It was last week that bitcoin stirred and this week, it is simply flying.
Over the weekend, we broke above the key psychological level $10,000 and extended these gains on Monday by breaking into a new 2020 high, crossing even $11,400 mark. Jeff Dorman, CIO at Arca said,
“This breakout was just a matter of time, as the inflation protection / store of value thesis was working everywhere else and Bitcoin was simply playing catch-up (gold at all-time highs, silver at 8-year highs, 2s/30s Treasury curve steepening, and tech stocks flying).”
For now, bitcoin retraced slightly and is currently trading around $11,000 on the back of strong volume — $4.25 billion worth of BTC exchanged hands in the past 24 hours, as per Messari.
Go talk to your friendly neighborhood OTC desk. This $BTC move is US driven. The fomo hasn’t started yet.
— Kyle Davies (@kyled116) July 28, 2020
These gains were recorded as the dollar experienced a slump and precious metals rallied bolstering the notion that cryptocurrencies could be a viable alternative to traditional monetary systems.
The world’s largest digital currency has surged nearly 25% since last week to the level last seen in August 2019. The rally accelerated after the coin breached $10,500, a level bitcoin failed to sustain in June and February. Matt Maley, chief market strategist at Miller Tabak + Co. said,
“It’s attracting the momentum players, and of course, the momentum players play such a big role nowadays that it’s giving Bitcoin the big move.”
A Paradigm Change
Bitcoin is starting to act like “digital gold” just as the yellow metal hits a new all-time high, climbing to $1,980. Both the assets are acting as a way to protect wealth from government actions like stimulus measures which are viewed as inflationary.
Interestingly, bitcoin’s one-month correlation with bullion has surged to +64.3%, up from -42.8% on April 27 while its one-month correlation with S&P 500 has fallen to 24.1% from the all-time high of 78.8% on July 8, as per Skew.
Bitcoin is undergoing its second paradigm change.
The first was becoming a risk asset, following stocks and risk sentiment, after being uncorrelated for a full decade.
The second is evolving into true digital gold. The dollar gets dumped, and $BTC benefits.
— Alex Krüger (@krugermacro) July 27, 2020
Senate Republicans have also unveiled their proposal for a new $1 trillion coronavirus relief bill that includes a second round of $1,200 stimulus checks, extended PPP, and unemployment benefits but at 70% of an individual's lost wages rather than the $600 weekly.
This is further propelling the dollar's slide which initially benefited from a flight-to-safety when the coronavirus pandemic first spread in March. Now, that the world’s focus is back to fundamentals, the world’s reserve currency has rapidly declined to a two-year low.
Besides, all the money the government is pumping into the system, the dollar is also pointing to the ultra-low interest rates well into the future, the prospect of mounting US deficits that has swollen to multi-trillions, and potential for inflation. Everyone is joining the dollar bearish party. Goldman Sachs’ team of analysts led by Jeffrey Currie said,
“Combined with a record level of debt accumulation by the U.S. government, real concerns around the longevity of the U.S. dollar as a reserve currency have started to emerge.”
The dollar has lost 4.9% against the euro in July, 2.5% against Yen, 6.4% versus the Swedish krona, and 4% to the New Zealand dollar. In the emerging markets, Mexico peso has risen 4.9%, Brazilian real is up over 6%, and China's yuan only 1% against the dollar this month.
Although the foreign exchange market is yet not trading on the presidential election, concerns of a Democratic winning are adding to the bearish sentiment on the dollar because of fears of higher taxes. And the dollar’s pain is bitcoin and gold's gain.