Will the rise in U.S. Treasury yields affect the cryptocurrency market?

This article was published in Wu's Blockchain, author: Liu Quankai.

Since the beginning of the year, according to CoinMarketCap data, the BTC increase is still close to 100%. However, the stock price performance of the top ten publicly listed companies holding Bitcoin has been poor, possibly due to the rise in the yield of the U.S. 10-year Treasury bonds, which sends out a dangerous signal.

After experiencing a downward trend, fluctuations, and adjustments for most of March, Bitcoin's price finally rebounded at the end of March. As of the evening of March 30, according to Binance data, Bitcoin's price was consolidating around $59,000. On April 7, Bitcoin rebounded again, returning to around $57,000. (The following data is related to the end of March.)

According to glassnode data, many options investors have placed their bets on Bitcoin's price reaching $80,000, indicating very high expectations for the market in April. Everything seems to be moving in a positive direction, but one risk point still exists—the yield of the U.S. 10-year Treasury bonds remains at historically high levels. Although it has lasted for a long time, the attention seems to be gradually decreasing. The rise in U.S. Treasury yields, as the "anchor of global assets," often signifies a tightening of monetary policy.

According to Trading View data, the yield of the U.S. 10-year Treasury bonds is 1.75, still on the rise, and may reach 2.5 by the end of the year. The main factors for the rise in U.S. Treasury yields include: expectations of U.S. economic recovery, gradual exit from loose monetary policy, rising inflation expectations, and insufficient willingness of the Federal Reserve to combat the rise in Treasury yields.

Currently, the Federal Reserve is still sending dovish signals, and loose monetary policy will continue for a while. In the context of excessive monetary issuance and devaluation, Bitcoin can still maintain a good upward momentum, but the rising inflation expectations and continuous increase in Treasury yields put ongoing pressure on the valuations of growth stocks. Moreover, with more and more publicly listed companies purchasing Bitcoin, the pressure on growth stock valuations may spread to Bitcoin, becoming a significant hidden danger for the rise in Bitcoin prices.

Theoretically, the continuous rise in Treasury yields will lead to consolidation or decline in the stock market and result in tightening of monetary policy.

Image source: Twitter user @yk1211

Comparing the stock price trends of the top ten publicly listed companies holding Bitcoin from the beginning of the year to now (January 4 - March 26), it is found that the overall performance of these companies' stock prices has been poor. Voyager Digital (a cryptocurrency brokerage) has had the most impressive stock price trend, while more well-known companies like Tesla and Square have shown somewhat dull stock price movements. Additionally, companies like MicroStrategy and Meitu have experienced roller-coaster-like market conditions.

Although Bitcoin has undergone several significant adjustments, since the beginning of the year, according to CoinMarketCap data, the BTC increase is still close to 97%. This indicates that the overall poor performance of publicly listed companies holding Bitcoin is not closely related to holding Bitcoin itself, but more due to the continuous surge in Treasury yields since the beginning of the year, which has pressured stock valuations. Compared to value stocks, the upward movement of Treasury yields has a more pronounced downward pressure on high-risk assets like growth stocks.

Growth stocks have stable growth in free cash flow and high valuations, where the discount rate is the general discount rate minus the stable growth rate of free cash flow, i.e., a low discount rate of r-g; while value stocks' free cash flow is considered unable to achieve free growth, using the general discount rate for valuation, i.e., r. When the discount rate r rises, the decline in the valuation of growth stocks for every dollar of profit is greater than that of value stocks.

Cryptocurrencies and technology growth stocks can both be classified as high-risk assets, and their valuations are similar to those of technology growth stocks, with prices also being affected by the rise in Treasury yields.

Introducing the widely recognized intrinsic value DCF model (Discounted Cash Flow model) in the industry for explanation. The core idea of the DCF model is to discount all future cash flows of a publicly listed company to present value. The enterprise valuation P equals the ratio of the company's cash flow CF in a growth state multiplied by (1+g) to the sum of the risk-free rate of return and risk premium.

The main influencing factor for valuation is the risk-free rate of return, which can be represented by Treasury yields. Therefore, when there is not much change in the company's fundamentals, the soaring Treasury yields will lead to a decrease in expected valuations. Similarly, for Bitcoin, the current fundamentals have not undergone significant changes or impacts, and the rise in Treasury yields will lower investors' expectations for Bitcoin prices.

Some giants in the U.S. stock market, such as Tesla, have formed a certain bundling between their stock prices and Bitcoin prices by purchasing large amounts of Bitcoin. By comparing the correlation between Bitcoin, Tesla, and the S&P 500 index over the past six months, it is found that the correlation between Bitcoin and Tesla reaches 0.615, far exceeding the correlation of either Bitcoin or Tesla with the S&P 500 index. This may explain why Musk frequently promotes Bitcoin.

Image source: Forbes magazine columnist Leeor Shimron

Although Coinbase is about to go public and has disclosed an astonishing first-quarter financial report, the overall poor performance of companies holding large amounts of Bitcoin due to rising Treasury yields and valuation pressure may still be a major trend, which could spread to the Bitcoin market and become a potential hidden danger for the rise in Bitcoin prices.

Therefore, Bitcoin prices may be affected by the rising Treasury yields, leading to lower investor expectations. Additionally, due to the high correlation between publicly listed companies holding Bitcoin and Bitcoin itself, the poor stock performance resulting from rising Treasury yields may also constrain these companies' desire to purchase Bitcoin, further impacting the rise in Bitcoin prices.