The Federal Reserve's shift away from quantitative tightening and the possibility of rate cuts are pivotal in creating liquidity, which diminishes the allure of fixed-income assets. As tech credit risks climb, evidenced by rising costs for Oracle's debt protection, investors are turning toward alternative, scarcer assets such as Bitcoin.
Bitcoin (BTC) experienced a 4% drop on Friday, hitting a low of $88,140, and extending its decline to 19% since November. Meanwhile, the S&P 500 is nearing its all-time high, being less than 1% away. This notable divergence could soon narrow with a potential Bitcoin upswing, driven by significant changes in central bank policies and escalating credit stress. Such conditions could push Bitcoin to the crucial $100,000 threshold by the end of the year.
The diminishing appeal of fixed-income assets and the tech sector's credit scare are key factors that might boost a Bitcoin rally. Central to this is the Federal Reserve's pivot from quantitative tightening, which involves reducing liquidity by letting Treasury and mortgage-backed securities mature without reinvestment. This program officially ended on December 1. Over the last six months, the Fed's balance sheet shrank by $136 billion, significantly reducing cash flow. The market is eagerly anticipating the next phase, which includes lower interest rates. Data from the CME FedWatch Tool indicates an 87% chance of a rate cut at the December 10 Fed meeting, with three cuts expected by September 2026.
Falling interest rates and rising systemic liquidity diminish the attractiveness of fixed-income assets. As the Fed reduces rates, the returns on new bond issuances also decrease, making them less appealing to institutional investors. Currently, US money-market funds have reached a record-high $8 trillion, according to Bloomberg. The structural risks in the equity markets, particularly within the tech sector, further incentivize potential capital rotation. The cost for Oracle's debt protection using Credit Default Swaps has surged to its highest level since 2009, with Oracle holding $105 billion in debt, including leases, as of the end of August.
Moreover, Oracle's reliance on significant revenue from OpenAI and its status as the largest non-banking debt issuer in the Bloomberg US Corporate Bond Index highlight growing investor concerns about future supply. The Bank of America reports that steady Fed rates could increase the likelihood of an economic slowdown. Investor apprehension is also heightened by the US Donald Trump administration’s Genesis Mission, which aims to double US scientific productivity through AI and nuclear energy, leading to increased demand for debt protection and significant market unease about debt-fueled spending potentially not yielding sufficient returns.
Bank of America strategist Michael Hartnett suggests that if the Fed maintains steady interest rates, the probability of a broader economic slowdown rises. This uncertainty, coupled with a desire for growth less reliant on stimulus, enhances Bitcoin's appeal due to its scarcity, as institutional capital seeks to mitigate risks in traditional tech sectors.
The Fed's cessation of its liquidity drain program and the market's anticipation of interest rate cuts present a significant tailwind. With tech credit risks escalating due to substantial AI-related debt, capital is structurally poised to shift toward scarce assets. This convergence provides a clear pathway for Bitcoin to potentially surpass the $100,000 mark in the upcoming months.