data taken at 10:03am 28/08/2020
Written by: Yves, Head of Trading at Wirex
The Bitcoin price (BTC/USD) is slightly lower this week, near the $11,450 level, and down by a few percentage points since last Friday’s close. The relative stability of the BTC/USD price confirms last week’s sentiment in favor of an exhaustion of the market rally. So far, it is holding above the $11,120 support levels. This support has already been reached twice over the last four days and could be again at risk in the coming days.
As discussed last week, both Bitcoin price drivers, namely gold (XAU/USD) and the DeFi economy boom, have shown signs of exhaustion. Still, there are strong reasons to believe that the trend is still positive, with the potential of a renewed momentum from DeFi.
The first Bitcoin price driver, gold (XAU/USD), was particularly shaken on August 27th after Jerome Powell’s speech. Then, the Federal Reserve Chair announced a more flexible policy for the 2% target inflation rate. Just after 12:30 UTC time, the XAU/USD price moved up, then down within a 3.5% range. At the same time, the BTC/USD price rose from $11,281 to $11,602 (+2.8%), only to dive back to $11,249 in less than an hour (-3.0% from the high).
We mentioned before that the Federal Reserve (Fed) seems to be very keen on letting the inflation run for as long as it takes to ease the US sovereign debt burden. However, after Powell’s speech, the question is: can the Fed effectively target a 2% inflation? The sentiment that prevails is that the Fed’s monetary policy seems more helpless than ever. The Fed is struggling to convince that it has any ammo left to drive inflation. Also, it is clearly harder to push inflation when the unemployment rate stands now above 10%. So the Fed is throwing the ball to the government and legislators, hinting that they should devise a fiscal stimulus that can lift the economy, lift inflation, and hence decrease the debt burden. Typically, a positive shift in the economy is always a matter of time. There are already observable positive indicators: for instance the US Inventories to Sales ratio quickly recovered and is now back to pre-March levels. Unfortunately, if the unemployment rate will decrease eventually, what will definitly remain in future decades is the gigantic sovereign debt, which can only be reduced through either inflation or default. This perspective is the positive long-term driver of both Gold and Bitcoin prices. But in the short term, the gold driver should remain dormant in line with inflation, and as indicated by the stable yield of the 10-Year TIPS (Inflation-adjusted) Bond.
The second Bitcoin driver, DeFi, appears to be gaining a new momentum this week. As reported by defipulse, the BTCs locked in the DeFi economy rose by another 14% this week, reaching a new high of 55,080 BTCs. The DeFi economy is expanding very quickly: financially, and technically.
Financially, top-tier investors are joining the excitement. Technically, projects tackling the blockchain interoperability challenge (e.g. Polkadot) are offering new perspectives beyond the Ethereum Blockchain. The community expects Polkadot’s governance token (DOT) to rise to the top three cryptocurrencies by market capitalization. As Ethereum-based applications are suffering from high GAS prices, they are considering moving away from them. Coinbase and Circle simplified the network fee management for their users: they upgraded the USDC stablecoin protocol to allow “Gasless Sends”. Ripple (XRP), the most notorious centralized cryptocurrency, married to traditional financial institutions, might dream now of riding the DeFi boom. Flare Networks is looking to bridge Ethereum and Ripple to give XRP access to Ethereum based applications. The rising blockchain competition and the rising fees might be holding the Ether price (ETH/USD) down as it lost nearly 5% this week.
Back to cryptocurrency markets:
On the institutional side, Bitcoin.com reported that Fidelity is looking to launch a new Bitcoin fund as a “Notice of Exempt Offering of Securities” has been filed with the SEC. It is the natural evolution of Fidelity’s activity after the launch of its custody arm: Fidelity Digital Assets. It would compete with the 4.8 billion Grayscale Bitcoin Trust (GBTC), and hopefully dampen the frenesy around the large premium cost of the GBTC share.
On the derivatives side, a total open interest of 66,400 Bitcoins is expiring this week according to skew.com: it is a large expiration event of nearly $750 million that is comparable to the previous month’s expiration, but still 25% lower in US dollar value than the Q2 expiration of June 26th. Positions are renewed and volumes on the option market are consolidating. The total BTC options open interest across major derivatives exchanges is again near the all-time high, above $2 billion There is always the fear of a higher volatility risk near expiration events, the fear of error or manipulation. However this seems less likely with every new successful expiration. The largest exchange platform, Deribit, concentrates 80% of the BTC open interest. The reference BTC/USD price is an equi-weighted average of prices sourced from up to 8 major exchanges, with outliers removed. It is difficult to manipulate this index as arbitrage bots are flooding these 8 exchanges. However the Deribit index failed once before, when one price source sent erroneous prices to Deribit in November 2019… Errors and opportunities are always around the corner…
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.