Table of Contents
Bitcoin's recent weakness might seem puzzling given the relatively strong economic backdrop, but the cryptocurrency is caught in a classic monetary policy trap where good news has effectively become bad news for risk assets.
Key Takeaways
- Bitcoin typically experiences 30% corrections in January of post-halving years, making current weakness historically normal rather than concerning
- Strong labor market data is actually hurting Bitcoin because it questions the Federal Reserve's aggressive rate cutting cycle
- The unemployment rate dropped to 4.1%, but bond markets are revolting against Fed policy with the 10-year yield surging higher
- Bitcoin has actually outperformed traditional markets like the S&P 500 and Russell 2000, which have given back most post-election gains
- The 10-year Treasury yield's breakout pattern historically coincides with Bitcoin and stock market struggles until yields eventually peak
- Labor market strength combined with rising inflation creates a dangerous scenario where the Fed may have cut rates too early
- Current Bitcoin price action mirrors 2024's January correction, suggesting potential support around the 100-day moving average near $90k
- Job openings per unemployed worker sits at 1.14, indicating a still-tight labor market that doesn't justify aggressive monetary easing
- The bond market's "revolt" against Fed policy reflects concerns about inflation reaccelerating rather than economic weakness
- Historical precedent from 1998 shows similar Fed fund rate cycles can reverse quickly when policymakers cut too aggressively
The January Post-Halving Pattern: History Rhyming Again
Here's the thing about Bitcoin corrections in January - they're about as predictable as winter following fall. Looking at the historical data, Bitcoin has experienced roughly 30% corrections in January of post-halving years going back to 2017 and 2021. What's happening now isn't some unprecedented crisis; it's Bitcoin following a well-worn playbook that most investors seem to forget each cycle.
The current price action mirrors 2024's January correction almost perfectly. Bitcoin went below the bull market support band in Q3, rallied in October and November, then went sideways for months. We're seeing the same pattern now, except this time the January wick higher was slightly weaker because it didn't create a new cycle high like it did in 2024.
What's particularly interesting is how Bitcoin is currently holding above the 100-day moving average, which has historically served as crucial support during these corrections. In January 2017, Bitcoin found support exactly at the 100-day moving average. Last year, it wicked below but quickly bounced back. If we're following the same script, any dip below the $90k range low might find buyers stepping in around that moving average.
The broader context here is that Bitcoin, despite feeling weak to holders, has actually outperformed traditional asset classes significantly. While Bitcoin sits around $93k compared to $67k at election time, the S&P 500 has nearly given back all its post-election gains. The Russell 2000 has completely erased its Trump rally. Even the altcoin market, which tends to be more volatile, is holding up better than traditional small-cap stocks.
When Good News Becomes Bad News: The Fed's Credibility Problem
The labor market data has been telling a story that bond investors increasingly don't want to hear. With unemployment at 4.1% - down from higher levels - and job openings still exceeding unemployed workers at a 1.14 ratio, the question becomes: why exactly is the Federal Reserve cutting rates?
This is where the narrative gets really interesting. The Fed has already cut 100 basis points from their peak, but the long end of the yield curve isn't playing along. The 10-year Treasury yield keeps climbing higher, essentially staging a revolt against Fed policy. Bond investors are saying, "Hold on a second - you're cutting rates when the labor market looks fine and inflation is starting to tick back up?"
The employment data supports this skepticism. Total temporary help services employees actually increased for two consecutive months. Job postings on Indeed continue to slowly rise. Multiple job holders dropped by 109,000, suggesting people aren't needing second jobs as much. Initial claims sit at just 201k, which is remarkably low by historical standards.
What we're witnessing is a fundamental disconnect between Fed policy and economic reality. The central bank appears to be cutting rates preemptively, trying to get ahead of potential economic weakness, but the data isn't cooperating with that narrative. Labor markets remain tight, and early signs of inflation reacceleration are starting to appear.
This creates the perfect storm where good economic news becomes bad news for risk assets like Bitcoin. Strong employment data reinforces the bond market's view that the Fed cut too aggressively, pushing yields higher and creating headwinds for anything that trades as a risk asset.
The Bond Market Revolt: Why Yields Keep Rising
The 10-year Treasury yield's recent breakout pattern looks almost identical to what happened over a year ago, and that's not good news for Bitcoin or stocks in the short term. When the 10-year yield breaks out and then backtests the 21-week exponential moving average - which it's done twice recently - risk assets get "stuck in traffic on struggle street."
Looking at the historical precedent, Bitcoin tracked the S&P 500 almost perfectly during the last yield surge. Both assets struggled until the 10-year yield finally topped out. The S&P didn't bottom until yields peaked, and Bitcoin followed the same pattern. Now we're seeing the same dynamic play out again.
The bond market's concern centers on a simple question: if the labor market is holding up and inflation shows signs of reaccelerating, why is the Fed cutting rates at all? This echoes the 1970s pattern where inflation started rising slowly and then really picked up steam in the post-election year of 1973. The market topped around that time and sold off significantly.
What makes this particularly concerning is the comparison to 1998. Back then, the S&P 500 divided by M2 money supply reached the same level where it's getting rejected today. The Fed cut rates from 5.5% (exactly where they peaked this cycle) down to 4.75%, but within a year or two, they had to raise rates all the way back up to 6.5%. Nobody saw that coming at the time.
The parallels are striking enough to make bond investors nervous. They're essentially asking: are we setting up for a scenario where the Fed has to reverse course and start raising rates again? Even if that doesn't happen, the mere possibility is enough to keep the long end of the yield curve elevated.
Labor Market Strength: More Robust Than Expected
Digging into the specific labor market indicators reveals an economy that's more resilient than many expected. The unemployment rate didn't just hold steady - it actually improved to 4.1%. Job losers dropped, new entrants to the labor force decreased, and re-entrants also fell. These are all positive signs that suggest labor market conditions aren't deteriorating.
The establishment survey showed payroll gains of 256,000, which is substantial. While there was a similar spike in January 2023, the three-month moving average has been slowly dropping, indicating some moderation but not collapse. The household survey jumped by 478,000, and the year-over-year change went from negative to positive again.
Perhaps most telling is the job openings data. There are currently 1.14 job openings for every unemployed worker, which is right around pre-pandemic levels. This tight labor market condition doesn't typically coincide with aggressive Fed rate cutting. Companies appear to be hoarding workers rather than laying them off, but they're also not hiring aggressively.
State-level data shows some mixed signals, with six more states seeing unemployment rate increases over the last month. However, this still pales in comparison to what we'd see during major economic downturns. The Sahm rule, which triggers recession warnings, has actually untriggered as unemployment has come back down.
Initial claims at 201k represent historically low levels of jobless benefit filings. Based on seasonal patterns, these are likely to bottom out soon and start rising slightly, which could actually help the 10-year yield find a top as it signals some labor market cooling.
The Fed's Timing Problem: Cutting at All-Time Highs
One of the most perplexing aspects of current monetary policy is the timing. The Federal Reserve cut rates while markets were at or near all-time highs, unemployment was low, and inflation hadn't durably returned to their 2% target. This represents a departure from historical precedent where rate cuts typically follow significant market stress or economic deterioration.
In 1998, the Fed cut rates after the S&P 500 had already dropped 20%. This time, they cut rates while the S&P was still making new highs relative to the money supply. The comparison becomes even more interesting when you consider that the S&P divided by M2 is getting rejected from exactly the same level that caused problems in August 1998.
The Fed's justification appears to be getting ahead of potential problems rather than responding to existing ones. Fed Chair Powell has indicated they don't want to wait for a market crash to start cutting. But this preemptive approach creates its own risks, particularly if it leads to asset bubbles or inflation reacceleration.
What's particularly concerning is how quickly Fed policy can reverse. The 1998-2000 cycle shows how rapidly central bankers can go from cutting rates to raising them aggressively when inflation concerns emerge. The market is essentially asking: are we setting up for a similar reversal if inflation continues to drift higher?
This uncertainty creates a challenging environment for risk assets like Bitcoin. Even if the economy remains strong, the monetary policy backdrop becomes less supportive if bond investors lose confidence in the Fed's approach.
What This Means for Bitcoin's Path Forward
The key question for Bitcoin holders is whether this correction follows last year's playbook or represents something more concerning. If we're following historical patterns, Bitcoin could still stay weak for another one to two weeks before potentially finding support around the 100-day moving average.
The most optimistic scenario involves Bitcoin sweeping the $90k range low, finding support at the 100-day moving average, and then bouncing as more data comes in. A middle-of-the-road scenario might see a deeper test of that support level. The worst-case short-term scenario would involve a retest of the major breakout point, though this seems less likely given Bitcoin's relative outperformance compared to traditional assets.
The timing of any potential recovery likely depends on when the 10-year yield finally tops out. Based on seasonal patterns and historical precedent, the long end of the yield curve could peak sometime in Q1 2025, possibly around the next FOMC meeting or the one after that. If yields sweep their previous highs around 5%, that might be enough to finally exhaust the selling pressure.
For the 10-year yield to top, it needs a fundamental reason to reverse. That could come from initial claims slowly starting to rise or other signs that the labor market is cooling naturally. However, it won't top if we keep getting consistently strong labor market data that undermines the Fed's cutting cycle.
The crucial distinction will be whether yields top on benign data (like gradually rising initial claims) or truly bad data (like inflation jumping a full percentage point in one month). If yields peak because of good data that shows natural economic cooling, that becomes a tailwind for risk assets. If they peak because of genuinely concerning economic developments, even falling yields might not help Bitcoin and other risk assets.
What's clear is that Bitcoin is operating as a risk asset whether crypto enthusiasts like it or not. It's following the same playbook as the S&P 500 and will likely continue to do so until the bond market's revolt against Fed policy runs its course. The good news is that historically, these periods of struggle coincide with important bottoms that set the stage for the next leg higher.
