Introduction
Up to now few months, analysts have questioned if the huge liquidity injections from central banks (and governments) to save lots of the economies from falling right into a deflationary despair will finally result in a major appreciation in some belongings with restricted provide such because the basic gold and silver, and to an additional extent bitcoin (BTC-USD). Determine 1 (proper body) reveals that we switched from a worldwide financial tightening surroundings, with the annual change of the G4 (US, UK, Euro, Japan) central banks’ belongings contracting by 1 trillion US {dollars} in early 2019, to an aggressive financial easing program with the annual change in belongings exceeding 7 trillion USD in September 2020. Consequently, the surge in liquidity led to an enormous restoration in dangerous belongings, particularly the mega-cap progress shares (i.e. FAAAMN corporations), that are at present buying and selling almost 50% greater than their February peak (determine 1, left body).
Nevertheless, we will discover that previously two years, bitcoin has strongly co-moved with the FANG+ shares, which raises the next query: can bitcoin costs proceed to rise even when shares appropriate?
Determine 1
Supply: Eikon Reuters, RR calculations
Consciousness continues to rise
Up to now few years, a rising variety of buyers continues to take a position that bitcoin is simply firstly of its LT bullish cycle and that the cryptocurrency will acquire a a lot larger share as a reserves asset within the subsequent 10 years to come back. At this stage, with a present spot worth of $11,500 per unit and a complete variety of 18.5m of mined cash which might be at present circulating on the community, bitcoin’s market capitalization totals $212bn, which represents ‘solely’ 1.7% of gold market cap. We beforehand mentioned that we might count on the share to succeed in 3 to five p.c in the long term, implying that every unit of bitcoin ought to commerce between $20,000 and $35,000, which is considerably greater than present ranges.
Extra importantly, the share of bitcoin as a worldwide reserves asset is way decrease and we’re assured that it’s going to step by step rise within the coming years on this ‘world financial debasement’ surroundings. It was estimated that the worldwide quantity of reserves belongings (gold, M1, authorities bonds, FANG+ shares) was standing between 180 and 200 trillion US {dollars}, implying that bitcoin share is 0.01%, which we predict may be very low. Determine 2 reveals that the notice (one of the crucial vital elements when defining a reserves asset) of bitcoin was consistently rising, particularly in international locations experiencing a excessive political uncertainty and a depreciating forex (i.e. Turkey, South Africa…). Due to this fact, desire for belongings with restricted provide ought to proceed to extend within the medium to long run and due to this fact ought to assist bitcoin costs.
Determine 2
Supply: Statista
2020 onwards: QE replaces the economic system
It’s clear that the restrictive economies amid social distancing (and journey restrictions) will drive governments to consistently help all nations with the intention to keep away from an entire financial and social chaos, which can due to this fact lead to an enormous rise in debt utterly financed by central banks. As we talked about earlier, we’re assured that the rebound in dangerous belongings similar to equities we now have seen prior to now 6 months was primarily attributed to the titanic improve in liquidity, which additionally had a constructive impact on enterprise surveys and sentiment indexes (i.e. ISM manufacturing, ZEW index…).
We do count on fundamentals to deteriorate within the coming months (Winter Despair) and the rise in uncertainty amid US elections. Brexit and new nationwide lockdowns might finally begin to weigh on shares, which can push central banks to behave once more with the intention to forestall the entire monetary market from collapsing. With the restrictions anticipated to final up till the summer season of 2022 (which we predict is a extra practical assumption than the summer season of 2021), the loss in the actual economic system will probably be absorbed by central banks’ cash printing, which can end in extra liquidity within the system and due to this fact greater bitcoin costs.
Bitcoin: not so zero beta!
Although we’re assured that bitcoin has large upside potential within the medium to long run, short-term merchants ought to stay cautious because the cryptocurrency has strongly been influenced by fairness strikes lately. As an example, bitcoin costs fell by 42% and 9% within the final two market selloffs in This autumn 2018 and Q1 2020 (determine 3, left body).
Uncertainty ought to stay excessive within the coming months and due to this fact ought to preserve worth volatility elevated, which has traditionally been adverse for bitcoin. In determine 3 (proper body), we compute the typical each day performances of bitcoin in numerous pockets of worth volatility (VIX). We are able to discover a pointy drop when VIX rises; for example, bitcoin has averaged -0.9% in each day returns when the VIX was buying and selling between 20 and 25.
Determine 3
Supply: Eikon Reuters, RR calculations
Closing ideas
General, although we stay cautious within the quick run amid rising uncertainty resulting in a possible correction in dangerous belongings, we’re bullish bitcoin in the long term because the fixed improve in cash provide and liquidity will result in a surge in all belongings with restricted provide similar to bitcoin.
Determine 4 reveals that after almost retracing to its December 2018 low of three,090, bitcoin is at present buying and selling on the 50% Fibo retracement of its 3,100–19,500 vary and has been consistently receiving assist from market members every time we noticed a consolidation in latest months. Momentum indicators similar to transferring common crossovers are nonetheless displaying a constructive sign and the 200D SMA (at 9,800) might act as a powerful assist within the coming weeks. We’re acutely aware {that a} 20-percent correction is extremely possible within the present surroundings; nevertheless, we don’t need to miss the dip and due to this fact we stay bullish in the long run because the cryptocurrency affords a really engaging threat reward at present ranges.
Determine 4
Supply: Eikon Reuters
Did you want this?
Please click on the “Comply with” button on the prime of the article to obtain notifications.
Disclosure: I’m/we’re lengthy BTC-USD, USDCHF. I wrote this text myself, and it expresses my very own opinions. I’m not receiving compensation for it (apart from from Searching for Alpha). I’ve no enterprise relationship with any firm whose inventory is talked about on this article.
