Bitcoin December 2024 Update

Market Commentary

The Federal Reserve's preferred inflation measure, the personal consumption expenditures (PCE) price index, showed an uptick in November, rising 0.1% monthly with a 12-month rate of 2.4%, higher than October's 2.3%. Meanwhile, core inflation, excluding food and energy, demonstrated stronger momentum at 2.8% annually. Housing inflation, one of the stickier components during this economic cycle, showed signs of cooling in November, rising just 0.2%. Regardless, this marked the second month in a row of rising PCE, an unwelcomed sign for many. 

Expectations for a January rate cut are around 11% while a March rate cut is uncertain at 45%. The Fed's recent consecutive rate cuts in September and November, totaling 0.75 percentage points, reflected growing confidence in inflation's trajectory toward the 2% target, though officials are seemingly more hawkish and maintaining a cautious approach to future rate reductions.

BTC's correlation materially rose in December as the prices rose in line with the broader stock market during the first half of December and fell during the second. Furthermore, when the Federal Reserve made its expected move to cut rates by 25bps at the FOMC meeting they also delivered a surprise. Looking ahead, they signaled fewer rate cuts than previously expected. The stock market reacted sharply as the NASDAQ 100 dropped 4.1% from its level at the FOMC announcement while BTC followed the same pattern but with even more intensity, falling 8.5%. The correlation is especially noticeable during "risk-off" events. When markets get spooked by hawkish policy surprises, BTC often amplifies the traditional market reaction rather than providing a hedge against it. However, more broadly this is not relevant as there are significant periods of negative correlation between the stock market and BTC through the years. However, it serves as a clear reminder that BTC is not an uncorrelated asset. As it becomes more integrated into the financial system, it increasingly moves in response to factors that affect other major assets. Below we show the 5-day rolling correlation between the NASDAQ QQQ ETF and BTC over the last three months.

Historically December has not been a strong month for BTC, with an average of +4.8% and a median of -3.2% returns. December 2024 was no different with a -5% return, within the range of previous periods. December is usually a more quiet month for BTC, especially as investors reallocate and adjust for a new year.