The 2016-2017 crypto cycle was largely driven by industry expansion, pushing crypto’s reach beyond early adopters. In contrast, the 2020-2021 surge was fueled by unprecedented COVID-era interest rate cuts. Now, two powerful catalysts are converging: the looming 2024 U.S. elections and a nascent global liquidity cycle for risk assets.
The Looming 2024 U.S. Elections
This election cycle marks several firsts for crypto, including its emergence as a relevant topic in political discourse and campaign financing. Another interesting trend is how Polymarket, a breakthrough crypto application, now provides real-time estimates of consensus on election results, with over $1 billion at stake.
The Relationship Between Election Outcomes and Crypto Prices
The chart below shows the relationship between two factors over 3-day periods: changes in Republican win odds on Polymarket and changes in bitcoin prices as a proxy for overall crypto market performance. Different election phases are color-coded:
- Gray: Initial phase (before June 26)
- Red: Period of Republican momentum (between the end of June and the end of July)
- Blue: Democratic gains (between the end of July and mid-August)
- Black: Final stretch (since mid-August)
If the market linked crypto prices directly to Republican win odds, the dots in the chart above would form an upward-sloping 45-degree line. Conversely, a direct link to Democratic win odds would show a similar, but downward-sloping, line. Instead, we see a scattered cloud of dots, indicating no clear, consistent trend between election outcomes and crypto prices so far.
This dynamic is evident across all phases highlighted in different colors throughout the scatterplot. Although the relationship is stronger during the phase of Republican momentum, it still explains less than 20% of bitcoin price movements.
While the elections are likely to play a crucial role in determining crypto price action, the inconsistent relationship suggests that other critical factors have also been dominating crypto market price action. The relationship may strengthen as we approach Election Day, now less than one month away.
Interest Rate Outlook and Its Impact on Crypto Prices
Recent global liquidity shifts have driven markets worldwide, including crypto. The Federal Reserve’s strong start to this rate-cut cycle, coupled with China’s surprising market-lifting measures, likely fueled crypto’s recent price surge.
Unlike equities, crypto lacks extensive historical data for gauging returns across different interest rate regimes. Nevertheless, examining crypto prices against rate environments remains instructive. The chart below shows the effective federal funds rate alongside Treasury constant-maturity yields from 1-year to 30-year tenors.
For context, the lower chart displays bitcoin’s USD price (in log scale for perspective), with color-coded market cycles:
- Green: 2016-2017 and 2020-2021 bull markets
- Red: 2018 and 2022 bear markets
The chart suggests that a soft landing with lower rates — the current investor consensus — would create an unprecedented macro backdrop for crypto. This scenario differs from both the industry-driven 2016-2017 cycle and the COVID era, rate-cut-fueled, 2020-2021 surge.
Consequently, macroeconomic factors are expected to significantly influence crypto prices in the near term, as evidenced by strengthening correlations between crypto and broader risk assets.
Looking Ahead: The Intersection of Elections and Liquidity
Low crypto liquidity following Labor Day indicates a market in wait-and-see mode. While factors such as geopolitical tensions and supply/demand imbalances can still influence the market, two primary drivers most likely to define market direction into 2025 are:
- The upcoming election
- Global liquidity conditions
The next one to three months will be crucial in revealing how these trends will unfold.
Note: The views expressed in this column are those of the author and do not necessarily reflect those of CoinDesk, Inc. or its owners and affiliates.
