This week in Crypto
Bitcoin volatility continues to compress and discussions about this sideways $9k consolidation have started to turn to that of accumulation on social media with the expectation of a break upwards and a return to volatility more characteristic with Bitcoin.
Bullish indicators are also returning and we note that mining hashrate and difficulty adjustment are back to all time highs. The mining ecosystem that provides the security to Bitcoin’s blockchain is showing considerable strength just 2 months post halving. Will price follow hashrate? Time will tell and as the number of active BTC addresses holding >0.1BTC continues to grow, the medium and long term prospects of further price gains are encouraging.
Looking into this coming week, further sideways consolidation along the line of support is a likely outcome as both RSI and MACD momentum indicators on daily and weekly timeframes are showing neutral bias. At some point volatility will return, and this period of possible accumulation has a Q1 2019 feel to it. If history repeats then an explosive move to the upside will occur but with the vast majority of public Bitcoin advocates and investors all calling for the same move, the path of maximum pain may be down. Should BTC price break down through the resistance then it should be seen as a buying opportunity especially if Bitcoin flirts with the log long term trend line (blue).
Last week we looked at how digital assets like Bitcoin are being positioned as alternative ways to protect wealth and livelihoods in a seemingly unpredictable and chaotic world. Global black swan events such as COVID-19 are almost impossible to predict and the effects of mass disruption to international commerce, political alliances/structures and the labor markets are nigh on impossible to calculate. Such events highlight the need for some form of insurance to protect personal livelihoods and wealth from the disruptive fallout and erosive effects of government stimulus and central banks’ balance sheet expansion around the world. Although Bitcoin and other digital assets remain niche in their adoption as a form of wealth protection, as we have seen with gold’s recent impressive price appreciation, investors across the board are becoming increasingly informed and concerned with the macroeconomic setup and as a result, allocating capital to ‘’safety’’ assets.
America plays a central role in this macroeconomic setup, a result of the simple fact that according to the World Bank ~80% of international trades and ~70% of all imported trades are all settled in USD. Couple this with the fact that all oil trades are valued and settled in USD, approximately 70% of all foreign currency reserves are held in USD and it’s clear that understanding and monitoring US domestic and foreign policy is essential in calculating the USD exposure risk that the world is subjected to. Disruption to America’s standing in the world will likely have dramatic knock on effects as almost everyone and everything is married in some way to the USD. Any sign of a slow divorce from a USD denominated and America centric world should be great cause for concern and disruption.
Although we don’t anticipate the USD to reduce in importance anytime soon, it certainly feels like change is coming when considering the anti-globalization, protectionist, America First stance that Trump is taking.
Trump’s recent and abrupt exit from the World Health Organization feels more like a deflection and a means to blame anyone else other than his actions of the terrible COVID-19 stats piling up in the US. This retreat from global affairs was also evident with his very public criticism of the North Atlantic Treaty Organization and threats to withdraw due to the unfair financial burden it was perceived to have on the US. Public criticism of French tax policy on US technology firms has resulted in $1.3 billion of tariffs imposed on French goods due to take effect in January 2021 and Trump’s sudden removal of 9,500 US troops from Germany is yet another sign that countries that once relied on the US economically and militarily are facing a new era of self-determination.
With the entire US population effectively banned from traveling to many parts of the world due to their high COVID numbers, and the Trump administration pressing ahead with the reopening of schools and businesses amidst exponential growth in COVID infection rates, the faith and trust in the US to act in a way that instills trust and confidence on the rest of the world is being brought into acute focus. The repercussions of Trump’s America First policy stance are starting to manifest themselves politically and economically and could over time accelerate the decline in the USD’s hegemony. If countries are getting less of the benefits from an outward looking, supportive and rational US then perhaps the difficulties and risks of USD dominance as the world’s reserve currency start to become harder to justify. This erosion of confidence in the US may accelerate change to the current debt based financial system, especially as we do not see any end in sight of the Fed increasing their balance sheet and exporting USD inflation around the world.
The USD is here to stay, for now, but the need and importance of an alternative solution is being a explored and discussed more so than ever. An unpegged fiat global reserve currency is something that humanity has not experienced before and although a USD collapse is unlikely, we can see what this looks like in Lebanon, Argentina, Venezuela and Zimbabwe. For how long the USD can maintain reserve status is anyone’s guess but the actions of the current administration are likely to draw into question when not if change is coming.
Bloomberg released a detailed institutional research piece last week — A Resting Bitcoin Bull — likely a result of increasing demand from their 325,000 Bloomberg terminal using clients. Sitting firmly in the ‘’Bitcoin is digital gold’’ camp, Bloomberg were explicit with this popular narrative which supports our discussion that Bitcoin is progressively seen as an alternative store of value comparable to gold by their institutional investors.
‘’Volatility should continue declining as Bitcoin extends its transition to the crypto equivalent of gold from a highly speculative asset’’
‘’Unparalleled global central-bank easing and the rising price of gold are trends we expect will endure, supporting Bitcoin appreciation vs. most crypto peers. At about 65% of the market cap of all cryptos at the start of July, Bitcoin is to its sector as gold is to commodities, with favorable macroeconomic underpinnings.’’
As predicted over the past few weeks, gold has broken the psychologically important price level of $1,800 and impressively provided several daily closes above this price level, not seen since 2011. We are now entering the 6th straight week of price gains for this +$9 trillion asset class and we will want to see gold hold $1,800 and use this level as support rather than resistance.
Percentage gains in gold’s market capitalization are enormous when compared to similar percentage gains in Bitcoin which is encouraging for more dramatic price gains for the leading digital asset as the same investors who store and protect their value in gold become more aware and educated, via articles such as Bloomberg’s recent example, and move into Bitcoin over time. As this gold / bitcoin narrative strengthens, the rise of gold in a post COVID / Modern Monetary Theory environment will only benefit Bitcoin’s continued price discovery. Therefore we will continue to keep track of gold’s price action in the coming months.
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