Bitcoin and Its Rebound Relationship with Gold

Bitcoin this week broke up its three-month-old relationship with the US stocks. The hottest cryptocurrency is now dating gold. A rebound relationship ensues.

In non-Woody Allen’s terms, the short-term correlation between Bitcoin and the S&P 500 plunged this week – from 78.8 percent two weeks ago to 42 percent. At the same time, the cryptocurrency’s proximity with the rival safe-haven asset, gold, grew from minus 0.1 percent to 40.4 percent upward.

Bitcoin-Gold correlation grows in the week ending on July 26. Source: Skew

In a way, Bitcoin is in love with two different markets around the same time. It’s a super-conflicting scenario for an asset that was practically trading without a clear bias from more than two weeks.

Eventually, it has to break the heart of either one to date the other. Or, in the best-case scenario, Bitcoin will leave them both to focus on itself.

But before going into the whys, let’s understand the entire Bitcoin-Gold-S&P 500 conflict.

S&P 500: A Showoff Partner

The S&P 500 fell in July as one of our earlier articles feared.

The US index rallied sharply from its March 2020 nadir, which was helped only by the Federal Reserve’s guarantee to support the US economy at any cost – even if it is by injecting trillions of dollars into the market or slashing its benchmark lending rates to near zero.

When cash liquidity enters the market, it reduces an investor’s probability of selling stocks and other profitable assets for money. On the contrary, the greedy man can use the stimulus money to raise its stakes in the stock market.

If not entirely, that was one of the reasons why the S&P 500 recovered impeccably following its February-March crash.

S&P 500 rally stops amid poor fundamentals. Source: TradingView.com

But there comes the point of reckoning. Stocks that impressed during the second quarter of 2020 were of corporate firms that earned less-than-expected on the ground. Almost all the corporate earnings reports, barring a few like Tesla, showed disappointing quarterly results.

So what is the accurate valuation of stocks listed on the S&P 500? No one knows.

That leaves the market with two kinds of investors. The first will hold shares based on an assumption of promising future earnings by corporates. The other one will call the bluff and dump his holdings for either 1) cash, 2) commodity, 3) other stocks, 4) government bonds, 5) bitcoin 6) or for a no-nonsense holiday in France. 

[Special note: The writer of this article would do number 6]

As it appears, the second type of investors sent the S&P 500 down this week. And it was not just the earnings season that switched his bullish instincts off. There were also concerns related to the rising number of coronavirus cases in the US and the lockdown they ensued, alongside the escalating US-China geopolitical tensions.

Meanwhile, the pessimistic investor left his bullish stance also as unemployment rates ticked higher once again, showing that the US economy does not precisely promise a V-shape recovery.

So what did the investor do after dumping his stock positions? The list is endless, but our best guess is that he purchased gold—our reason: the US dollar fell through this week.

All this time, Bitcoin watched the events unfolding, realizing that it is not safe enough to have the shady S&P 500 as its partner. The cryptocurrency conveniently drifted apart, shows its plunging correlation with the US index.

Enter Gold: The Safe-Haven

As the S&P 500 and likewise US indexes plunged, gold continued to trend higher. As of Friday, the precious metal was approaching its all-time high in the longest winning streak since 2011.

Gold rallies towards its all-time high. Source: TradingView.com

Investors look at gold as their safe-haven in times of economic stress. Strategists believe that it rallied strongly because its rival safe-haven assets fell apart. They included the US dollar – that weakened in recent weeks amid the rising COVID-19 cases – and the inflation-adjusted yields on available government bonds that fell below zero.

US 10-Year Treasury Bond Real Yields. Source: FRED

Gold surged to a high of $1,900 as the New York session came into play. It is now looking to test its record intraday high of $1,921 from September 2011. Expectedly, catalysts that caused the S&P 500 are helping gold rise.

“The latest move is being driven by the COVID outbreaks in the US. The realization that the recovery is going to be longer and harder than many people were expecting a few weeks ago,” Joe Foster, fund manager at VanEck in New York, told FT. “The US dollar is also weak, and silver has broken out. So that probably tells you some speculative money has come into the market.”

Bitcoin: Going with “Safe” than “Risky”

Bitcoin has chosen its new partner in gold. The cryptocurrency broke above its lazy trading range of $9,100-9,300 in a breakout towards $9,700 this week.

Bitcoin (BTC) price rose towards $9,700 this week. Source: CoinStats

The rally almost matches moves like the one delivered by gold – except minor setbacks that appear on profit-taking sentiment among daytraders.

Meanwhile, Bitcoin also received help from certain in-house factors, including a US regulator’s approval to banks that want to offer crypto custody services, as well as PayPal’s announcement of introducing a crypto-focused product this year.

Indeed, Bitcoin’s bullish bias also improved because of a falling US dollar and super-poor US bond yields. Analysts are already predicting it to rise further into 2020, given the health of the US and global economy.

For once again, Bitcoin is a safe-haven like gold. But how long this rebound relationship would last is a thing best left for the future.

Since you’re here…please check out our flagship cryptocurrency portfolio management app, CoinStats, to buy, sell, trade, and manage your investments all from one place.

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The DeFi Runs Ahead of Bitcoin, Stocks, Gold, And Others

The pace of gains in DeFi is crazy.

Also known as Decentralized Finance, the DeFi sector is booming in anticipation that it would change the way people look at finance. 

Instead of a prominent banking corporation sitting in the middle of a borrower and a pile of cash, one has an automated protocol governing the lending part with the financial assistance of a pool of stakeholders and depositors. A shady-looking, user-spying exchange faces competition from a chilled-out alternative with no central control/authority. And then, there are asset managers that provide users an on-chain exposure to real-world currencies, commodities, stocks, and indices.

Booming DEX

The core of all DeFi models is the same: to lock funds into a pool so they could back the services. Traders who trust the DeFi businesses buy their native tokens in anticipation of exponential returns or stake their capital into their wallets to earn steady yields.

The promise alone has caused what appears to be the DeFi boom. In the second quarter alone, total value locked with the DeFi platforms surpassed over $2 billion. And with it, the demand for their tokens have skyrocketed.

Take decentralized exchanges, for example. The two dominant players in the space – Kyber Network and Uniswap – reported a significant spike in their trade volumes. That came at a time when both underwent significant upgrades in their underlying protocols.

Now have a look at the performance of their native tokens. The Kyber Network’s pet cryptocurrency KNC surged by an astonishing 712 percent on a year-to-date timeframe (charts courtesy to CoinStats crypto portfolio management app).

KNC price performance in the last six months. Source: CoinStats

BTW. Uniswap does not have a native token, exactly. The non-custodial exchange, instead, maintains liquidity pools and pays its backers a 0.3 percent trading fee.

Liquidity Pools

Interestingly, the concept of Liquidity Pools helped raise the token prices on non-DEX projects. Decentralized synthetic asset platform, Synthetix, used the same model to attract about $263 million worth of assets – an all-time high – as of this week.

Meanwhile, SNX, an asset one stakes to use Sythentix’s synthetic tokenization services, surged by 526 percent since it first started trading in April 2020. One has to know that Ren Project and BitGo created their bitcoin-backed tokens – namely sBTC, renBTC, and WBTC – on Synthetix earlier this July.

Its competitor Melon also reported $1 million worth of assets under management. The platform’s native token MLN surged by 400 percent in Q2.

Melon (MLN) price performance in the last three months. Source: CoinStats

COMPOUND, a decentralized lending protocol, also nailed the Liquidity Pool model. The total value locked inside its wallets reached $647 million, with its native token COMP surging by more than 200 percent during Q2 on rising demand.

Compound (MLN) price performance last month. Source: CoinStats

One of its top competitors, Aave, also reported an explosive surge in the value locked inside its pool – from $25 million to over $200 million. The lending project’s growth was visible in its native asset LEND; it surged by over 500 percent in Q2.  

Suffice to say that people are hunting for yields.

Oracle Tokens

It is not just the DeFi projects that had a rocking year so far – even the firms that offer them services benefited from the rally. 

Chainlink, a decentralized oracle network, didn’t enjoy much attention at the beginning of this year. But the project came on its own as it kept on signing lucrative deals with other DeFi projects. The task is straightforward: to feed public blockchains with off-chain data from markets, events, and payments through a decentralized network.

That allows anyone with a data feed to join Chainlink. They become node operators that get paid in Chainlink’s native token LINK. These operators can also stake their LINK to assist the smart contracts that require collateral. That makes Chainlink an ideal partner for DeFi lending projects.

It is perhaps among the few reasons why LINK started surging exponentially in the second quarter. Ahead of its close, the LINK token price was up 293 percent already.

Another Reason for DeFi Craze: A Boring Bitcoin

Despite all the mouth-watering fundamentals discussed above, one of the significant reasons why DeFi projects have boomed so far is Bitcoin – a pretty boring one.

DeFi tokens started rising almost alongside Bitcoin after March 2020 global market crash. Back then, traders were super bullish on Bitcoin because of all the hype surrounding its third “halving.” But as the event passed on May 11, the BTCUSD price restricted itself to a trading range, wherein $10,500 acted as the ceiling and $8,800 as the floor.

The $2,000-area later squeezed into a $300-range. Bitcoin is now finding it difficult to cross even above $9,300 while maintaining a strong foothold near $9,000-support.

Bitcoin (BTC) price performance last month. Source: CoinStats

Boredom may have sent traders towards the DeFi market. Meanwhile, analysts like us merely started justifying the price rally using the fundamentals that were there before buying spree.

In the end, hype beats common sense in the cryptocurrency market. Even the 2017’s ICO boom made people rich until the real tragedy struck.

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Beware of a China-Induced Bitcoin Plunge

Last week, CoinStats discussed how Bitcoin investors should prepare for a stormy second half of 2020. So it appears, the raining has started in China.

This Monday, the CSI 300 index, a collection of China’s most significant stocks listed in Shenzhen and Shanghai, surged 5.67 percent. It kept on rising higher further into the week, with observers crediting the state-media for the rally.

So it goes on like this: agenda channels ran optimistic print and video coverages about the Chinese stock market. They encouraged investors to rush into equities, citing China’s “amazing” economic recovery after the coronavirus lockdown. People listened and bought the stocks. And voila!

CSI 300 on a bull spree. Source: TradingView.com

The result was an overly bullish CSI 300, hitting higher levels it last touched five years ago. 

As usual, China’s influence on the global economy ensured that foreign bourses and indices do well as well. European equities and US stocks climbed. Meanwhile, Bitcoin’s correlation with the risk-on market also helped it jump towards $9,500.

But then, cracks started appearing in the so-called recovery rally.

It all starts with the nature of the China stock surge. While individual investors were busy FOMOing, some analysts at data service Wind anatomized the catalysts that pushed the CSI 300 higher. What they discovered was worrisome.

Bullish by Margins

Margin loans served as one of the most significant fundamentals behind the China stock market rally. WIND found that individual investors – many of them newbies – borrowed Rmb1.27tn (~$184 billion) from brokers in the days leading to this week’s surge.

So that one knows, margin trading is risky because it requires investors to maintain minimum collateral as they keep their bullish/bearish positions open. If the collateral value falls below a certain threshold, brokers ask investors to top-up their accounts with cash or securities. If they don’t, they lose the entire collateral.

Let’s go back to March 2020, the most beautiful month for the global market (pun intended). 

As the coronavirus-induced lockdowns sent stocks lower, everything else – even the so-called safe-havens gold, bitcoin, and government bonds – plunged in tandem. It happened because traders wanted cash to cover their margin calls. Indeed, the US dollar index rose.

Bitcoin price chart showing its March 2020 crash and subsequent recovery. Source: CoinStats Crypto Portfolio Management App

What’s happening in China presently is not entirely the same. 

The country has escaped the coronavirus pandemic. There are signs of economic recoveries after the lifting of lockdowns. Nevertheless, worries about the second wave of infections keep influential investors away, leaving the market in the hands of erratic, overleveraged individuals.

Assertions

Observers, including Hao Hong of Bocom International, have already started drawing comparisons between the current CSI 300 rally and the one from 2015.

The chief strategist noted that the state media urged investors to move their wealth into stocks, causing a 100 percent surge. The rally also appeared out of increased margin trading positions.

But about a year later, the CSI 300 crashed by almost 40 percent.

“I think people are getting greedy because liquidity is abundant, and there is policy support from the top,” Mr. Hong told the Financial Times. “You can sense the speculative atmosphere.”

Stephen Innes, the chief global market strategist at AxiCorp, repeated the same in his investor note, stating:

“China’s retail investors’ army seems to be perfectly able to look through the worrying Western media headlines of another global coronavirus record. Instead, they listen to the enthusiastic chorus from the nation’s influential state media, which are universally singing bullish from the same song page.”

He added that about 12 percent of daily trading volumes in July 2020 had been processed via margin financing. It raises eyebrows because the volumes last month were just 8 percent.

Separate data shows that China’s brokerage firms have opened over 85,000 new margin trading accounts in June. The demand has also surged in the wake of the central bank’s loosening monetary policies. Some of them have found their way into the Chinese stock market.

How the House of Cards Impact Bitcoin?

Top global economies, including the US, the European Union, Japan, Germany, Sweden, India, and others, rely on the Chinese economy. That was reflecting in the global market’s response to the CSI 300’s rally earlier this week as all rose in tandem.

If observers are correct about a margin trading-induced China bubble, then the equities could fall as quickly as they rose. That would leave investors on the wrong side of the trade, requiring them to either exit their positions at higher losses or maintain them by covering their margin calls.

Such a scenario would increase the likelihood of a bitcoin sell-off, as had happened in March 2020. Meanwhile, the impact of China’s stock market on Bitcoin remains unknown since the cryptocurrency’s ban in the country.

But in the US, where Bitcoin has formed a record high correlation with the S&P 500, any bad news in the stock market would expose the cryptocurrency to downside risks.

Therefore, if CSI 300 drops, then the S&P 500 may follow its downside cue, impacting Bitcoin as the bearish ripple expands.

Since you are here, don’t forget to check out CoinStats, the industry’s leading bitcoin and altcoin portfolio management app.

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Bitcoin Investors Should Prepare for a Stormy Second Half of 2020

It’s only halftime, and Bitcoin is leading the financial crisis sentiment by 1-0.

During the first six months of the year 2020, the benchmark cryptocurrency experienced one of its biggest quarter-swings in more than two years. First, the coronavirus pandemic caused an unprecedented lockdown that soon resulted in a global market rout.

Stocks fell, gold plunged, government bonds went out of style – and Bitcoin, which was sitting atop the best year-to-date profits before the crash, became a global scapegoat to cover those losses. As a result, the unique asset lost more than 60 percent in just 24 hours of trading.

Bitcoin price performance during the first half of 2020 | Source: CoinStats

But then, Federal Reserve and its global equivalents came to rescue the market. They announced a giant monetary aid that not only stopped the sell-off but resulted in one of the sharpest pullback recoveries.

On March 12, Bitcoin’s YTD returns were 42 percent below zero. But at the half-yearly close on June 30, the same metric showed the price 29 percent higher. Bitcoin surged by about 139 percent from its March nadir.

Now that the thrilling first half is behind, it is time for the cryptocurrency to decide what it wants to do in the next session. Hardcore bulls want newbies to believe in a rally towards $20,000, $50,000, and even $100,000. Bears cannot think Bitcoin anywhere above zero.

At the same time, there is no significant event – like the “halving” in May 2020 – that could hint Bitcoin’s next bias. There is only a positive correlation with the US stocks that somewhat suggests a shaky sail ahead for the cryptocurrency.

Lockdown 2.0

Bitcoin enters its third quarter for the year at a time when coronavirus cases in the US are rising all over again. Despite hinting a slowdown in June, the number of infections started growing in June after the Black Lives Matter movement.

It was obvious—people who must have been practicing social distancing measures after the reopening stood hand-in-hand on the US streets. The result was a resurgence in the case, especially in Arizona, California, Texas, and Florida.

US coronavirus cases by states as of July 3, 2020. Source: John Hopkins University

Those states have decided to reimpose lockdown. That directly impacts small and medium-scale businesses looking to reopen after facing hardships during the first lockdown. That also hurts the individuals who were hoping to go back to their jobs.

Read More on CoinStats Blog: Bitcoin, Wall Street, And The End Of Their Social Distancing

Meanwhile, warnings of more infections and overwhelmed hospitals keep arriving. The head of the Coronavirus task force, Dr. Anthony Fauci, alerted that the US could see as much as 100,000 cases every day.

“We now have 40-plus thousand new cases a day. I would not be surprised if we go up to 100,000 a day if this does not turn around,” Dr. Fauci told a Senate hearing. “I am very concerned because it could get awful.”

A second lockdown translates into a depressive stock market unless the Fed is willing to extend its stimulus program. Moreover, losses for stock market investors with in-depth exposure in bitcoin also put the cryptocurrency at risk of a deeper downside correction.

But will the Fed extend its quantitative easing policy when it may have to save the suffering US corporate sector? Let’s see.

Earnings Reports Ahead

There is so much uncertainty about the coronavirus that nearly 40 percent of the S&P 500 companies have decided not to publish their earnings forecasts. But the benchmark US index is sitting 24 percent higher from its March 23 low.

Why would an investor, in his/her capable sense, put his money into a market whose fundamentals are unclear? The lockdown has indeed robbed corporates off their second-quarter earnings, but their equities are rallying nonetheless.

Read more: Three Reasons Why Top Crypto Bitcoin Can Still Fall Towards $6,000

Data provider FactSet reports that the companies’ profits have fallen by more than 40 percent in Q2. And most of them may end up revealing the results in their customary earnings reports after mid-July.

What’s worsening the economic outlook further is the record-setting number of bankruptcies since 2013. Financial Times reported earlier this week that a total of 3,427 companies have filed for Chapter 11 bankruptcy in the US.

Bitcoin

Based on the narrative that is running amok for the last decade, Bitcoin is the answer to a financial crisis, such as the one taking place currently. But sadly, the cryptocurrency has left its safe-haven credentials to rally and plunge alongside the S&P 500, the Dow Jones, and the Nasdaq Composite.

That leaves Federal Reserve to call the final shots. As businesses fail, coronavirus cases rise, and lockdown gets imposed, the US central bank would have to do whatever it can to aid the market. It’s going to be a market surviving on a ventilator called endless money-printing.

But many, like veteran hedge fund manager Paul Tudor Jones, still see a silver lining. They believe Bitcoin will come of age as the Fed’s monetary policy results in a period of inflation. People will want to buy cryptocurrency as their savings lose value.

Unfortunately, that is not going to happen in the second half of 2020. So one should be prepared to sail the rough storm ahead.

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