Bitcoin: risk-on rally or fragile recovery? The market's mixed signals

Shelved “Project Freedom”, launched by the U.S. Army to secure the safe passage of oil tankers through the Strait of Hormuz, due to the refusal from Saudi Arabia to lend infrastructure to the U.S Army, rattled the market late last week, forcing Bitcoin to correct to $79k. However, the correction was short-lived, as the plan's failure was later processed as de-escalation, sending oil lower (to sub-$90 per barrel at one point) and reigniting the risk-on rally. Bitcoin reclaimed $80k, while the 200-day moving average remains a solid ceiling at $82k for now.

Key forces behind the current market structure

Despite expected higher inflation (CPI print releases tomorrow), the risk-on rally found support in the currently stable job market, coupled with very positive ETF flows. The markets are experiencing extreme dislocations between weakening macro factors: rising inflation and weak job vacancies, and capital inflows in risk assets. $857 million in digital investment asset product inflows were recorded last week, propelled by sustained short-term risk-on narrative and progression on Clarity Act, the main driver of the sustained $79k-$82k price level. After April’s ~12% performance, which began with Strategy’s STRC buying and $1.97 billion in spot BTC inflows, the momentum carried into May with a ~6.3% rise. What pushed markets higher during the Sunday rally was $241 million in short liquidations, only for Bitcoin to correct amid a profit-taking event orchestrated by short-term holders (approximately 20k BTC sold).

The rest of the crypto market has followed the direction but not the intensity of the Bitcoin rally. The TOTAL2ES index (market cap of the rest of the crypto market, excluding BTC and stables) recorded only 3.46% in April and 5.33% in May thus far, indicating extreme selectivity among capital deployers, with Bitcoin chosen first rather than any other altcoin.

The Big Whale’s take

Above-expectation earnings calls from major tech companies are among the key drivers of the recent risk-on sentiment amid geopolitical unease. Oil’s correction from the highs allows investors to be more aggressive, expecting that the AI boom will continue much longer and that CAPEX from the big tech will continue at a possibly larger rate.

Bitcoin falls in between a risk-on asset and a store of value, tapping into one role or the other depending on the more dominant short-term narrative. As flows returned amid the heavy Bitcoin sell-offs in February and March, the asset’s correlation with Nasdaq and equities has increased (0.9 as of May 9), leading to BTC’s role becoming more of a risk-on asset rather than a store of value.

However, it is important to question the sustainability of the flows that ignited the rally and to recognize that it remains a very fragile recovery, not a full-blown trend reversal or the beginning of the next bull market. Finally, excess liquidity remains scarce, as investors are extremely strategic, riding the AI revolution and positioning Bitcoin as a largely justified digital asset allocation in their portfolios.

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