The Federal Reserve's balance sheet shrank last week below $7 trillion, but bitcoin investors are betting it's only a matter of time before the economic toll of the coronavirus leads to bigger government deficits – and more money printing by the central bank.
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MARKET MOVES
It would be an understatement to say bitcoin has been a big disappointment for traders and investors over the past few months.
Ever since the coronavirus ravaged financial markets in March and sent the Federal Reserve scrambling to pump trillions of dollars of emergency liquidity into global financial markets, cryptocurrency analysts have speculated that a resulting surge in inflation would eventually push up bitcoin prices. The community even celebrated a meme, "Money printer go Brrr," satirizing the U.S. central bank's efforts.
Yet since late April, bitcoin prices have barely increased – hovering around $9,000, which is up from around $7,600 at the start of 2020, but still well off the year's high of $10,500, reached in February. At a time when the largest cryptocurrency was supposed to shine, it's been pushed out of the limelight by rallies in tech stocks and gold, not to mention price zooms in a cadre of lesser-known digital tokens like Chainlink's LINK , Cardano's ADA and Aave's LEND.
Bitcoin investors, though, are undaunted. They still see the cryptocurrency as a hedge against everything from inflation to turmoil in the global financial system to widespread bankruptcies, which by themselves could prompt new rounds of stimulus and money printing. The bet is that the apocalyptic economic scenario remains entirely possible during the remainder of this already-tumultuous year.
"Capitalism is either breaking, or is already broken, and investors know it even if they are still playing the game," the cryptocurrency investment fund Arca wrote Monday in a weekly update. "We believe Bitcoin will remain the best insurance policy against currency collapse and a complete unwind of the financial system as we know it."
Bitcoin price chart. (TradingView)
Last week, the Fed's balance sheet shrank by $88 billion, the most in 11 years, falling below $7 trillion as foreign central banks repaid emergency dollar loans known as "liquidity swaps."
Theoretically such a decrease might be seen as bearish for bitcoin: The U.S. central bank's money printer was essentially working in reverse as market funding strains eased. That might imply lower inflation in the future.
"This is part of the Fed’s success story in stabilizing markets," Bloomberg News trumpeted in an email. Cryptocurrency analysts were more focused on developments in the fast-growing arena of "decentralized finance" than they were about bitcoin.
Chart showing recent decrease in size of Fed's balance sheet. (Federal Reserve Bank of St. Louis)
Bank of America predicted in a report last week that the Fed's balance sheet will climb by the end this year to about $7.6 trillion, which would be a new record.
But Marc Cabana, an interest-rates strategist for the bank, said in a phone interview that the "risks to our forecast are to the high side," since it's not unlikely that the U.S. central bank would pump in a fresh round of emergency liquidity if traditional financial markets took a turn for the worse.
"The U.S. appears to have the virus under control in no way, shape or form," Cabana said. "If market conditions deteriorate, they would respond. If it was another very acute and rapid deterioration in liquidity conditions, it can be quite fast."
In the U.S., extra unemployment checks of $600 are set to expire at the end of July, and lawmakers are debating a fresh round of stimulus. According to Reuters, U.S. House of Representatives Speaker Nancy Pelosi says the Trump administration's call to limit the next relief package to $1 trillion "doesn't come anywhere near" to meeting the need.
"Anything less than a further $1 trillion to $1.5 trillion would be a damp squib," Ian Shepherdson, of the economic forecasting firm Pantheon, wrote on Sunday.
The U.S. government's budget deficit totaled $864 billion in June, nearly as much as in the entire fiscal 2019, the Treasury Department said Monday.
Economists at Deutsche Bank, the German lender, who have predicted that the U.S. deficit could total $4.5 trillion for all of fiscal 2020, say they expect the Federal Reserve's balance sheet to expand to $8.3 trillion by the end of this year.
"It seems inconceivable to me that the Fed and other central bank balance sheets will do anything other than explode over the next decade and perhaps beyond," Strategist Jim Reid wrote Monday in e-mailed comments.
Notoriously volatile bitcoin prices haven't moved by more than 1% for five straight days. Christine Sandler, head of sales and marketing for digital assets at the money-management giant Fidelity Investments, told First Mover last week that greater price stability could induce more big institutional investors to consider an allocation to bitcoin.
"Perhaps this tamping of volatility will lead the thundering herd to crypto," Sandler said.
For bitcoin investors, even the doldrums can seem bullish.
Chart showing bitcoin's notoriously outsize volatility decreasing, almost to the level of U.S. stocks. (CoinDesk Research)
– Bradley Keoun, Editor, First Mover
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CoinDesk Research covers quarterly data in crypto markets including volatility, correlation, volume and returns of the CoinDesk 20 list of crypto assets.
In this report, we also cover derivatives markets, synthetic bitcoins, BTC versus ETH, central bank digital currencies, the return of aging bitcoin mining equipment and looks at the relationship – or lack thereof – between online sports betting and crypto markets.
Trend: Bitcoin's restricted trading environment continues, with its 30-day volatility falling to 23.5% – the lowest level since March 2019.
Some believe the cryptocurrency is on the brink of embarking on a new bull-market cycle in the month(s) ahead as prices are holding above the 50-week moving average (MA).
Indeed, the bulls have maintained a strong foothold above the 50-week MA over the past eight weeks. In addition, signs of seller exhaustion near $9,000 have emerged on the weekly chart over the past two weeks. As such, a move higher cannot be ruled out.
Major resistance is seen near $9,930, which is the upper end of a pennant pattern defined by trendlines connecting the December 2017 and June 2019 highs and March 2017 and February 2019 lows.
A weekly close (Sunday, UTC) above that level would imply a bullish breakout from the 2.5-year-long pennant pattern and open the doors for a stronger rally toward $13,880 (June 2019 high). Analysts at cryptocurrency exchange Kraken think $10,500 is the level to beat for the bulls. That's a logical target, as a move above $10,500 would invalidate a bearish lower high on the weekly chart created in February.
Meanwhile, on the lower side, $8,900 – the low of a doji candle created in the first week of July – is key support. If breached, the 50-week MA support at $8,598 would be exposed.
At press time, bitcoin is changing hands near $9,180, representing a 0.36% decline on the day.
– Omkar Godbole, Markets Analyst
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Disclaimer: The information presented in this message is intended as a news item that provides a brief summary of various events and developments that affect, or that might in the future affect, the value of one or more of the cryptocurrencies described above. The information contained in this message, and any information liked through the items contained herein, is not intended to provide sufficient information to form the basis for an investment decision. The information presented herein is accurate only as of its date, and it was not prepared by a research analyst or other investment professional. You should seek additional information regarding the merits and risks of investing in any cryptocurrency before deciding to purchase or sell any such instruments.
