Bitcoin Could Surge Thanks to Looser Financial Conditions

As a seasoned researcher with over two decades of experience in financial markets and digital assets, I have witnessed countless cycles of market ebb and flow. The recent dip in the Chicago Fed’s National Financial Conditions Index (NFCI) to -0.56 has piqued my interest, as it harks back to the 2021 cycle high of bitcoin.

The Chicago Fed’s National Financial Conditions Index (NFCI) offers a weekly update on U.S. financial conditions across money markets, debt and equity markets, and the traditional and shadow banking systems. The NFCI is a valuable tool for assessing the health of financial markets, providing insights into liquidity, credit availability, and market risk. The index is structured so that a negative NFCI value indicates looser-than-average financial conditions, suggesting an environment where liquidity is more readily available. Conversely, a positive value indicates tighter-than-average conditions, where access to capital becomes more restrictive.

A significant discussion about the link between the NFCI (Non-Financial Conditions Index) and Bitcoin was recently presented by Fejau on his Forward Guidance Podcast. In a recent post, Fejau highlighted the inverse relationship between the NFCI and Bitcoin, suggesting that more lenient financial conditions can boost risky assets like Bitcoin. Essentially, when financial conditions become less strict, there’s typically an uptick in risk-taking behaviors, causing speculative assets such as Bitcoin to experience growth.

Fejau’s research finds that bitcoin tends to grow when financial conditions become more lenient, as shown in various market cycles. In 2013, for instance, when financial conditions relaxed, the value of bitcoin skyrocketed from approximately $100 in July to over $1,000 by November. At this time, the NFCI index recorded a low of around -0.80, suggesting that financial conditions were much looser than usual.

During the time period of 2017-2018, an easing of financial circumstances coincided with bitcoin’s remarkable surge from $2,000 to $20,000 within six months, toward the end of 2017. Conversely, during the COVID-19 pandemic, there was a substantial tightening of financial conditions—the most restrictive since 2009—which resulted in a plunge for both conventional risk assets and bitcoin.

Just recently, as reported by Fejau, Bitcoin has experienced another growth spurt over the last year, escalating from $25,000 to more than $73,000 in March 2024, prior to global central banks reducing interest rates. This suggests that financial conditions have been relaxed for the past twelve months.

The path of Bitcoin isn’t always easy to predict, as it’s affected by other elements too, such as the DXY index, which reflects the strength of the U.S. dollar. When the DXY rises, it generally means unfavorable conditions for Bitcoin, since a stronger dollar can diminish the appeal of speculative assets like Bitcoin.

Under easier financial circumstances, the perspective for Bitcoin and other high-risk investments may stay optimistic, as long as other economic elements maintain their support.