Bitcoin surpassed the $15,000 mark and is trending toward its all-time high of $19,600 by year-end if the momentum continues. The chart shows a daily high of nearly $13,000 in June 2019, but the hourly high around that time was closer to $14,000 so that may be a more appropriate support level for the most recent break out. We should expect a correction and a retest of the $14,000 level support. Bitcoin has also increased it’s dominance against altcoins as measured by the Bitcoin Dominance Index from a low of 56.7% on Sept 13th to 65.3% today shown below:
Bitcoin, US Elections, Markets And Economy
The US election uncertainty may have lead to some short term weakening of the dollar, strengthening of yuan and may have increased inflows into gold and cryptocurrencies. The chart above shows the US dollar index trending lower. A Trump win and trade policies may support a stronger dollar and weaker Yuan, but other macroeconomic factors and Federal Reserve policy will be more significant for US dollar trends in the long run.
Bitcoin Correlation With Stock Markets
The US stock market would have been expected to go down because of US election uncertainty and generally is not correlated with dollar strength or weakness, but the US stock markets seem to be dismissing election results and have rebounded from the short downturn leading up to the election. The SP500 has been range-bound between the highs of early Sept. and the lows of late Sept. and the post-election bounce seems like a natural rebound from late Sept. lows. The upward US stock market trend should support continued speculation and investments in risky assets.
The key question for Bitcoin remains if it can sustainably decouple from the broad US stock market in a bear market. The US stock market has been in a bull market since the inception of Bitcoin and on occasion Bitcoin has been correlated with US stock markets during liquidity and credit shocks such as during the COVID hysteria and lockdowns in late February. How much has Bitcoin’s decade long move been supported by speculative capital and a bull market? It remains to be seen if Bitcoin would truly decouple from other assets in a ’08 or ’09 financial and credit crisis. However US stock markets seem to still be trending in a bull market anyways so perhaps it’s reasonable to continue to bet on another major Bitcoin boom in 2021. Just in case it’s probably a good idea to keep a careful eye out for potential credit risk shocks. To monitor credit risk trends we can look at the ICE High Yield Option Adjusted Spread chart that tracks the risk premium of high yield bonds above ‘risk-free’ Treasury bond rates as shown below:
We can see the significant spike during the ’08/’09 financial crisis and more recently the spike during the COVID scare. Bitcon prices were affected by the recent credit spike.
Bitcoin, Gold, Inflation and Interest Rates
Gold prices as seen in the chart above were also affected by the liquidity, economic and credit scares in late February and has since rebounded post-election just like Bitcoin and stock markets. We should expect gold to be favored over bonds in a negative interest rate environment. Bitcoin as digital gold should also receive significant capital inflows from the bond markets as negative real rates continue.
We can see in the chart above that 10 yr Treasury yields have crept up from a low of around 0.5% this August to about 0.9% today, but are still extremely low overall. With government measuring annual inflation at 2% and more realistic inflation at 5%, capital should continue to flow into both Bitcoin and Gold. We can also see M1 and M2 money supply charts below that show aggressive Fed quantitative easing during COVID:
M1 money supply has increased from about $4 trillion to $5.6 trillion for about a 40% increase since Feb 2020.
M2 money supply has increased from about $15.4 trillion to $18.8 trillion or about a 22% increase.
Therefore aggressive Fed monetary inflation portends continued consumer price and asset inflation.
Conclusion
Bitcoin continues to trend closer and closer to its all-time high most likely based on internal fundamentals and increased demand. However significant favorable macroeconomic factors such as stable credit markets, negative interest rates and inflation should buoy Bitcoin as well. We’ll continue to monitor these macroeconomic factors moving forward to help you manage the Bitcoin allocation in your portfolio.