Stakes For Bitcoin Are Highest Since The 2017 Bubble

Story by: Oliver Renick

Bitcoin’s chart is at a crucial area. Stuck between lower highs since 2017 but higher lowers in its long-term trend, and the heralded “havening” around the corner, bitcoin speculators expect King Crypto to be on the verge of a monster move higher. But if bitcoin serves the purpose that true believers think it will, the next big move is likely to be lower.


The most important debate around crypto is whether investors should think of bitcoin as a “safe haven” asset like gold and bonds. It’s the question that matters most to true believers, who see bitcoin as the solution to global central banks undermining fiat currencies. But at least in the short-term, evidence from the global economy suggests central banks will be able to stay out of the picture. If bitcoin really is a safe haven, then it should resume its trend lower.


There’s no perfect box in which to put bitcoin, but bitcoin’s overall trend the last 12 months – higher during spring and summer of 2019, lower highs until December – does to a large degree match the trajectory of bonds and gold. And it makes a good bit of sense, if you accept that bitcoin trades on belief that it could be a potential store of value in a world awash with cheap money.


More specifically, bitcoin is best thought of as a *subset* of traditional safe-haven assets. Because bitcoin is viewed by enough of its investor base as a way to bet on excessive central bank activity that will one day undermine the value of fiat currencies, it moves in relation to expectations of central bank activity. It’s rallied when the economic outlook looks rough, because right now, the market equates uncertainty to central bank activity.

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Fed cuts also support bond bulls and gold bulls. This is why bitcoin has been trending lower since the summer of last year as a U.S.-China trade deal came to fruition, the Fed was able to pause its cut cycle, and the global economy turned toward stability. Bonds and gold followed, but bitcoin had the most pronounced move, because it has the most riding on central bank cuts. If negative interest rates peaked last year, economies stabilize, and the existing financial system is not broken enough to demand a solution to fiat money, bitcoin’s use-case falters.



It doesn’t have the same track record as gold, and bonds attract buyers for all kinds of reasons. Bitcoin has the most to prove, the biggest hype to live up to, and will swing the most as those interest-rate expectations change. One could loosely describe it as a “high-beta” haven trade, assuming the solution to economic risk means interest rate cuts. And so as coronavirus sent the odds of another Fed cut soaring this year, bitcoin, bond and gold all rallied.

Yet right now it’s looking weary next to its safe-haven peers. Gold broke out to a new 7-year high this year, bonds are the highest since early October, and bitcoin is struggling to break 10,000. Overhead pressure from bubble-buyers and whales likely remains, and U.S. economic data is crushing expectations. If this continues, the odds of a rate-cut will likely revert lower, and the trend lower in bitcoin should, according to this theory, resume downward too.


Or will it?


The exception to bitcoin’s trend as a safety asset is of course 2017. The epic bubble in crypto then looked a lot more like the melt-up in risk assets like stocks than anything in bonds or gold. So what do we conclude if it indeed explodes higher? Unclear, but unless it comes with a big deterioration in the economic outlook, it’s probably a sign of gross speculation gone AWOL once more. In that case, it’s best thought of as a risk asset more similar to stocks – and that’s not good for its long-term viability.

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