Bitcoin’s recent breakout could be one of the most important moves in its history. Not only is it happening at a seemingly crucial juncture for the economy, but it’s doing so as important relationships in the market are being tested and possibly preparing for a new regime.
Bitcoin and the Nasdaq have traded in lockstep for almost all of 2020, but over the past ten days they’ve traded at the lowest correlation in more than a year. Part of the excitement has surely stemmed from PayPal’s adoption of Bitcoin into its ecosystem, but you can’t ignore the timing of Bitcoin’s rally within the broader macro context.
As Bitcoin is detaching itself from stocks, its inverse relationship with the U.S. dollar the past six months remains strong. With expectations of big fiscal stimulus being an eventuality no matter who wins in November, Bitcoin bugs are giddy at the prospect of money-printing pushing the dollar lower. But the dollar hasn’t made new lows in two months, so that doesn’t go all the way to explaining Bitcoin’s pop. That said, however — Treasuries did sell off this month without any big economic data beats or hot inflation prints, so that supports the idea that investors are thinking about incoming money supply as a market catalyst. That’s music to Bitcoin’s ears. Combine it with gold’s lackluster performance, and one could argue investors are warming up to the digital version.
So, it’s all potentially very exciting for crypto bulls, but King Crypto still has a few big things it needs to do to convince skeptics like myself.
First, it needs to make a new high. Because let’s be real, a lot of Bitcoiners are in it to make money. They preach from the mountaintops and say they’ll never sell, but when the going gets rough we’ve seen whales dump. Bitcoin has made subsequent lower highs on the chart since the world learned about it in 2017, which makes it a risky place to be if people are looking to book big gains by selling rallies. P.s., not to nitpick, but this bitcoin only passed 2019’s high on a closing basis — not intraday, yet.
Second, and most important, Bitcoin needs to do more to prove it’s not just another risk asset. Beating the Nasdaq while equities are 4%-5% off the all-time record is a good start, but the real test will be if Bitcoin can stay afloat when stocks are down 20-30%. After all, the big Bitcoin rally just brings its 1-year move in-line with the Nasdaq – from that perspective, it’s a whole lot of hoopla. Bitcoin billionaires and evangelists mostly hail from a tech background, and many have wealth that is denominated in tech stocks. They have never seen a sustaining bear market, so we have no idea what role bitcoin will play in a sustained tech drawdown.