BTC/USD was below $300, and have written defenses against ill-informed attacks many times, most recently a few weeks ago. My fascination with the concept and belief in the ultimate utility of cryptos does not, however, make me a perma-bull. Regardless of one’s long-term view of bitcoin, market realities exist, and those realities suggest that the big drop we have seen since the end of last year is set to continue, and quite possibly accelerate.
When you look at the chart above for BTC/USD, it is easy to put on rose tinted glasses and say that a bounce is inevitable now that we are back to around the launching point of the strong run up. However, that would ignore a couple of fundamental things about bitcoin itself and the nature of that rapid climb.
While there is some philosophical debate on the subject, from a trading perspective BTC must be viewed as a currency. Like any currency, it is traded in a pair with others, meaning that when a trade is executed you effectively have two positions rather than one. When you buy BTC/USD, for example, you are going long BTC, but you are also shorting the U.S. Dollar, at least in a relative sense. It therefore follows logically that while most people focus on the strength or weakness of bitcoin, the dollar’s intrinsic value also affects pricing.
Three things have become known this week that together make it likely that we are entering a period of sustained dollar strength. First, the Fed hiked rates and made it clear that they would continue to do so. Second, the ECB announced that they expected their massive program of asset purchases to begin winding down in December. You would normally expect tighter monetary policy to support a currency but given the debt problems faced by several E.U. member countries, the market quickly sold the Euro on that news, adding to relative dollar strength.
Then this morning, we got the third leg of the stool that will hold the dollar up over the next few months: a reaffirmation and escalation of the Trump administration’s policy of entering merrily into a trade war with China. You could argue that the instability and threat to global growth that will result from that would be supportive of BTC as an alternative to conventional currencies, but for now let’s focus on the implications for the dollar, where we see a spike each time this issue resurfaces.
There are, therefore, multiple reasons to believe that the dollar will continue to strengthen. The volatility of BTC itself would usually overcome that influence, but BTC/USD is, as stated above, back where we started to get frothy, so BTC will be looking for the next direction. A combination of dollar strength, the prospect of higher interest returns on conventional currencies and a global shift to tighter monetary policies, particularly credit restriction in China, make downward the most likely movement.
I am always cautious of using the word “bubble” in any market context, but at the end of last year, as BTC/USD was flying, I wrote at the end of last year that the word applied to bitcoin’s spike of close to $20,000. At the time, bitcoin talk had become ubiquitous, and there were people with little understanding of the currency spouting off on TV, and many more following their advice to get on board.
As we have retraced, many of those people have been squeezed out. However, late entrants to a move tend to hold on the longest to their losses, so there are probably a good number left. Global factors and dollar strength appear to be pushing BTC/USD below the psychologically important $5000 level and, if that happens, it will trigger the second leg of the big squeeze.
For the true believers and long-term holders of bitcoin, none of this matters. They have seen extreme volatility in the past and know they will do so again and are quite content to ride it out. The irony for them is that they have frequently defended bitcoin’s role as a currency from its detractors, and that role is what makes another big drop likely from here.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of NASDAQ, Inc.
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