Activity in the bond market may be slowing the bitcoin rally

At first glance, the bitcoin market's appeared bullish again Thursday morning, and perhaps with reason: Coinbase — the largest exchange in the US — had released its S-1 to go public, revealing promising financial data for one of the industry's most important firms. 

But even early in the session, Genesis Global Trading's Josh Lim noticed the bitcoin market was actually turning bearish.

"We're seeing people short selling this a.m.," Lim, a former director at UBS, told The Block. The market may have anticipated the Coinbase S-1, he said. "I think basically this was pretty much widely expected and people thinking it might be a sell the news type event."

A day later, bitcoin is down more than 4.7%, trading at $47,200 at the time of writing.

Of course, it's hard to know if there has been a Coinbase effect. Either way, now investors across the market are sounding the alarm about potential macro factors that could serve as potential headwinds to bitcoin's extended rally. 

Specifically, signs of anxiety are creeping up in the bond market. Yields on government debt have hit their highest point in a year — an indicator of speculative fervor in the markets. The yield on the 10-year US Treasury hit 1.61% during Thursday's trade, according to Bloomberg. 

Goldman Sachs said in a note to clients Thursday that the bond market sell-off "continues to gather steam, and the move has increasingly been led by real yields rather than breakeven inflation."

Over the past few weeks, real yields — which indicate how much it costs to borrow — have ticked up sharply, as Goldman's data shows. Across the board, yields are at levels not seen since prior to the Covid-19 pandemic first gripped markets early last year. Typically, rapidly rising yields can lead to a decline in equity valuations.

The Federal Reserve is being criticized for not engaging in monetary policy aimed at lowering long-term yields. Some hold that the Fed should aim to "twist" the yield curve by buying long-term bonds and selling short-term ones. 

"The Fed has thus far not been willing to soothe markets," noted analysts at TD Securities. 

More concerning than the rapid rise in yields is the rate difference between the 10-Year Treasury Constant Maturity and the 3-Month Treasury Constant Maturity, alternatively known as "the 10-3 Spread." During the last two credit cycles, rapid increases in this all-important funding spread have led investors to seek less-risky assets. 

What it means for bitcoin

Bitcoin, meanwhile, is "still trading like a risk asset," said Anthony Scaramucci, founder of Skybridge, a multi-billion dollar hedge fund that recently launched a bitcoin-focused fund. Scaramucci said that he's worried about a soaring 10-year yield. 

"Markets understandably get spooked with a pop in yields, as zero forever has been a key driver of asset appreciation for over a decade," said Rich Rosenblum, co-founder of crypto trading shop GSR. 

Still, bitcoin's role as an inflation hedge could be its saving grace — provided investors buy that thesis. "While bitcoin gets hit as well, if it's inflation causing the move, BTC is likely to catch a bid as it's the asset of choice for inflation protection," Rosenblum said.

Elsewhere, Treasury Inflation-Protected Securities (TIPS) — a popular asset for investors wanting to protect themselves from inflation — have seen their yields surge. According to Goldman, they are "within striking distance of pre-Covid estimates."

As for the possible Coinbase effect: the impending public offering might be weighing on the bitcoin market even more than the macro factors are, according to Fundstat's Tom Lee. "I think Coinbase IPO is making people think it is gonna suck a lot of money allocated to crypto," he said. "Like instead of BTC, buy Coinbase."

"Like imagine if we could only own gold. Then a gold miner was going public," said Lee, who was among the few analysts to predict a V-shaped recovery early on in the pandemic.

"Some gold holders sell to buy it and those not wanting gold buy the miner."