Bitcoin prices were slipping early Thursday along with U.S. stock futures. U.S. 10-year Treasury yields declined.
Crypto traders are prepping for a speech by Federal Reserve Chair Jerome Powell in Jackson Hole, Wyoming, where inflation is on the agenda.
Bitcoin's implied volatility falls sharply ahead of Powell speech
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PRICE POINT
Bitcoin prices were down early Thursday along with European stocks and U.S. equity futures as traders in both digital-asset and traditional markets awaited a speech by Federal Reserve Chair Jerome Powell that's expected to address inflation policies.
The largest cryptocurrency, seen by many investors as a potential hedge against inflation, like gold, was off 0.9% to about $11,370. For the past month, bitcoin has mostly traded in a range between $10,500 and $12,400.
"If inflation does pick up, we can expect the dollar to continue lower with inflows directed into equities, precious metals and alternative assets, namely bitcoin," Lennard Neo, head of research for Stack Funds, wrote Thursday in a report.
U.S. 10-year Treasury yields declined to 0.68% and the dollar was steady in foreign-exchange markets.
MARKET MOVES
As Federal Reserve Chair Jerome Powell prepares to speak Thursday at the U.S. central bank's annual Jackson Hole Economic Symposium in Wyoming, the occasion offers a glimpse of just how dramatically once-slow-moving monetary forces have accelerated due to the devastating economic toll of the coronavirus pandemic.
At at the 2019 Jackson Hole gathering, then-Bank of England Governor Mark Carney warned in a speech that the U.S. dollar’s status as the de facto global currency contributes to an unsustainable international economic and monetary regime. He argued that world leaders should create a “synthetic hegemonic currency,” potentially provided “through a network of central bank digital currencies.”
Fast forward to now, and the Jackson Hole conference has been forced to go virtual because of the coronavirus. Trump’s economic stewardship, including a U.S. stock market that many investors now say is propped up by the Fed’s $3 trillion of freshly printed money, has become a core issue in the 2020 presidential election. The national debt now stands at $26.5 trillion. Digital currencies are now being studied and pursued by central banks in China, the U.S. and just about everywhere else. Goldman Sachs recently warned the dollar risked losing its dominant reserve status.
“The pandemic has sped up key structural trends and triggered substantial market swings,” strategists for the $7 trillion money manager BlackRock wrote this week. "The policy revolution was needed to cushion the devastating and deflationary impact of the virus shock. In the medium term, however, the blurring of monetary and fiscal policy could bring about upside inflation risks.”
U.S. M2 money stock, one of the broadest measures of money supply (Federal Reserve Bank of St. Louis)
Many investors are betting on bitcoin as a hedge against the potential debasement of the U.S. dollar, but Fed officials say deflationary forces might be stronger because of an expected drop off in demand from consumers and households.
Crypto traders will focus in the short term on what the Fed’s speech might mean for bitcoin prices, which have surged almost 60% in 2020, far exceeding this year’s 7.7%year-to-date gain in the Standard & Poor’s 500 Index of U.S. stocks.
But the Fed’s actions could also have implications for ether, the native token of the Ethereum blockchain, where entrepreneurs are developing alternative currencies and semi-autonomous lending and trading networks that might one day replace the current financial system. There’s also a fast-growing business in dollar-linked “stablecoins,” with the amount doubling this year to $13 billion.
“So much has changed,” said Joe DiPasquale, CEO of the cryptocurrency-focused hedge fund BitBull Capital. “There is this danger of the U.S. [dollar] in the future no longer being the world’s reserve currency. We are in a much worse position than we were in a year ago.”
Mati Greenspan, founder of the cryptocurrency and foreign-exchange analysis firm Quantum Economics, wrote this week that Powell’s return to Jackson Hole comes at a time when “people are just starting to ask questions about the intrinsic value of money.”
“U.S. authorities have just taken on an inordinate amount of debt, more than they could possibly ever hope to pay back,” Greenspan wrote. “So the only viable option is to decrease the value of that debt by way of monetary debasement. It’s despicable and dangerous, but the only other option is austerity, which is too unpopular for any public servant to mention at this time.”
Dollar-linked stablecoins outstanding, in billions of dollars (Coin Metrics)
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Bitcoin’s options market is foreseeing little price turbulence in the short-term despite central bank watchers expecting fireworks from the Federal Reserve on Thursday.
Bitcoin's implied volatility on one-month options, which gaugesmarket's expectations for price gyrations over the four week period, fell to 52% early Thursday – the lowest level since July 25, according to data source Skew.
Short-term price expectations have declined sharply from 70% to 52% over the past two weeks.
The three-month gauge has pulled back from 80% to 68% and the six-month has declined from 80% to 72%.
Analysts expect Powell to signal tolerance for high inflation – a move that could weaken the U.S. dollar and propel bitcoin higher.
However, with strong expectations already built in, the scope for disappointment is high. The dollar may surge if Powell’s comments fall short of expectations.
The event, therefore, has potential to trigger big moves in either direction.
Bitcoin's price correlation with the U.S. Dollar Index (CoinDesk)
Potential volatility in forex markets could feed into cryptocurrencies, since the inverse correlation between bitcoin and dollar has strengthened over the past few weeks.
The 60-day inverse correlation is now strongest in 16 months.
Also, the implied volatility terms structure remains steep, meaning the six-month implied volatility is still hovering above the three-month, which is greater than the one-month metric.
"It indicates that uncertainty is high," Denis Vinokourov, head of research at the London-based institutional brokerage BeQuant told CoinDesk in a Telegram chat.
– Omkar Godbole
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