Bitcoin’s (COIN:BTCUSD) move out of its recent trading range appears to have been driven primarily by improving US regulatory sentiment rather than broader concerns about currency debasement, according to Citi analysts.
The bank pointed to the delayed reaction in Bitcoin following the US Treasury’s bond buyback announcement, as well as ether outperforming Bitcoin during the rally, as evidence that the traditional “digital gold” argument was not the dominant catalyst.
“We think U.S. regulatory news is a more durable explanation for the move,” the analysts said.
Citi watches Bitcoin ETF flows for confirmation
Citi said one of the most important indicators over the coming weeks will be whether improving sentiment translates into renewed demand for Bitcoin exchange-traded funds.
ETF inflows have struggled to regain momentum since the liquidations seen last October. According to Citi, a meaningful recovery in flows during the next month could indicate that investors are beginning to price in a more favourable US regulatory environment, even if uncertainty remains over the passage of comprehensive market-structure legislation.
Citi’s base case currently assumes no net ETF flows. Over the longer term, the bank also sees uncertainty around how value will accrue to public blockchain networks if more financial activity shifts towards private blockchains.
Todd Ault, founder of Ault Blockchain, also linked the latest rally to developments in Washington.
“What you are seeing in Bitcoin right now is the market starting to understand how significant this moment could be for crypto in the United States. President Trump putting his weight behind the CLARITY Act is a big deal,” Ault told Investing.com.
Bernstein points to Treasury liquidity as another catalyst
Bernstein offered a different interpretation, arguing that the US Treasury’s decision to increase purchases of longer-dated bonds provided a major trigger for Bitcoin’s advance.
Analyst Gautam Chhugani said cryptocurrency markets had struggled earlier in the year as the Iran conflict tightened financial conditions, while strong investor demand for artificial intelligence and semiconductor stocks diverted liquidity away from digital assets.
However, with growing AI capital expenditure increasingly being financed through debt markets, Chhugani believes greater liquidity could ultimately find its way into Bitcoin as investors seek a hedge.
He also argued that regulatory clarity from the SEC and CFTC “is here to stay with or without the CLARITY Act,” which is scheduled for a September 15 vote.
Ether outperforms as tokenization theme strengthens
Ether has risen faster than Bitcoin during the latest cryptocurrency rally, a trend Bernstein attributes to the asset’s broader exposure to stablecoins, tokenization and the adoption of real-world assets on blockchain networks.
The relative strength of ether also supports Citi’s argument that the rally is being driven by regulatory and industry-specific developments rather than solely by Bitcoin’s role as an alternative store of value.
Bitcoin ETF flows, meanwhile, have started showing signs of stabilisation. According to Bernstein, outflows peaked at close to $7 billion between May and June, equivalent to roughly 10% of assets under management.
Inflows subsequently reached $1.1 billion through August 20, while total Bitcoin ETF assets surpassed $85 billion, compared with approximately $70 billion in June.
Strategy balance sheet stabilises after limited Bitcoin sales
Bernstein also highlighted an improvement in the financial position of Strategy (NASDAQ:MSTR), one of the largest corporate holders of Bitcoin.
The company’s cash reserves now provide coverage for approximately 2.8 years of dividend payments, according to the brokerage.
Strategy sold only around 0.8% of its total Bitcoin holdings, with the disposals intended to support share buybacks rather than signal a broader reduction in cryptocurrency exposure.
Bernstein expects Strategy to resume Bitcoin purchases as the nominal value of its STRC preferred shares moves closer to $100.
Taken together, analysts see several forces behind Bitcoin’s latest breakout, but regulatory developments in Washington, recovering ETF demand and improving market liquidity are emerging as the principal factors to watch for evidence that the rally can be sustained.