Crypto Market Poised for Change as 2024 U.S. Elections and Global Liquidity Cycle Converge

Seismic events often trigger shifts in the crypto market cycle. The 2016-2017 cycle was largely driven by the industry itself, expanding crypto's reach beyond early adopters. In contrast, the surge from 2020 to 2021 was mainly fueled by unprecedented interest rate cuts during the COVID-19 pandemic.

Now, two significant factors are coming together: the upcoming 2024 U.S. elections and a new global liquidity cycle for risk assets. This combination could break bitcoin's trading range of $58,000 to $70,000, where it has been stuck since late March. It might just spark the next big market movement.

As Election Day approaches, the 2024 U.S. elections are likely to gain more attention. This election cycle marks several firsts for crypto. It’s becoming a relevant topic in political discussions and campaign financing. Plus, Polymarket, a cutting-edge crypto platform, now offers real-time estimates on election outcomes, with over $1 billion at stake.

The chart below shows the relationship between two key factors over three-day periods: changes in Republican win odds on Polymarket and shifts in bitcoin prices, which act as a proxy for overall crypto market performance. Different election phases are color-coded: gray for the initial phase, red for Republican momentum, blue for Democratic gains, and black for the final stretch.

If the market linked crypto prices directly to Republican win odds, the dots in the chart would form an upward-sloping line. Conversely, a direct link to Democratic win odds would show a downward slope. Instead, we see a scattered cloud of dots, indicating no clear trend between election outcomes and crypto prices so far.

This dynamic is evident across all phases highlighted in the scatterplot. While the relationship is stronger during Republican momentum, it still explains less than 20% of bitcoin price movements.

This doesn’t mean elections are unimportant for crypto prices. It’s possible that this connection strengthens as we get closer to Election Day, which is now less than a month away. However, this inconsistent relationship suggests that other critical factors are also influencing crypto market prices.

Recent shifts in global liquidity have impacted markets worldwide, including crypto. The Federal Reserve's strong start to this rate-cut cycle, along with China’s unexpected market-boosting measures, likely contributed to the recent price surge in crypto.

Unlike equities, crypto lacks extensive historical data for gauging returns across different interest rate environments. Still, looking at crypto prices against rate conditions is insightful. The chart below shows the effective federal funds rate alongside Treasury yields from 1-year to 30-year tenors. For context, the lower chart displays bitcoin's USD price, with color-coded market cycles: green for the 2016-2017 and 2020-2021 bull markets, and red for the 2018 and 2022 bear markets.

This chart suggests that a soft landing with lower rates—currently the consensus among investors—would create an unprecedented backdrop for crypto. This scenario differs from both the industry-driven cycle of 2016-2017 and the COVID-era surge of 2020-2021. Thus, macroeconomic factors are expected to significantly influence crypto prices in the near term, as seen in the strengthening correlations between crypto and broader risk assets.

Low crypto liquidity following Labor Day indicates a market in a wait-and-see mode. While factors like geopolitical tensions and supply/demand imbalances can still sway the market, the two primary drivers likely to define market direction into 2025 are the upcoming election and global liquidity conditions. The next one to three months will be crucial in revealing how these trends will unfold.