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- Macro: Rising long-term yields and tightening financial conditions - compounded by a weakening AI trade and token price deflation - pose growing correction risks for equities, with the US 10-year yield approaching critical levels. Bitcoin, however, is increasingly decoupling from US equities, as it is driven primarily by US Dollar dynamics rather than global growth expectations. A structurally weaker Dollar and accelerating global money supply growth could fuel a Bitcoin catch-up rally, with a cointegration-based equilibrium price of around $197k.
- On-Chain: Risk-on conditions continue to strengthen, with historical regime signals remaining durable, investor behaviour firmly profit-dominated, and relative performance versus traditional assets improving. With all major cost-basis levels now reclaimed, attention shifts towards the $90k-$100k region, where multiple technical and on-chain reference levels converge around key resistance.
Chart of the Month
Macro Environment
Bitcoin managed to outperform other major assets in September despite an increasingly volatile macro environment.
The current macro environment continues to be characterised by a transition from a regime of tight financial conditions to easier financial conditions.
While fiscal policy already exhibits a clear easing bias, monetary policy is still on collision course with financial markets. From our point-of-view, the recent Fed rate hike may add “fuel to the sovereign bond fire” by accelerating increases at the long end of the yield curve which may tighten financial conditions further.
The reason is that first rate hikes in a Fed rate hiking cycle have usually been followed by continued increases in the long end of the yield curve. We think this continues to be a key risk for financial markets due to an imminent repricing in (still benign) global growth expectations.
In fact, this is one of the strongest tightenings in monetary policy since 2022/23:
As far as the Fed is concerned, it is stuck between a rock and hard place. The Fed essentially faces the following dilemma: If the Fed hikes too aggressively, it will worsen the fiscal interest expense problem. On the other hand, if the Fed cuts rates too aggressively it will worsen the inflation problem. Note that in both tail scenarios, bitcoin may perform well – both as a decentralized asset that is essentially free of counterparty risk and as an absolutely scarce finite asset that may hedge investors against debasement.
That being said, the truth of the matter is that the sovereign bond market is effectively dictating monetary policy due to “fiscal dominance” and rising commodity prices. In fact, the implied shadow Fed Funds rate - based on the whole US Treasury yield curve - has clearly been signalling a higher Fed Funds target rate.
The Fed essentially just adjusted to that reality. More specifically, despite the fact that the Fed just recently raised rates by 25 basis points, the yield curve / shadow rate still suggests that the target rate should be around 4.14% instead of 3.875% (mid rate). The Fed is essentially “behind the curve” and the risk is that bond yields will just run off and demand more aggressive rate hikes.
Two-factor shadow-rate model with 25bp lower bound, FFTR = mid of target range
Another analysis suggests that sharp increases in the 10-year yield in the short-term significantly increases the risk of a correction in the S&P 500 (i.e. a -10% drawdown). More specifically, a +80 basis points increase in the US 10-year yield over 20 trading days has historically almost tripled correction risks for the S&P 500 (see table below):
At the time of writing this report in late September, the US 10-year has already breached the 5% mark and has increased by +47 basis points on a rolling 20-day period. In other words, yield increases are significant but not yet critical to induce a stock market correction.
However, further short-term increases towards 5.4%-5.5% may increase significant correction risks in the stock market and may lead to a reversal in the monetary policy regime.
In any case, the rise in yields suggests that a slowdown in economic activity is imminent as changes in long-term bond yields usually lead the ISM Manufacturing Index by around 12 months (see chart below – note that 10-year yield changes are inverted). This is also something that we highlighted in our previous BMI reports.
The reason why that is relevant for financial markets is the fact that the global semiconductor cycle is highly correlated with global growth expectations. Any repricing to the downside will most likely entail a further repricing in semiconductor stocks, and by derivation, the global stock market more broadly.
We have highlighted the risk to the global semiconductor cycle in our previous Bitcoin Macro Investor report as well.
In general, we are seeing a confluence of both macro headwinds and industry-specific headwinds that may lead to a continued consolidation of the AI trade.
Macro headwinds can be summarised as tightening financial conditions and industry-specific headwinds mostly centre around ongoing AI token price deflation.
For instance, token price expenditure index has declined by more than -50% from its recent high. Moreover, we expect even more token price deflation due to increasing cost savings and routing to cheaper non-frontier AI models, concerns over intellectual property theft, and, most importantly, competition from Chinese open models.
In fact, based on our own research, most frontier models’ tokens in China are still 2x-3x times cheaper than comparable models by Anthropic or OpenAI. We think that this gap will most likely continue to exert downside pressure on US token prices.
In this context, we interpret the most recent comments by AI industry leaders such as Anthropic’s Dario Amodei to slow down frontier lab developments rather as a way to manage investor expectations towards (sharply) decelerating growth.
For Bitcoin, however, weaker equity markets do not necessarily mean renewed downside pressure.
One of the reasons is that, from a pure quantitative perspective, Bitcoin rather appears to be influenced by changes in the US Dollar unlike the S&P 500, which appears to be influenced more by changes in global growth expectations.
In other words, Bitcoin and US equities are influenced by very different macro forces which makes a decoupling more likely.
As highlighted in one of our weekly Crypto Market Compass reports, the log-log correlation between Bitcoin and the S&P 500 has become the most inverse since 2015 – supporting the thesis of an ongoing structural decoupling between US equities and Bitcoin.
Furthermore, as highlighted in our previous Bitcoin Macro Investor report, from a statistical point-of-view, bitcoin exhibits the most negative sensitivity to the US Dollar among major assets like the S&P 500 or gold. Thus, a pronounced weakness in the Dollar historically creates the biggest tailwind for bitcoin.
In general, we continue to expect that the trifecta of rising commodity prices, rising sovereign bond yields, and a weakening AI trade may create a structural weakness in the Dollar. This may create secular high-inflation regime that supports hard assets.
A very important note in this context is that changes in the Dollar are inversely correlated with changes in global money supply growth.
So, a structural weakness in the Dollar implies a structural acceleration in global money supply growth.
In that context, Bitcoin continues to undershoot global money supply. One of the key reasons that we also highlighted in previous reports was the fact that the AI trade has “sucked the oxygen out of the room” – i.e. the capital out of bitcoin and other cryptoassets.
A catch-up to (accelerating) global money supply may provide a renewed tailwind for bitcoin over the coming months.
More specifically, a simple cointegration analysis as shown above implies a model “equilibrium price” for bitcoin of around 197k USD.
That being said, a renewed flare up of the Euro crisis may lead to a more pronounced strength of the Dollar/weakness of the Euro in the short-term. More specifically, French-German 10-year sovereign spreads have recently broken out to the highest level since 2012 as the French economy continues to struggle amid higher global energy prices and domestic political uncertainty.
Bottom Line: Rising long-term yields and tightening financial conditions - compounded by a weakening AI trade and token price deflation - pose growing correction risks for equities, with the US 10-year yield approaching critical levels. Bitcoin, however, is increasingly decoupling from US equities, as it is driven primarily by US Dollar dynamics rather than global growth expectations. A structurally weaker Dollar and accelerating global money supply growth could fuel a Bitcoin catch-up rally, with a cointegration-based equilibrium price of around $197k.
On-Chain Developments
What Does History Tell Us?
The bear-market transition is something we have been tracking for some time. In our previous Bitcoin Macro Investor, we examined the mechanics that typically underpin this process and introduced two models designed to assess when the market is moving beyond the bottoming phase and back towards risk-on conditions.
The Long-Term Holder model noted in last month’s edition highlights periods when ownership becomes increasingly concentrated among mature, less price-sensitive investors, signalling that more transient capital has largely exited the market. Rather than treating this as a precise bottom indicator, we use it as a marker of the transition back towards risk-on conditions. Excluding the structurally different 2011 cycle, subsequent performance following prior signals has been notable.
Twelve months after each signal, Bitcoin had gained 102%, 117% and 164%, finishing each period at more than double its starting level. However, the paths differed considerably, ranging from prolonged consolidation to sharp early advances followed by meaningful retracements. Historically, the signal has therefore marked a major improvement in the broader regime, but not a smooth or uninterrupted path higher.
13-Jan-2023, 21-Aug-2026.
We can visualise this observation from a different perspective by assessing the 90-day rolling Sharpe ratio following each signal. Notably, the subsequent periods contain both strongly positive and negative Sharpe readings, reinforcing the point that the transition back towards risk-on conditions has historically been accompanied by substantial variation in the quality and consistency of returns.
13-Jan-2023, 21-Aug-2026.
In Search of Escape Velocity
A long-standing thesis within Bitwise Research has been that the AI trade has absorbed a disproportionate share of investor liquidity and attention, with Bitcoin a potential beneficiary should that leadership weaken. With parts of the AI complex now softening, we are beginning to assess whether capital rotation is emerging.
When comparing Bitcoin against the S&P 500, the BTC/S&P 500 ratio is now testing its previous high, placing the relationship at an important technical decision point.
A sustained break above this level would mark a meaningful improvement in Bitcoin’s relative performance against US equities and could provide an early indication that marginal investor attention is beginning to rotate towards digital assets.
Alternatively, when assessing Bitcoin relative to gold, the incumbent leader within the hard-money and debasement trade, the BTC/Gold ratio has now formed a technical higher high.
While this does not confirm a sustained rotation, it provides early evidence that investor preference may be shifting towards Bitcoin after a prolonged period of gold leadership. If sustained, this could mark an important transition in the next phase of the debasement trade, with Bitcoin beginning to capture a greater share of marginal capital flows.
To further assess the rotation thesis, we can examine relative valuation through the percentile ranking of each asset’s deviation from its 200-week moving average. The 200-week moving average provides a long-term measure of trend, while the percentile ranking allows us to assess how extended or compressed each asset currently sits relative to its own historical distribution.
On this basis, Bitcoin remains at a comparatively low percentile relative to both equities and precious metals, indicating that price remains historically compressed against its long-term trend despite the recent advance.
This long-term compression is particularly notable when compared with other major assets, which currently sit much higher within their respective historical distributions. From this perspective, Bitcoin retains considerably more scope for valuation expansion relative to its long-term trend should the current risk-on regime continue to mature.
Risk-On Remains Robust
One of the clearest markers of the bear- to bull-market transition was the pronounced shift in investor behaviour. We can now revisit those measures to assess whether risk-on conditions remain durable.
The first measure is the net profit or loss being realised by investors. Notably, the market remains firmly within a profit-dominated regime. Risk-off environments are typically characterised by persistent capital destruction, with investors repeatedly disposing of coins below their acquisition price and realised losses overwhelming profits. At present, the opposite dynamic remains in place, with profit-taking continuing to dominate. This indicates that investor profitability has improved materially and that fresh liquidity from new investors continues to enter the asset, supporting its overall upwards ascent.
A similar behavioural shift is visible through the Spent Output Profit Ratio (SOPR), which measures the average profit or loss locked-in across coins spent on-chain. Bear-market environments are typically characterised by persistent readings below 1.0, with rallies often encountering resistance around the equilibrium level as investors use a return to break-even as an opportunity to exit.
That behaviour has now reversed. SOPR has remained predominantly above 1.0, while pullbacks towards the equilibrium level have increasingly been absorbed rather than rejected. This suggests that investors are defending their cost basis, with coins spent near break-even being absorbed before subsequent spending returns to profitability. Such behaviour has historically been associated with bull-market conditions, where cost basis begins to function more like support than resistance.
Importantly, the same pattern is evident across both Short-Term and Long-Term Holder cohorts. Despite the significant differences in their investment horizons and behaviour, both groups are currently exhibiting similar profit-dominated spending dynamics. This convergence suggests that the shift in market psychology is broad-based rather than isolated to a single cohort, with behaviour increasingly resembling a transition to risk-on conditions.
Additionally, the Sell-Side Risk Ratio provides insight into the magnitude of realised liquidity flows relative to Bitcoin’s broader capital base. The metric compares the absolute value of profit and loss taking forces with the Realised Cap, effectively measuring how much economic value is being transferred through spending relative to the capital stored within the asset.
Notably, the ratio remains extremely compressed at the 3rd percentile, despite the recent increase in upside volatility. This suggests that while the market remains firmly within a profit-dominated regime, the absolute scale of realised capital flows is still relatively sparse. Investors are spending coins at a profit, but the magnitude of that spending remains subdued.
Historically, the more euphoric phases of Bitcoin bull markets have been accompanied by a substantial expansion in realised profit-taking and sell-side liquidity. The continued compression in the metric therefore suggests that the market has not yet entered this more liquidity-intensive phase, leaving scope for greater capital turnover and volatility should the bull market continue to mature.
Looking Ahead
From the perspective of key cost-basis and structural price levels, Bitcoin has now reclaimed each of the major thresholds we have consistently highlighted as important markers of a transition back towards risk-on conditions.
- The Short-Term Holder Cost Basis at $73k represents the average acquisition price of newer market participants and has historically acted as an important delineator between local risk-on and risk-off conditions.
- The True Market Mean near $77k estimates the average acquisition price of active investors by excluding supply considered lost or deeply dormant.
- The average ETF cost basis near $83k has emerged as an increasingly relevant reference point following the expansion of the spot ETF complex.
With Bitcoin now trading above all three measures, these levels form the key reference zone for assessing the durability of the current risk-on structure (Chart-of-the-month). The average ETF cost basis near $83k represents the first major level on the downside, with a successful defence providing early evidence that former resistance is transitioning into support.
Looking further ahead, Bitcoin has now broken decisively above the +1σ Short-Term Holder Realised Price band near $85k, pushing price into the upper end of the four-year STH cost-basis distribution. With this threshold cleared, the next major reference points sit around $90k at the +1.5σ band and $95k at +2σ.
Importantly, these levels are not simply arbitrary extensions from spot. Historically, the +1.5σ band has been exceeded on only around 3.8% of days, while the +2σ band has been exceeded just 1.7% of the time.
This places the $90k-$95k region within an increasingly stretched part of the historical Short-Term Holder cost-basis distribution, where further upside would move price into relatively rare extremes compared with recent investor positioning. This suggests that the market may be somewhat overheated in the near term, with a period of consolidation potentially allowing structural reference levels, such as the Short-Term Holder cost basis, to converge further towards price.
Interestingly, the Fibonacci retracement structure provides a second, independent framework pointing towards a similar region. Measured from the cycle high to the cycle low, the 0.5 retracement sits near $92k, while the 0.382 retracement comes in around $100k. Both levels therefore fall within the same broader upside zone identified by the Short-Term Holder deviation bands.
Importantly, these are not newly identified levels. Both were among the key pivot points we highlighted during the initial market breakdown in our previous research here. Their re-emergence as relevant levels on the way back up adds further structural significance to the $90k-$100k region, where multiple technical and on-chain reference points are converging.
Window: 2 years
Bottom Line
- Macro: Rising long-term yields and tightening financial conditions - compounded by a weakening AI trade and token price deflation - pose growing correction risks for equities, with the US 10-year yield approaching critical levels. Bitcoin, however, is increasingly decoupling from US equities, as it is driven primarily by US Dollar dynamics rather than global growth expectations. A structurally weaker Dollar and accelerating global money supply growth could fuel a Bitcoin catch-up rally, with a cointegration-based equilibrium price of around $197k.
- On-Chain: Risk-on conditions continue to strengthen, with historical regime signals remaining durable, investor behaviour firmly profit-dominated, and relative performance versus traditional assets improving. With all major cost-basis levels now reclaimed, attention shifts towards the $90k-$100k region, where multiple technical and on-chain reference levels converge around key resistance.
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