data taken at 10:00am 31/07/2020
Written by: Yves, Head of Trading at Wirex
All indicators are on green this week as the Bitcoin price finally breached the $10,500 level. The price soared all the way to $11,417 on July 27th. The rise marks the end of a four months period of stagnation within the $8,500-$10,500 range. The BTC/USD price has set a new 2020 high . It also broke a very long-term bearish trend that started in December 2017 . The Bitcoin price seems to be riding two trends: the weakening US dollar, and growing expectations over the growth of Decentralised Finance (DeFi) projects.
The US dollar is in a free fall. The DXY index that tracks the US dollar price against a basket of currencies has lost more than 7% since February 2020, before the covid-19 crisis. It reached a two-years low yesterday. The Federal Reserve decided on Thursday to keep interest rates low even though expected inflation is gaining ground. An indicator of expected inflation is the yield of U.S Inflation-adjusted bonds(TIPS) that’s been dropping fast. The US dollar price correction is raising fears that the currency would be losing its World Reserve Currency status. As a result, commodity prices are soaring. The S&P GSCI Indexthat includes 18 major commodities, is up 4% this month. The S&P GSCI Precious Metals index is up by more than 10%. More specifically, Gold (XAU/USD) gained another 4.5% this week against the greenback, and it’s up by ~11.5% this month… Bitcoin, as the newest hedging solution against inflation, drew a bullish trend that is comparable to the trend observed in precious metals. The BTC/USD price is up by more than 16.5% this week, and more than 20% month-to-date.
The price is now very close to Tradeblock’s estimated mining cost level at $12,500 per BTC. A level that doubled after the Bitcoin fees halving of May this year. Tradeblock’s report could be reviewed now in light of the recent collapse in the price of energy.
Macroeconomics doesn’t seem to be the only Bitcoin price driver. Cryptoeconomics also presents a reason for the bull run . Cryptoeconomics refers to the fundamental structure behind cryptocurrencies and their objective inside the digital economy. For instance Ethereum is “a marketplace of financial services”. It lets you design smart digital contracts (ERC-20 tokens) that are governed by a code, where transactions are stored in the Ethereum blockchain. In other words, financial services could be theoretically digitized on Ethereum. For example, a hedge fund can be conceived and implemented as smart contracts on the blockchain (e.g. the Melon Protocol).
Most DeFi projects have been designed on the Ethereum blockchain, and they usually include several ERC-20 tokens. Over time, the projects worked continuously on bridging the gaps between blockchains. One of the most successful ERC-20 tokens, bridging the gap between the Ethereum and Bitcoin blockchains, is the Wrapped Bitcoin (WBTC). WBTC is a cryptocurrency that represents Bitcoin. At MakerDAO, WBTC can be posted as collateral to borrow DAI. At Compound, it can be posted as collateral to earn now a small annual yield of 0.25% APY. The total value locked (USD) in WBTC more than doubled this month, reaching $173 million. There are now close to 15,000 WBTC minted, but it is still a water drop for the Bitcoin market: ~0.07% of the BTC circulating supply, and ~0.20% of the BTC supply that moved at least once in the past year. Furthermore, project founders can be reluctant to take on more WBTC debt, and communities are divided. Still, expectations seem to be extremely high for WBTC, in line with the realised growth of the DeFi space. The price of the ETH/USD pair this week increased by 21%!
The Ripple cryptocurrency price also jumped this week by 20%, Naimetrics reports that the rise could be fuelled by new capital from large investors. The Litecoin cryptocurrency (LTC) soared by nearly 30%. The XRP and LTC price movements seem to be more speculative this week, at least in light of the public information. They follow partly the US dollar depreciation, but the remaining excess is more difficult to explain given the lagging fundamentals. Could this be the sign of new project pivots. Overall it seems that the positive cryptocurrency sentiment took over the major cryptocurrencies.
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.