data taken at 9:27am 04/09/2020
Written by: Yves, Head of Trading at Wirex
The Bitcoin price (BTC/USD) tumbled this week, losing nearly $2,000 from high to bottom over a few days. It recovered today nearly 450 US dollars from the week low, quoting now around $10,450. The crash was triggered by a series of adverse macroeconomic conditions and negative headlines. It started with a growing selling pressure near the $12,000 levels. The pressure built up since the end of last Month as indicated by the total inflow to exchanges. Chainalnalysis recorded a continuous increase of inflows since Sunday that eventually topped the highest August level.
The $12,000 resistance level is proving difficult to overcome despite some bullish indicators, such as the steady growth of the number of BTCs locked in the DeFI economy. But these indicators were just not enough to support the Bitcoin safe-haven against the optimistic outlook of the US economy. We mentioned last week the sovereign debt issue, and DeFi, the two recent drivers of the BTC bull run… Despite the collapse in price of many DeFi tokens this week, driven by the general market trend, there seems to be no such thing as a slowdown of the DeFi economy. On the contrary, the DeFi growth is still experiencing the same pace, and both ETH and BTC quantities locked in DeFi projects are rising at a steady rate . There are some headlines explaining the speculative aberrations around a few DeFi projects or scams, namely the DeFi food-themed tokens, but this is anecdotic at best. The only black dot is the scalability of the blockchain networks with regards to the high transfer fees. In particular, there are questions raised after the failure of Coinbase and Binance to satisfy cryptocurrency transfers during the most critical time: when market risk is soaring . As far as derivatives are concerned, this operational risk alone triggered several unwarranted liquidations as many could not send ETHs or BTCs to satisfy margin requirements. The liquidations also generated more negative market impact.
From a macro perspective, the US labor market is improving slowly . At least before Thursday, expectations were higher than ever after the covid-19 health crisis. Despite the ADP payroll figure coming short of expectations (428,000 more payrolls versus 1.17m expected), the price of Gold lost nearly 1.4% on Wednesday. The same day, the bitcoin price lost nearly 4.6%. The US dollar currency index (DXY), which compares the greenback value against a basket of major currencies was moving higher, as well as the yield of the 10 Year TIPS. These are all expectations of stable or lesser inflation, at least for now.
Clearly, despite a “Minsky moment” on Thursday, the market considers that the worst of the pandemic in the US is most likely behind us. The growing payroll figure released Wednesday will have to be confirmed by the US employment data today. However, as we mentioned last week, the recovery is almost a certainty, and only a matter of time. To this extent, the BTC price correction on Wednesday is comparable to the price movement of any safe-haven or inflation-adjusted asset explained by an optimistic economic outlook.
The BTC price drop on Wednesday started much earlier than the Gold price drop as It was most likely precipitated by a police raid at Bihumb’s premises. Bithumb is the number one exchange in Korea, one of the top 10 exchanges by volume. The raid is linked to an alleged investment fraud around the $25 million BXA token pre-sale but also around potential violations of the country’s foreign exchange policies. One of these restrictive policies is the prohibition of Korean Wong (KRW) fund transfers outside South Korea.
Although it is easy to explain Wednesday’s price movement, the severity of Thursday’s movement seems more specific to Bitcoin. The price crash observed then is nothing like the one observed on Gold. It felt like it was part of the global sell-off that shook down the Equity markets, as if Bitcoin forgot its “safe-haven” status for a day. The Equity market downturn is a wake-up call to bring Wall Street back to the reality of Main Street. The S&P Index lost 4% on Thursday. Most technology stocks dropped by 6 to 8%. It is possible that fear eventually took over some Bitcoin holders, similarly to what happened with cryptocurrencies on Black Thursday (March 12th), but still, several orders of magnitude below!
The “fear and greed” needle swung quickly to the red zone on Thursday. Ethereum (USD/USD) lost 13% that day and Ripple (XRP/USD) lost 11.3%. No major cryptocurrency was spared. The crash is a reminder that Bitcoin’s volatility is twice as high as the volatility of Gold for both structural and operational reasons. The correction is clearly not unusual for the cryptocurrency, and worse ones happened in the past, even during the best post-halving bullish runs.
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.