Cryptocurrency is at a critical juncture

The U.S. election combined with looser monetary conditions could spark the next cryptocurrency bull run.

Major events often trigger cyclical shifts in crypto asset markets. The 2016-2017 cycle was largely industry-driven, expanding crypto’s influence beyond early adopters. In contrast, the 2020-2021 surge was driven by unprecedented COVID-era rate cuts.

Now, two powerful catalysts are converging: the looming 2024 U.S. election and an emerging global liquidity cycle for risk assets. This powerful combination could break Bitcoin’s $58,000 to $70,000 trading range, where it has largely remained since late March, potentially triggering the next major market move.

The importance of the 2024 US election is likely to grow as Election Day approaches.

This election cycle marked several firsts for cryptocurrencies, primarily how the industry has become a relevant topic in political discourse and campaign financing. Another interesting trend is that the breakout cryptocurrency app Polymarket now offers real-time estimates of the consensus on election results, with over $1 billion involved.

The chart below shows the relationship between two factors over a three-day period: the change in the odds of a Republican victory on Polymarket and the change in the price of Bitcoin, which is a proxy for the overall crypto market performance. The different election phases are color-coded: gray represents the initial phase (before June 26), red represents the period of strong Republican momentum (late June to late July), blue represents Democratic wins (late July to mid-August), and black represents the final phase (since mid-August).

If the market were pegging cryptocurrency prices directly to Republican odds of winning, the points in the above chart would form an upward-sloping 45-degree line. Conversely, a direct link to Democratic odds of winning would show a similar but downward-sloping line. Instead, what we see is a scattered cloud of points, indicating that there is no clear, consistent trend between election results and cryptocurrency prices so far.

This dynamic is evident at various stages of the scatter plot, highlighted by different colors. Although the relationship is stronger during stages of Republican momentum, it still explains less than 20% of Bitcoin’s price movement.

This doesn’t mean that elections aren’t important to cryptocurrency price action. It’s possible, if not likely, that the relationship will strengthen as we get closer to Election Day (which is now less than a month away). But the inconsistent relationship suggests that other key factors have been dominating price action in the cryptocurrency market.

Interest rate outlook hints at new regime for cryptocurrency prices

Recent changes in global liquidity have driven global markets, including the cryptocurrency market. The Federal Reserve’s strong start to this round of rate cuts, coupled with China’s unexpected market-boosting measures, may have contributed to the recent surge in cryptocurrency prices.

Unlike stocks, cryptocurrencies lack extensive historical data to measure returns under different interest rate regimes.

Still, it is instructive to study cryptocurrency prices based on the interest rate environment. The chart below shows the effective federal funds rate and the fixed maturity yield of US Treasury bonds from 1 year to 30 years. For ease of understanding, the chart below shows the US dollar price of Bitcoin (displayed on a logarithmic scale) and color-coded market cycles: green represents the bull markets of 2016-2017 and 2020-2021, and red represents the bear markets of 2018 and 2022.

The chart suggests that a soft landing with lower interest rates (current investor consensus) would create an unprecedented macro backdrop for cryptocurrencies. This scenario differs from the industry-driven 2016-2017 cycle and the COVID-era, rate-cut-driven 2020-2021 surge.

As such, macroeconomic factors are expected to significantly impact cryptocurrency prices in the near term, as evidenced by the increased correlation between cryptocurrencies and broader risk assets.

Looking ahead

Low cryptocurrency liquidity at the moment suggests the market is in wait-and-see mode. While factors such as geopolitical tensions and supply-demand imbalances will continue to influence the market, the two main drivers most likely to determine the direction of the market in 2025 remain the upcoming elections and global liquidity conditions. The next one to three months will be critical in revealing how these trends will unfold.