data taken at 9:27am 21/08/2020
Written by: Yves, Head of Trading at Wirex
The Bitcoin price (BTC/USD - source Bitstamp) reached another 2020 record level this week at $12,473 on August 17th, despite an overall flat weekly performance. Bitcoin held its bull trend, defending the $11,600 level on August 19th, despite a severe mid-week price correction of its two main drivers: Gold (XAU/USD) and the DeFi token economy. The BTC/USD price direction is still undecided, moving along the lower band of a bull channel that started on July 28th, just after the July 26th-27th price jump of nearly 14%. However, the rally is showing some signs of exhaustion. At least, it might be hitting the pause button for a short while.
The main sign of exhaustion comes from the price of Gold (XAU/USD) which dropped from $2,015.6 to $1,924.4 over the span of two days (down 4.5%) and it is still near this week’s low levels, potentially heading near the $1,900 levels. The second sign is the price correction of most DeFi tokens. MakerDAO’s governance token (MKR) and the Compound token (COMP) are down nearly 30% from their respective $852 and $264 high levels reached on August 13th and 12th. Our last sign of exhaustion is the serious rise of Bitcoin network fees: the Bitcoin average transaction fee reported by bitinfocharts for the month of August stayed around $5 per transaction. For comparison, this cost was mostly below the $1 mark from Jan until April, and in June this year.
The mid-week market correction followed the release of the July Minutes of the Federal Open Market Committee (FOMC). We explained in a previous post that the Federal Reserve (Fed) wants to keep interest rates low, most likely to decrease the US dollar debt burden and stimulate the economy in the current health crisis. Furthermore, G20 countries, including Russia and China, have massively decreased their US dollar reserves in the current “trade war”, questioning the USD status as the World’s dominant reserve currency. The US dollar depreciated significantly in the past three months, which looks like the pause button has been hit again.
The slightest comment from the Committee that goes in favour of an interest rate increase in the long term is scrutinised. The July FOMC report brought some balance to the Fed’s position on low interest rates. First, the Fed is monitoring consumer inflation closely, noting that “the 12 month percentage change remained well below the rates that prevailed early in the year”. A higher consumer inflation might mitigate the Fed’s position on keeping interest rates low. Second, the use of more drastic monetary policy tools such as “yield caps and target interest rates along the yield curve” discussed by the Committee was discarded. This was probably enough to slow the US dollar rout in the short term, but it won’t be enough to revert the trend.
Even though Bitcoin has a tendency to move along the Gold price, the so-called digital gold has still many reasons, as a standalone currency, to break new yearly records. Glassnode reports that the Sentiment indicator experienced a 4 points increase last week (“Week 33”), mostly imputable to the “investor sentiment” and the “saving behaviour categories”. Bitcoin exchange reserves are also rather bullish. They fell to a 14-month low which suggests that tokens are typically withdrawn from exchanges to be kept in cold wallets. But this observation should be mitigated as the number of withdrawals from exchanges looks rather stable. An anecdote that provides more perspective on the positive sentiment is a twitter poll this week showing that 72.1% of the 22,635 voters would never sell their Bitcoin holdings, “riding it to $0” if they have to!
By contrast to the flat Bitcoin price this week, the Ether price (ETH/USD) lost nearly 8%. The correction is in line with the price drop of most ERC-20 DeFi tokens. Ethereum-based blockchains are suffering from exploding transaction costs. On August 13th, costs were 78 times higher than the average cost recorded on January 1st, reaching its all-time high at $6.6 per transaction, fuelled by the DeFi boom, and the rising number of Tether (USDT) transactions.
This is a major constraint for scalability, and a clear advantage for competing platforms such as Waves. Waves announced last week a partnership with TRON on DeFi projects. It also became this week, a valid collateral for cash loans as Cointelegraph reported the first WAVES-backed loan issued in Russia. Waves seems to have sufficient recognition to imagine and build a bridge between the traditional and the decentralised financial worlds. Like BTC/USD, WAVES/BTC is flat this week, but still down to $3.44 from the mid-week high at $4.8 (down ~28%).
Cryptocurrencies have entered a new mass branding era with crypto institutions launching TV ad campaigns. Grayscale announced that its campaign helped collect investments in their trusts for more than $200 millions. Wirex is also going mainstream. This is certainly helping the speculative side of the price rally. On the other hand, Bitcoin adopted the dynamics of the traditional markets. Most price movements can be explained through the classical macroeconomic concepts that drive the traditional assets, especially Gold and traditional currencies. This is an incredible development since its creation nearly 22 years ago.
The above is an opinion piece and therefore should not be taken as financial advice. Please do your own research thoroughly when looking at Cryptocurrency.