Bitcoin expects blood – despite recent price recovery
Bitcoin traders should expect further shocks from the Treasury markets – even as the cryptocurrency goes through a strong rebound phase.
With the drop in coronavirus cases, a likely further round of government stimulus and millions of Americans getting vaccinated every week, expectations about how fast the US economy could expand this year have skyrocketed.
A Reuters poll found that 90 percent of 120 economists surveyed believe the US economy will reach pre-COVID-19 levels within a year.
Bitcoin expects headwinds
Expectations of a stronger economy have pushed up long-term interest rates, with the 10-year Treasury note yielding 1.455 per cent, up from 0.93 per cent earlier this year. While this is a common Immediate Bitcoin reaction to an optimistic economic outlook, it has brought risks to assets that have enjoyed a supersonic bull run in a low interest rate environment since March 2020.
This includes Bitcoin (Go to Buy Bitcoin at eToro guide), which has risen more than 1,200 percent from its mid-March low. Investors chose it as an alternative to poor returns, alongside certain sectors of the US stock market (tech stocks) that remained profitable during the Corona-induced lockups.
FactSet data shows the S&P 500 is now trading 22 times higher than its estimated gains over the next year. That’s the highest price-to-earnings ratio in 20 years and even higher than after the 2009 economic crisis.
As a result, even a modest move in yields tends to cause volatile moves in overvalued stocks.
On the other hand, Bitcoin should absorb the pressure as long as Treasury yields rise on the back of the US economic growth outlook. Nonetheless, any sudden rise in interest rates could pose a risk to the cryptocurrency, given how it corrected down more than 21 percent last week as the bond sell-off suddenly picked up steam.
Interest rates at zero
Federal Reserve officials plan to leave short-term interest rates near zero and buy Treasurys and mortgage securities at a pace of $120 billion a month. But if the coronavirus crisis subsides after a faster vaccination programme, then that could call into question the central bank’s commitment to continue its asset-buying programme.
Such uncertainty could lead to higher volatility in bond markets, dragging down Bitcoin („Top US executive sees Bitcoin at $150,000 by early 2022“) and US equities. Meanwhile, a definitive rate hike by the FED could put the cryptocurrency on a corrective course lower.
„If the FED decides to change course and raise interest rates, it could act as a major headwind for crypto,“ explains Ben Lilly, author of ChainPulse, a crypto newsletter. „That’s because in such an environment, capital is less likely to flow into assets at the bottom of the risk curve… aka crypto.“
In other words, bitcoin’s sell-off last week could be a preview of what a nervous bond market might do to cryptocurrencies.