data taken at 9:12am 25/09/2020
Written by: Yves, Head of Trading at Wirex
There is absolutely no lack of excitement in the crypto economy. The flow of unscheduled information, good or bad, is violently shaping the market dynamics this week. The Bitcoin price (BTC/USD) experienced its sharpest drop since September 3rd , falling from the $11,000 level to $10,138 two days later. From a technical analysis point of view, the BTC/USD price should find short-term support near the $10,100 levels.
The drop shook the price of most DeFi related cryptocurrency, starting with Ether (ETH). Within the span of a few days, the ETH/USD price lost more than 13% . DeFi pulse is showing a sharp correction of the BTCs locked in DeFi on September 21st, from 116,015 BTCs locked to 82,160 BTCs the next day, followed by a strong rebound back to 116,743 on Tuesday. It is now at an all time high, near 125,000 BTCs locked. The number of ETHs locked reported by DeFi pulse was also shaken, moving above the 10.5 million ETHs locked on September 23rd, and back below 8 million ETHs today. Despite these sharp movements, the fundamental trend is still positive for DeFi. The wheels are in motion… but it is likely that DeFi projects will need time to reach maturity, as it is the case for any new industry or technology. Cointelegraph reports that 48% of the DeFi platforms are expecting the DeFi industry to reach maturity in 3 to 5 years . In the meantime, our best indicator is the plethora of projects, partnerships, and investors pouring funds into the sector. This week, the most bullish event is probably the partnership announcement between the TRON blockchain (TRX cryptocurrency) and the digital custodian leader BitGo, that would bring “ Wrapped Bitcoin (WBTC) and a newly minted Wrapped Ether to the TRON ecosystem as TRC20 tokens ”…
In fact, even though DeFi contributed to the price volatility this week, it is not the main driver.
It looks fairly easy this week to draw a parallel between the crypto and equity markets. The S&P index lost more than 3.2% this week . This month might be the S&P’s worst September performance over the past ten years. The market is certainly more nervous as the November US elections are getting closer . The US political context could delay the potential fiscal stimulus that the Fed is counting on to boost back inflation. Instead, the riots and the election of a new Supreme Court judge to replace the late Ruth Bader Ginsburg are brought to center stage. Furthermore, there is a lot of sector rotation and profit taking: innovation and small caps are rewarded, large caps in the banking or airline sectors are collapsing. This is fueling volatility. Finally, the Covid-19 metrics are worsening, economies are slowly going back to lockdown. The UK, the US, Germany, and France are all reporting a surge in new cases. The scenario of a double dip recession can’t be excluded.
Despite their similarities this month, we’ve established that the crypto and equity markets are not always riding a similar trend. They are not strictly driven by the same indicators. In fact, the main culprit behind the crypto markets rout this week is none other than the US dollar .
Indeed, the US dollar (DXY Index) bounced back this week. The DXY price broke the 94 resistance level, reaching 94.59 yesterday. The dollar is acting as a short-term safe haven: investors are selling equity and holding cash . The US dollar bounce against foreign currencies also reflects the prospect of more quantitative easing by foreign central banks . Indeed, as the UK and European countries are dealing with the second wave of Covid-19, their crisis status seems now more comparable to the one observed in the US. Therefore a similar monetary policy is expected to take place. Meanwhile, the US dollar appreciation is hurting the price of every safe haven. The gold price (XAU/USD) is down 4% this week, and our digital gold (BTC/USD) followed.
Despite the short term US dollar bounce, the greenback is still in a bearish cycle . The depreciation will likely resume within months, in line with the bearish cycle of the government bond yields . Effectively, investors will likely swap their dollars for foreign instruments with higher yields… capital outflows should go on… and the Bitcoin price, like gold could reach new heights. At least, we should always expect more excitement down the line…