Wall Street giant Citi ( C ) said the sluggish start to the traditional Santa Claus rally may not yet derail the year-end stock rally, but pointed to bitcoins fall as a warning sign.
Bitcoin’s trading behavior has historically mirrored the fortunes of the Nasdaq 100: When the cryptocurrency is above its 55-day moving average, returns on the Nasdaq improve significantly, analysts led by Dirk Willer wrote in Thursday’s report.
With bitcoin now below that threshold, the analysts said the stock market’s risk-adjusted returns have weakened.
The bank’s analysts attributed the recent crypto weakness largely to tight liquidity conditions. The U.S. Treasury’s rebuilding of its liquidity coupled with falling bank reserves, which have fallen by about $500 billion since mid-July, have drained liquidity and pressured risk assets.
The analysts noted that while stocks had been resilient thanks to the artificial intelligence (AI) boom, bitcoin tends to react more quickly to liquidity shifts. The good news, the report said, is that treasury balances are now close to levels where the rebuild has typically stalled, suggesting that liquidity may soon improve and revive both bitcoin and stocks.
Still, Citi sees new concerns emerging around the AI trade. Investors question whether massive AI spending will yield sufficient returns, even as companies face rising hardware costs and supply constraints reminiscent of the late 1990s.
Hyperscalers such as Meta ( META ) and Alphabet ( GOOGL ) are also turning to debt markets to finance data center construction, issuing tens of billions of dollars in new bonds. The bank noted that this shift toward credit financing reflects the dot-com era, although balance sheets are still far stronger today.
The report concluded that debt issuance reflects opportunity rather than stress, but warned that the shift from cash to credit is rarely positive for bondholders.
Read more: Citi says Crypto’s weakness stems from slow ETF flows and fading risk appetite
