Crypto State of the Year for 2020 – Jake Ryan

Crypto State of the Year for 2020 – Jake Ryan

Here’s what should we be thinking about going in to 2020. There are several factors affecting the emergence of Bitcoin as sound money. In January, we’ve started off 2020 with Bitcoin trading as a safe haven asset, more correlated to gold and oil than risk-on assets like the stock market. Moving throughout the year, it will be important to track when Bitcoin is trading like a risk-on asset and when it’s trading like a safe-haven, or risk-off asset.

The crypto market has tail winds, which is great for investors. Here are a list of factors:

1. Fundamentals of the Bitcoin Halvening Event
2. Reflexivity of the Crypto Markets is very positive for crypto in Q4 of 2019 and all of 2020
3. Global macro events that are bad for the world are great for Bitcoin.
4. Trade tariffs
5. Chinese capital flight
6. Poor fiscal policy with no governments making the “tough” decision and the US raising the debt ceiling by $2T with debt now totaling $23T
7. Poor monetary policy by easing in the US, more QE being considered in Europe and additional asset purchases in the form of Japanese equities from the BoJ
8. Data privacy issues including Capital One financial data breach et al.
9. Pushback on Libra from governments globally
10. At times, we see correlation between BTC and gold, CHF, negative rate sovereign debt & QE
11. Global pandemics

The factors that were present at Bitcoin’s genesis, low interest rates, unconventional monetary policy, and rising geopolitical tensions, are still here and still degrading the integrity of our global fiat currency system. It happened mostly in July of last year, but bitcoin started to trade like a safe haven asset. In January, it began trading like a safe haven asset again. It was well-correlated to other safe haven assets like gold. This new way at looking at bitcoin will not happen overnight. It may oscillate between being considered a risk-on or risk-off asset for some time. However, it’s heading in the direction of being perceived as a risk-off, safe haven asset and this quarter was the first time we could really start to see some correlations to support this position.

In early January with the attacks on Iraq of Soleimaniand Iran’s proportional response with rocket attacks at a U.S. base on Iraq, Bitcoin traded similarly to gold and oil. Bitcoin has been trading like gold at the start of 2020. All of these set Bitcoin up well in the future to be a hedge against fiat currencies and their managers, the global central banks.

Furthermore, other crypto assets will do well later in the bull market cycle. Bitcoin always moves first, then it starts rotation to other cryptocurrencies, then platforms and then utility tokens which rise late in the cycle.

Bitcoin was born as a response to a deep, global recession caused by a financial system driven to the brink of collapse. Afterwards, central banks around the world responded with unprecedented and unconventional monetary policy. Amongst questions about its sustainability, Bitcoin got off to a slow start — in 2009, there were several days when less than one Bitcoin was transacted. But Bitcoin was able to survive in its early years partially because of the extreme macroeconomic environment that existed during the time.

Macroeconomic conditions were supportive of Bitcoin’s growth for several years after its creation. The Fed alone initiated three rounds of quantitative easing between 2008 and 2013. Such extreme monetary policy decisions combined with the willingness of governments to bailout critical financial institutions led many to question the sustainability of such policies, creating many ideological-converts to Bitcoin in the process.

For the past several years, the world has enjoyed relative stability with moderate growth and the longest U.S. economic expansion in history. Thus, most recently, Bitcoin and other crypto assets have grown without the supportive macroeconomic environment in which they were born in.

Recent developments present a radical shift in the macroeconomic and geopolitical environment. Faced with some softness in the latest macroeconomic indicators, widespread inversion of most developed world economy yield curves, negative nominal interest rates, a persistent inability to achieve central bank inflation targets, falling inflation expectations by market participants, and the possibility of a full-blown U.S.-China trade war, the Fed is once again leading the way in easing monetary policy. In the recent meetings of the Federal Open Market Committee, it is clear that the Fed is growing increasingly concerned about the potential impact of a negative shock to the economy and are willing to consider “insurance-type” interest rate cuts to sustain the current economic expansion.

Other central banks around the world have responded similarly. The ECB, although not yet cutting key interest rates, has adjusted its forward guidance to indicate more monetary easing. The PBoC recently has indicated its willingness to allow the yuan to float above the psychologically-important 7 level against the dollar (which they have defended in the past) to blunt the negative impact of additional U.S.-imposed tariffs. And a trio of emerging market central banks in New Zealand, India, and Thailand surprised market participants by announcing larger than expected rate cuts.

Bitcoin has not been immune from the impact of this dramatic pivot — it too has risen in concert with the decline in global yields and rise in gold. Bitcoin’s intrinsic qualities indicate that it could effectively serve as a safe haven asset — particularly its decentralized nature making it immune to the control of and the policy errors of any centralized institution, as well as its high stock-to-flow ratio. Such qualities are important for something to serve as hard money. Analyzed under this lens, it shares many qualities with gold, and it is theoretically sound and logical to make the comparison between Bitcoin and gold.

This theory, combined with a look at the year-to-date price action, has breathed new life in the Bitcoin as a safe haven narrative. Indeed, the decline in real interest rates and increased concerns of geopolitical instability have driven gold to six-year highs and, as the narrative goes, has also driven Bitcoin to steeply recover from its lows.

From a technical analysis perspective, the next key trading levels we want to see are trends starting with new higher highs and higher lows. We’re starting to see that in mid-January. Then one thing we want to watch for on the way up are high levels of resistance at $11,000, $13,900 and $16,000 on the way to all-time high (ATH). On the downside, it appears $6,500 has held twice, so this appears to be a good level of support. A lot of buyers would love to get in bitcoin in the 5’s or 6’s but I don’t see that happening based on the current fundamental metrics. The 200-day moving average is around $9,000, so that’s a major level of support going forward. Any of these levels of support would continue a thesis of a continued uptrend for bitcoin and crypto in general.

Published at Tue, 11 Feb 2020 16:22:39 +0000

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