Bitcoin has bounced off its local bottom since mid-April, and with the spot BTC ETF on the verge of approval, CryptoTwitter is ecstatic!

Crypto investment company Galaxy released a report indicating bullish market expectations for the spot BTC ETF, predicting that approval will generate $14B of Bitcoin buying pressure and should send BTC prices soaring by 74% in the first year after launch!

But while the brave souls remaining in the crypto space have positioned themselves for new highs, it will take outside capital to get us there, and merely approving a spot BTC ETF is no guarantee that the funds will follow.

Despite the widespread belief that institutions and investment advisors are awaiting the arrival of spot ETFs to unleash a tsunami of capital into cryptocurrencies, there appears to be little evidence to support this scenario, with Canadian spot BTC ETF AUM showing little change since March 2022.

Cryptocurrency remains a zero-sum game, with assets competing for limited available dollars. The pump is simply the result of internal capital rotation. After the spot BTCETF is approved, there is no evidence that capital will flow into the industry!

High-profile coins such as BTC, LINK, and SOL have been able to earn gains due to extremely thin liquidity, which has allowed small amounts of buying pressure to cause massive moves, but the broader market has lagged behind the leaders. This suggests that the rally was led by the outperformance of a specific number of assets and points to a lack of breadth in the crypto market.

Source: TradingView

Just as the market has shifted from apathy to exuberance over the past month, sentiment will shift in the opposite direction in a nanosecond. While the recent rally is exciting, it's time to temper your expectations and remind yourself that we're still deep in the macro forest.

Federal Reserve Chairman Jerome Powell remains steadfast in his commitment to returning inflation to the Fed's long-term inflation target of 2%, a feat achieved by raising interest rates. At the same time, the U.S. deficit is ballooning and major U.S. treasuries, such as China and Japan, are selling off dollar assets to defend struggling local currencies, putting further upward pressure on yields.

The Bank of Japan announced yesterday that it would modify its yield curve control policy to allow Japan's long-term government debt interest rates to exceed the previous 1% ceiling, suggesting that interest rates may need to continue to rise.

Crypto projects are long-term investments, and “longer-term higher” interest rates could cause liquidity to evaporate from risky markets, such as cryptocurrencies and stocks, further depressing valuations.

The only option for further interest rate increases is an economic collapse, and monetary policymakers respond by cutting interest rates. While the global economy has shown resilience during previous rate hikes, cracks are starting to appear in the system, which could drag down the prices of risk assets.

Consumer spending is funded by growing debt levels, but high interest rates are causing credit card delinquencies to skyrocket and driving car loan defaults to new highs! While the stimulus delayed the inevitable end of the business cycle, it led to inflation, and the remedy - higher interest rates - left many borrowers unable to make their payments.

Meanwhile, real disposable personal income has been falling since May, leaving consumers without money to pay down their growing debt burdens. This suggests that further increases in arrears and defaults can be expected, which will lead to further reductions in spending levels, which will force businesses to lay off workers, causing the economy to shrink further.

Source: FRED

While the era of fast and easy money helped cryptocurrencies hit all-time highs in 2021, the post-COVID credit bubble is threatening to burst and investors will need to scramble for dollars; the resulting deflationary depression will almost certainly derail crypto Investment is under pressure.

The only asset with a chance of surviving the surge is Bitcoin, which could serve as a potential hedge against currency devaluation if central banks engage in another round of quantitative easing to contain the crisis; however, it will still be relevant in times of deflation. dollar competition.

While a healthy dose of FOMO in a low-liquidity environment is enough to cause a short squeeze to send cryptocurrencies temporarily higher, rates will continue to rise until things start to break, and when they do, unemployment rises and Further declines in revenue will force long-term holders to capitulate and sell their bags.

In a "secular higher" or deflationary depression scenario, almost no asset stands a chance against the US dollar.