Bitcoin is back in the green while recording huge volume.
Over the weekend, the Federal Reserve slashed rates to zero percent and announced QE. This “over-delivering before schedule” resulted in circuit break in the stock market.
“This is all extremely bullish and should help markets pop hard. All markets,” said economist and trader Alex Kruger. But only to fade on lower volatility as “the real economy will visit purgatory, and a multi-months bottoming process followed by a strong reversal. Vol should fall. All markets include crypto. Also very bullish for gold.”
According to Kruger, Bitcoin’s outlook is “bleak” as it continues to trade like a risk asset and in line with the stock market “almost tick for tick.”
Gold meanwhile “should start acting again like a safe haven” as those assets that are affected by the dollar liquidity will perform best.
The precious metal lost more than $200 an ounce from its multi-year high above $1,700 in the past few weeks.
“The traditional rules are out of order and there is nothing which can be classified as safe haven — not even gold,” said Naeem Aslam, chief market analyst at AvaTrade.
The lower prices on Bitcoin meanwhile has the crypto lender BlockFi raising interest rates on bitcoin and ether, effective April 1. As per revised rates, users holding upto 5 bitcoin will earn 6% APY versus the current 3.6% APY.
This is an usual move as while BlockFi is raising the interest rates, the rate of interest in traditional financial markets are falling to their record low levels. According to founder of CEO of BlockFi, Zac Prince, it is because
“Supply constraint as other market participants have pulled back on their lending activities, and ample opportunities for market-making and arbitrage coming out of the extreme volatility that we experienced last week.”
It also reported fewer loan liquidations during the bitcoin crash last week, “ “with zero losses in the lending book.” The balance sheet of the company Prince said, is “stronger than ever and shifts in the institutional lending markets have created opportunities that expand our margin.”
He further said that bitcoin would decouple from the stock market and shine soon just like gold.
“The next few weeks will be interesting as we will see if assets like gold and bitcoin decouple from the public equities market. In times of extreme panic, every asset is typically sold. After the dust settled in 2008, gold performed very well and we will see if bitcoin experiences a similar cycle,” Prince added.
In the past month, bitcoin dropped harder than any other market but while others are still struggling, bitcoin has found stability above $5,000.
Before last week’s sell-off, the long/short ratios on Bitfinex and CFD provider IG, were “unbalanced in favor of longs.” The cumulative open interest on future exchanges was also near its peak, noted Christopher Bendiksen, Head of Research at CoinShares.
Over the last week, BitMEX liquidated more than $850 million longs and OI fell over 50%.
“When markets drop and levered positions start running out of collateral, other levered positions––especially those that are correlated to the falling asset––are often not available to be sold off to free up new collateral as this would realise losses. Instead, traders will turn to uncorrelated assets, risk assets, or other previously winning positions as sources of capital to shore up dwindling margins,” said Bendiksen.
The same dynamic happened between gold and equities in October 2008 when both gold and S&P 500 were down 17%.
In the time of crisis, all correlations tend to move towards 1 as in a flight to cash, everything is for sale, said Bendiksen.
In the current environment, Bitcoin is clearly not acting like a safe haven asset but that just means the status hasn’t been established yet. Also, “it would be extraordinary for a relatively tiny asset like Bitcoin to retain its value while even the safest of assets are looking vulnerable,” said Bendiksen.
He further noted jow “gold fumbled its way into the 2008 crash, when the dust finally settled, and emerged as a very clear winner.” And when it comes to Bitcoin, its fundamentals didn’t change during the price crash.
Bitcoin “remains an independent, uninflatable monetary system whose units are unconfiscatable and not subject to bail-ins,” with a hard cap of 21 million BTC that can’t be confiscated. This is why Bendiksen “remain as confident as ever in Bitcoin’s long-term value proposition.”