Why Are Bitcoin and Ethereum Down This Week? The Overlooked Yield Curve Connection

When sentiment isn’t the only factor driving down prices, a certain kind of unease settles into the cryptocurrency markets. That’s how this week felt. Bitcoin fell. Ethereum started to bleed. Additionally, the tendency on trading desks and Discord channels was to attribute the market’s mood, profit-taking, or geopolitics.

However, after analyzing the data for a few days, an older and more structural issue begins to emerge. This issue has its roots not in blockchain activity but rather in the bond market, corporate balance sheets, and the subtle decline of an economy that appears to be doing well on the surface.

As of mid-September 2024, the yield curves for the 10-year and 2-year U.S. Treasury have been inverted for 784 days. There should be a pause at that number. The previous record, which was set in the harsh economic climate of 1980, was 624 days. Not only is the current inversion lengthy, but it is also unprecedented in history. Nevertheless, it hardly makes an appearance in popular crypto commentary. Perhaps they should be watching bond spreads instead of Bitcoin’s candlestick charts.

A macro analyst known as “Doctor Profit” has been outspoken about the true significance of this inversion. He is a 15-year veteran trader who accurately predicted Bitcoin’s decline to $15,000 after the Fed’s 2022 rate hike cycle and was named one of Bloomberg’s Top 5 Macro Traders the following year. He does not believe that a crash is caused by the inversion itself. That’s what the repair stage does. Markets typically relax when the spread closes, as it did on August 27 from -0.8% to -0.1%.

People believe that the worst is behind them. Historically, that assumption has been the source of danger. 346 days of inversion preceded the 1990 recession. 232 days later came the subprime crisis. The contemporary financial system hasn’t yet had to deal with what comes after 784 days.

There is an odd duality to the situation, particularly with regard to Ethereum. The network is arguably doing well on-chain. The Ethereum network currently has about 788,000 active daily addresses interacting, which is close to its all-time high. That’s real usage, real transaction volume, and real users using the protocol in real ways; it’s not noise. However, in just one week, the price has decreased by almost 5%, from roughly $2,132 to just under $2,040. This type of divergence causes you to pause and consider which signal to believe.

Sentiment isn’t being improved by ETH’s technical picture. Even though the fundamental case for the network is subtly strengthening, a 14-day RSI at 34 indicates that selling pressure is currently winning the debate. Whether this discrepancy between price and usage is a significant buying opportunity or just a delay before fundamentals catch up to macro gravity is still up for debate. Both explanations seem reasonable. This is why it’s so hard to read this moment.

This week’s confusion was exacerbated by geopolitical noise. Oil prices increased as a result of President Trump’s comments regarding “Operation Epic Fury” and the ongoing conflict with Iran, and cryptocurrency, which still acts like a risky asset at these times despite what the Bitcoin maximalists claim, fell in tandem. Every time there is a stressful event, it is difficult to ignore how quickly the correlation reappears. Until something truly frightening occurs, cryptocurrency functions as a safe haven. After that, it sells off along with stocks.

The employment data has been subtly conveying the same message as the yield curve beneath the headlines. In August 2024, the unemployment rate in the United States increased slightly to 3.9%, the highest level since November 2022. Payrolls from non-farm sources came in at 156,000, which was less than anticipated, and previous months’ figures were lowered.

Temporary employment decreased by 23,000, which is significant because temporary positions are often a good predictor of future hiring trends. When businesses begin laying off temporary employees, they are typically getting ready to make a more permanent change.

Another layer of pressure that is rarely included in crypto analysis is corporate debt. As of Q2 2024, U.S. non-financial corporations owed $18.7 trillion, of which 28% were junk-rated bonds, an increase of 8 percentage points since 2020. At 6.8%, the average corporate borrowing rate is at its highest level since 2009.

From 5.2 times in 2021 to 3.1 times now, interest coverage ratios have drastically decreased and are perilously close to the point at which default risk materializes. Doctor Profit is worried that any tightening of that channel could cause defaults to soar above 4% in a matter of months, and that the low default rate of 2.1% in early 2024 is a mirage—companies rolling over debt to survive.

For the time being, Bitcoin’s institutional narrative remains intact. Institutional holdings through ETFs now make up 6.53% of the circulating supply, and spot ETF inflows brought in $2.07 billion for BTC-related funds in August alone. Based on rate-cut expectations that are currently priced at a 90% probability for September, Doctor Profit sees a path to $90,000–$94,000 as a base case. However, he also acknowledges that there is a chance of a crash prior to any increase to $140,000. This is not a contradiction, but rather a sincere recognition that macro cycles don’t follow charts.

Observing all of this, it seems as though the cryptocurrency market is in the midst of something for which it does not yet have the right vocabulary. It’s not a crash of sentiments. It’s not a fear of regulations. The weight of a macroeconomic cycle that has been accumulating since 2022 is finally beginning to show up at the door.