Crypto Corner - Summary of the Week 30/11

data taken at 9:06am 04/12/2020

Written by: Yves, Head of Trading at Wirex

The Bitcoin price recovered from the previous week’s correction, and finally reached a new all-time high (ATH) on Monday at $19,864. The first ATH was exceeded again the next day at $19,918.

The previous week’s correction was the most severe since early September. As discussed in last week’s analysis, it was triggered by the larger flows from whales’ wallets into cryptocurrency exchanges, signalling an intent to sell. The correction was clearly amplified by the high leverage accumulated in the past months on derivative contracts as the BTC Derivatives Exchanges Inflow recorded by Cryptoquant exceeded the Spot Exchanges wallet 3-fold on November 26th. Whales established a clear resistance near the $20,000 level, but the medium-term positive trend remains unchanged. The rise above the $20,000 seems to be a matter of time…

The cryptocurrency landscape is changing rapidly. Reuters observed a location shift of Bitcoin buyers from Asia to North America (NA) this week noting that “Weekly net inflows of bitcoin to platforms serving mostly North American users have jumped over 7,000 times this year to over 216,000 bitcoin worth $3.4 billion in mid-November”. The covid-19 crisis turned out to be a decisive factor, a catalyst for the increased adoption of both the oldest cryptocurrency and alternative cryptocurrencies alike. But the adoption is faster in NA as the impact of the health crisis on the U.S. economy is particularly severe, when at the same time, China’s economic activity is recovering fast. The growth of Chinese exports in October (+11.4%) was the highest since March 2019, and the domestic demand is now picking up: these trends are expected to carry on during the holiday season.

The US dollar (DXY Index) lost 3.5% since the end of October, reaching its lowest level since April 2018. As mentioned in previous analysis, there is little hope in sight for a trend reversal. This is all the more true given that corporate debt is piling up, and the size of negative yield bonds issuance worldwide is expanding like a disease. The glimmer of hope should come from rising inflation as the 5-Year Forward Inflation Expectation Rate is now at 1.94%, a record since July 2019, and very close to the Fed’s 2% inflation target. Expected rising inflation would normally point out to an expected rising demand. However cash injections are not easing and are driving the dollar further down. Although an agreement on the new stimulus package ($908bn) will soon be reached, without visibility on the end of the health crisis, it will only weigh further on government bond yields, and threaten the stability of the financial system. Eventually, the vaccine could be the ultimate solution to free the Western economies. Regardless, the economic context is casting an intense spotlight on cryptocurrencies.

Paypal contributed significantly to the buyers location shift from East to West when it opened its cryptocurrency services to all its U.S. clients. Data released this week by Mizuho Securities estimates that “one over five Paypal clients bought Bitcoin on the Paypal app” and “65% would use it at Paypal’s 28 million merchants”. Forbes also relayed VISA’s integration of the USDC stablecoin in its global payments network. USDC is the second largest US dollar stablecoin after Tether USDT. The partnership between VISA and Circle, the entity in charge of the governance of the USD-backed ERC20 token, validates the stablecoin’s business model: lower fees, faster settlements. This integration is a major step towards the Main Street adoption of cryptocurrencies. Despite ECB President Christine Lagarde’s latest concerns over cryptocurrencies, and the latest STABLEAct bill that would require stablecoins to seek approval from Federal authorities to operate, Paypal and VISA are keeping adoption on the fast track.

Christine Lagarde’s stance aims at protecting the banking system against any unsafe alternatives. It also aims at protecting ECB’s monetary policy and its ability, among others, to inject cash and create leverage through intermediaries (aka the multiplicative effect). To answer the latter, the DeFi economy acts as a proof of concept for the theoretical ability of a Central Bank to shift economic mechanisms from the traditional to the digital economy, and enforce a monetary policy through a Central Bank Digital Currency (CBDC): there is no doubt that this is a very long-term view on the future of money. If it seems to be a natural evolution of financial markets, what is most worrying for a Central Bank is the shift of confidence that goes hand in hand with the rising consumer demand for non-CBDC stablecoins…

In the centre of both the DeFi economy and stablecoins is the second largest cryptocurrency: Ether (ETH). Ethereum is the main smart contract platform that is slowly and certainly binding the digital and main economies, from decentralised DeFI to the Main Street adoption of ERC20 stablecoins such as USDT or USDC. More largely, cross chain interoperability, or at least the mere diversification of collateral (ETH, WBTC, DGB, etc…) as well as the diversity of blockchains that a stablecoin operates on (Ethereum, Stellar,…), typically contribute to the high price correlation. However, this year’s Bitcoin rally left Ether and altcoins behind and the ETH-BTC correlation has dropped as a result from 88% in August to 65% (60 days correlation). The Ether price has now strong reasons to catch up to the Bitcoin price, and indeed ETH and some altcoins have started to do so. The Ethereum (ETH/BTC) price is up nearly 10% relative to Bitcoin since the end of October, and the Stellar lumens price (XLM/BTC) is up by more than 60% relative to Bitcoin. There is an undeniable potential for performance as the ETH/USD price is still 58% below its ATH.

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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.
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