Analysts have indicated that bitcoin, along with other risk assets, could witness significant capital inflows next year, as market indicators suggest the Federal Reserve could pivot to a more dovish monetary policy stance.

According to the CME's FedWatch tool, recent futures trading data suggests investors are anticipating a more dovish stance from the U.S. Federal Reserve.

The latest indications on FedWatch reveal an almost 100% probability that the Fed will maintain its target rate within the current range of 5.25% to 5.50% at its next meeting on December 13.

The data also shows that futures traders are now pricing in at least four rate cuts by the end of the Fed’s December 2024 policy meeting.

Impact of a Fed pivot on risk assets

In light of this consensus that the U.S. central bank could reverse its "higher rates for longer" monetary policy, YouHodler Chief of Markets Ruslan Lienkha explained that this could see bitcoin surge by the end of 2024. "In the case of a pivot to avoid a recession in the U.S., the risk assets market can get significant capital inflow in the second part of 2024," he said.

However, Lienkha cautioned that the first reduction of interest rates "will start no earlier than in the middle of 2024, which means that risk assets will be under pressure at least until then."

CoinShares Head of Research James Butterfill pointed to historic instances when loose monetary policy led to a rise in the value of bitcoin. "The period of relaxed monetary policy between 2019 and 2021 coincided with a rise in bitcoin prices, while the subsequent tightening of monetary policy led to a decline," Butterfill added.

According to Bitfinex analysts, “A pivot from the Federal Reserve's current monetary tightening stance to a more accommodative policy could potentially have a positive impact on risk assets, including cryptocurrencies, which have a high beta." Speaking to The Block, Bitfinex analysts explained that a Fed pivot would signal a decrease in risk aversion among investors. "This could lead to increased capital inflows into riskier asset classes like cryptocurrencies," the analysts added.

Additionally, the Bitfinex analysts said that if the Fed were to signal a rate reversal in 2024, this would suggest that the central bank is anticipating the balance to be restored in the economic metrics, "which could further contribute to a more bullish sentiment among investors."

Bitcoin supply scarcity

A Federal Reserve rate reversal could coincide with the fourth bitcoin halving. This event is estimated to occur in April 2024, when the reward for mining new blocks will be halved. The halving has implications for bitcoin supply and valuation. 

"Bitcoin BTC -1.81% halvings have historically led to substantial price increases," Bitfinex analysts told The Block. The analysts explained how the reduced supply of new bitcoins tends to create upward pressure on the price. This is assuming demand remains constant or increases.

"The event typically attracts more investors, anticipating a price rise, thereby potentially driving the price up due to increased demand," Bitfinex analysts added. However, they cautioned that a ‘sell the event’ phenomenon could cause a valuation drawdown, historically and technically speaking, it has been a bullish event.

Bitcoin liquid supply at historic low

The upcoming bitcoin halving could have an impact on the liquid supply of bitcoin, which is already at historic lows. According to analysts at Glassnode, the long-term holder bitcoin cohort is accumulating the market share of the digital asset, and gradually removing it to cold wallet storage. "Short-term holder supply is currently at multi-year lows of 2.33 million bitcoin," Glassnode analysts added in a note sent to The Block.

"We will see the full impact on bitcoin supply later when the global economy overcomes current difficulties. If authorities manage to find a path to a soft landing, bitcoin price will significantly surge by the end of 2024," Ruslan Lienkha said.

He pointed to other indicators that show a bullish sentiment among traders. "USDT is the main quote ticker in the market right now; most BTC purchases are made with stablecoins. Therefore, growing stablecoins capitalization combined with increasing token prices will show market saturation with liquidity and indicate sustained growth," Lienkha added.

Additional indicators indicating bullish sentiment

Analysts at Bitfinex added to the specific indicators that investors should be aware of when attempting to anticipate future market responses.

According to Bitfinex, some indicators to watch are supply metrics, long-term vs short-term holder supply, and spent output age bands, or SOABs. "Notably, the SOAB indicator recently showcased that the intra-week bitcoin price depreciation to around $34,500 actually increased supply concentration with the bitcoin holder cohort who purchased 6-18 months ago, possibly also in anticipation of the halving," Bitfinex analysts added. 

The analysts said that in contrast to this, the supply with short-term holders, who hold for one to three months, has declined significantly. "This is reflective of the fact that experienced investors who time the market accurately are actually increasing their holdings while new market entrants are panic selling holdings when it moves below their buying price or dips sharply," the analysts said.

The world's largest cryptocurrency by market capitalization increased by around 0.5% in the past 24 hours to $36,516 at 12:00 p.m. in New York, according to CoinGecko.