We have been covering the decline in traditional markets and thinking about how this will affect digital assets over the last few weeks.
The capitulation event finally occurred in the equity markets, with blood well and truely in the streets. Fixed interest had led the way, and credit markets had also begun to show signs of stress. There is also talk of a cashflow problem for debt servicing due to the Russian and Saudi decisions in the oil markets, which comes as the United States reaches energy independence.
We had thought that Bitcoin and digital assets were not yet ready to withstand a proper panic in traditional markets, and where Bitcoins narrative as digital gold should perceptibly holdup from those within the space, who understand what it is, we thought that the wider public is not quite there yet and the digital asset space not developed enough to gain from challenges in traditional finance.
We described what is about to happen as act 3 in digital assets and traditional finance simply becoming ‘finance’.
From here, we expect that there will be a series of fiscal spending packages in a relatively co-ordinated way around the world. Monetary stimulus has not only likely taken us as far as we can go but lenders of last resort are becoming bag-holders themselves, Still, the US Fed has said that they would increase the amount of the liquidity they provide to repo markets daily, as well as having lowered interest rates and are likely to lower again.
An announcement including an economic response planned for tommorow in the US.
An interesting asset to watch will be gold, which has been bought in record quantity the last 2 years. A strong monetarist response would likely see it take off, and a weak monetary response but strong fiscal response could go either way. Additionally, if current market conditions are placed at the foot of monetarist economic policy over the last 2-3 decades, then we might look for hints of institutional gold purchases over the next 3-6 months in Western central banks, as well as the IMF or World Bank. In the case of any of these it would be game on.
Bitcoin hasn’t traded as digital gold for now and it looks like the digital asset space could have a strange year. On the one hand, there has never been a greater mandate for decentralised finance and the highly sophisticated financial innovation of digital assets. On the other hand, the conditions are likely to be poor for digital assets. Similarly to 2018 and 2019, those who work through 2020 with a clear vision on what they are trying to achieve will ultimately win.
Bitcoin has had a good bounce overnight, being rescued from almost $ 7300 USD by a ~$600 USD move that sees it at $ 7900 USD at the time of writing.
The move from 9200 to 7300 was on the break of the trend-line and would have been a great trade. The winners have likely piled out of it and the market mechanics are most likely to chase other shorts out of their positions in the medium term, especially with international markets likely to be slowly recovering.
For a straightforward squeeze of shorts, the horizontal at $8200 is a likely target, where convicted bulls might target the underside of the trend-line (or higher).
The Crypto Fear & Greed Index took a hit to ‘Extreme Fear’ after meandering around a neutral reading for some time, bolstering the (late) view that the dip to $7300 was a reversal point.
Trading volume has been very significant in the last 2 days, which is encouraging for higher prices. If volumes stay high as the price bounces back, the pain currently felt in digital assets could be a short affair.