Bitcoin’s recent breakthrough could be one of the biggest moves in its history. Not only is this happening at a seemingly crucial time for the economy, but it is happening as important relationships in the market are being tested and possibly gearing up for a new regime.
Bitcoin and Nasdaq have traded synchronously for most of 2020, but over the past ten days they have traded with the lowest correlation in over a year. Some of the excitement surely stems from PayPal’s adoption of Bitcoin into its ecosystem, but you can’t ignore the timing of Bitcoin’s rally in the larger macro context.
As Bitcoin pulls away from stocks, its inverse relationship to the US dollar over the past six months remains strong. With expectations of a big fiscal stimulus being an eventuality, it doesn’t matter who wins in November, Bitcoin’s bugs are stunned at the prospect of money printing pushing the dollar lower. But the dollar hasn’t hit new lows in two months, so that doesn’t fully explain the pop of Bitcoin. That said, however, Treasuries sold this month without big beats in economic data or inflation footprints, supporting the idea that investors are viewing the incoming money supply as a market catalyst. It’s music to Bitcoin’s ears. Combine that with gold’s mediocre performance, and it could be argued that investors are heating up towards the digital version.
So this is all potentially very exciting for crypto bulls, but King Crypto still has a few big things to do to win over skeptics like me.
First, he has to make a new high. Because let’s face it, a lot of Bitcoiners are out there to make money. They preach from the top of the mountains and say they will never sell, but when the going gets tough we have seen whales pounce. Bitcoin then hit lower highs on the chart since the world learned about it in 2017, making it a risky place if people are looking to make big gains by selling rallies. Ps, no nit-picking, but this bitcoin only broke 2019 highs at close – not intraday yet.
Second, and most importantly, Bitcoin needs to do more to prove that it is not just another risky asset. Beating the Nasdaq when stocks are 4% to 5% lower than the all-time high is a good start, but the real test will be whether Bitcoin can stay afloat when stocks are down 20 to 30%. After all, the big Bitcoin rally has just aligned its one-year move with the Nasdaq – from that perspective, that’s a lot of hype. Bitcoin’s billionaires and evangelists are primarily tech-savvy, and many have wealth denominated in tech stocks. They have never seen a lasting bear market, so we have no idea what role bitcoin will play in a sustained tech pullback.