Bitcoin Faces Headwinds Amid Massive Capital Rotation to Equities

Bitcoin is holding steady above the $73,000 level today, following a wave of declines that pushed it to its lowest points since last April.

The ongoing drop in Bitcoin comes amid a continuous shift of liquidity away from the cryptocurrency market and spot Bitcoin ETFs toward the stock market. This occurs as the performance gap between the two markets widens, with the stock market continuing to trend upward toward new record highs.

Bitcoin also appears to be struggling amid inflationary risks and the lack of a near-term resolution to the war in the Middle East. Even though oil prices have dipped, these risks are ultimately tied to rising yields on both US Treasuries and Japanese government bonds. Higher yields drive up financing costs for the speculative capital needed to push Bitcoin higher. In contrast, the stock market appears better equipped to withstand these negative factors, thanks to the continued strength of AI and tech companies. These sectors continue to attract strong demand, supporting the ongoing upward trend in the overall market.

With cryptocurrencies experiencing sluggishness and the stock market offering attractive prospects, it is natural to observe a swift transfer of capital between them. The introduction of spot Bitcoin ETFs appears to have facilitated this movement by integrating the two markets more tightly, enabling them to use shared infrastructure and trading systems.

Looking more closely at these spot Bitcoin ETFs, they are on track to record their third consecutive week of outflows exceeding $1 billion, according to data from SoSo Value. They are also headed toward their worst monthly fund-flow performance since last November. Excluding today's trading sessions, these funds have seen $2.3 billion in outflows in May. Meanwhile, major stock market passive index ETFs continue to pull in billions of dollars almost nonstop, even at these consecutive record peaks.

To make matters worse for Bitcoin, there is no clear or meaningful buying momentum from whales on the Bitcoin blockchain. Their activity is barely moving, and we are not seeing any significant accumulation by whales holding between 1,000 and 10,000 BTC, according to data from BGeometrics.

Bitcoin may recover and continue its upward trend, especially if current support levels hold. The daily chart shows that Bitcoin is in a correction after the last significant rally from March to mid-May. Currently, Bitcoin tests a crucial midpoint of that bullish impulsive wave around $73,800. If buyers maintain that level, a new bullish impulsive wave could arise and possibly target $90,000. Essentially, this outlook relies on a deceleration in stock market gains, but not a significant drop in risk appetite, along with progress in resolving the Middle East conflict.