21 Shares, only Grayscale GBTC experienced net outflows on May 2nd.

Historically, periods of fear, uncertainty, and doubt (FUD) in the cryptocurrency market have dampened investor enthusiasm. Examples include the “miners’ death spiral” and post-halving selling pressure. However, as investors understand the network’s automatic difficulty adjustment and the potential revenue increase for remaining miners during a hash rate reduction, buyers often return, leading to price recoveries.