Bitcoin price recovery driven by growing US financial concerns

Bitcoin ( BTC ) has risen 2.4% since retesting the $59,900 support level on Oct. 3, despite facing initial resistance at $62,000. The gains on Oct. 4 were primarily driven by macroeconomic factors, such as US employment data, expectations of economic stimulus in Japan, and growing concerns about the US financial system.

In the US, the economy is booming, but fiscal conditions deteriorated. Interestingly, the US dollar surged to a 50-day high against other major currencies, including the euro, the British pound, and the Japanese yen. 

Historically, the relationship between the US dollar Index (DXY) and Bitcoin has been inversely correlated . However, this latest movement seems to defy that pattern.

 DXY Index (green) vs. Bitcoin/USD (blue). Source: TradingView

One possible explanation for this anomaly is the "Milkshake Theory," which posits that the US dollar is absorbing excess global liquidity by offering higher interest rates and showcasing stronger economic fundamentals. As a result, the US attracts capital from other nations, which strengthens the dollar even as investors look to alternative assets like Bitcoin.

Better-than-expected US economic data has further accelerated this trend. US payroll data released on Oct. 4 showed 254,000 additional jobs in September, exceeding economists' forecasts. These figures put the US economy ahead of other regions, thereby bolstering the strength of the US dollar.

At the same time, concerns about global economic growth have intensified following Japan's signals of potential economic stimulus. Japanese Prime Minister Shigeru Ishiba has reportedly directed his ministers to draft an economic relief package , according to Reuters.

The plan is expected to include financial support for low-income households and subsidies for local governments, marking a departure from Japan’s previous monetary policies, which have struggled with deflation for the past three decades.

A 9% weekly surge in oil prices, driven by escalating conflict in the Middle East , is heightening global inflation risks. Rising transportation and logistics costs are likely to push consumer price indexes higher. Should these cost increases persist, governments may be forced to inject more liquidity into markets to prevent an economic downturn.

SP 500 futures (orange) vs. WTI oil (purple). Source: TradingView

In this environment, Bitcoin could benefit from the expectation of increased fiat money supply. However, its gains might be limited by a "flight-to-quality" phenomenon, as investors wary of a potential recession seek refuge in cash holdings and in companies that are well-positioned to weather an economic slowdown.

Bitcoin and the stock market act as hedge instruments

The SP 500 is not traditionally viewed as a risk-off asset, but when considering the high profit margins and robust balance sheets of major tech companies like Apple, Google, and Microsoft, these stocks are seen as safer options compared to real estate or corporate debt. This is particularly true as investors anticipate further increases in US Treasury yields in the near future.

Billionaire investor Stanley Druckenmiller has expressed concerns that the US Federal Reserve is "trapped" when it comes to further interest rate cuts, given the current strength of the US economy, according to a Bloomberg article. Moreover, Druckenmiller reportedly revealed that 15% to 20% of his portfolio is allocated to bets on rising US Treasury yields, as reported by MarketWatch.

US 2-year Treasury yield. Source: TradingView

In this scenario, buying debt instruments becomes less appealing to investors, which supports the stock market and alternative assets like Bitcoin. More importantly, concerns about the US financial market have risen due to a sharp increase in the Federal Reserve's use of repurchase agreements.

These agreements allow eligible financial institutions to trade bonds for emergency cash, acting as a safety valve to avoid direct market intervention while keeping interest rates in check. However, analysts cited by Reuters argue that this rise in repurchase agreements indicates the Fed has limited room to continue adding liquidity.

Therefore, Bitcoin’s positive performance on Oct. 4 can largely be attributed to the macroeconomic landscape, as concerns about US fiscal conditions grow.

This article is for general information purposes and is not intended to be and should not be taken as legal or investment advice. The views, thoughts, and opinions expressed here are the author’s alone and do not necessarily reflect or represent the views and opinions of Cointelegraph.