Rising Treasury yields worries economists, but what does this mean for Bitcoin?


This week’s correction in the price of Bitcoin (BTC) showed a market not going up in a straight line. Meanwhile, another topic has been gaining attention: the large increase in 10-year yields on US government bonds.

In the last weeks, the yield on 10-year US government debt has skyrocketed 35%, until reaching a new maximum of 1.44%, the highest point since the cross assets crash in March 2020.

Treasury yield recovers from 60-year low

1-Week Candlestick Chart of US 10-Year Yield Source: TradingView

The yield on 10-year Treasuries has accelerated tremendously in recent weeks, similar to the period leading up to the economic recessions of 2000 and 2008. Therefore, rising yields are often seen as a sign of weakness for the economy and can have a major impact in many markets.

As yields rise, governments must pay more for their underlying government bonds. This, combined with the current economic conditions of the post-COVID-19 era and record national debt, are factors that, unsurprisingly, economists are concerned.

However, looking at the chart above from a technical perspective, This entire run can still be seen as a simple retest of the previous support level.

An example of this is the previous attempt to test previous resistance. This could also happen here, where rates will fall again from the 1.53% level. But it is important to keep an eye on this level because breaking it can have a huge impact on the markets.

Yields on government debt also influence mortgage markets. Since the real estate market is hugely overheated right now, with people going into massive debt to buy houses, a rise in interest rates could blow up this whole bubble, similar to what happened in 2008.

However, returns affect other markets as well, as gold often reacts to these movements as well. But is this time different? And how will Bitcoin respond to these possible macroeconomic shocks?

A weakened dollar against Bitcoin

3-day chart of the US dollar currency index. Source: TradingView

US Dollar Currency Index (DXY) Continues to Show Weakness as Yields Rise, which in general is a good news for Bitcoin bulls. This suggests that investors are fleeing the dollar towards higher risk, higher reward investments such as Bitcoin.

However, from a technical perspective, the DXY saw a further bearish test at 91.50 points, followed by lower for the dollar, as seen in the chart above. Now, a new test of the 90 point level is being carried out, and the main question is whether this level will hold as support.

BTC / USD versus DXY. Source:: TradingView

However, it is debatable whether the rise in returns is having any direct effect on the price of Bitcoin, particularly in recent days. In the meantime, DXY has often been inversely correlated with the price of Bitcoin, although it has been declining in recent months (see below).

BTC 90-day moving correlation vs. USD, VIX, Gold and S&P 500. Source: Digital Assets Data

After the collapse in March 2020, this inverse relationship strengthened until September 2020, as a weakened dollar was accompanied by a major increase in the price of BTC.

Of course, assets are only correlated until they are not, and many other factors can have a much greater impact on BTC in the short term, for example, miners or whales selling Bitcoin, government regulations, etc.

Why is gold showing weakness?

Gold’s 3-day chart. Source: TradingView

The 3-day chart for the price of gold shows a clear correction from August 2020. More importantly, rising yields and a weak dollar have not affected the gold market as much as the Bitcoin market.

Even with the recent increase in yields, people are not buying gold. In fact, an increase in yields has historically not benefited gold, at least not in the short term, because higher yields would make government bonds more attractive for funds to hold for settlement and as a risk-free asset in their portfolios.

However, when yields continue to climb towards higher levels, the uncertainty surrounding the economy is also increasing, with investors generally beginning to switch from the dollar to gold as a safe haven. This was seen in the 1980s, when yields reached 14% and gold also soared to new all-time highs.

BTC has become increasingly important in macroeconomics

However, in the current state, falling gold prices may simply be an immediate reaction to rising yields overall. Yet another possibility is that an increasing number of investors are opting for “digital gold” over precious metal, not just because of the higher upside potential, ie risk-reward, but also because these positions can be liquidated much more easily.

But another possibility is that an increasing number of investors prefer “digital gold” to the precious metal, not only because of the greater upside potential, but also because these positions can be liquidated much more easily on digital trading platforms.

Today, Bitcoin’s market capitalization is still only 7% to 10% of gold, which highlights this huge upside potential.

Therefore, the macro conclusion to be drawn is that markets are becoming increasingly uncertain about the future of the economy and the dollar, as exemplified by the increase in 10-year Treasury yields. However, it is still too early to cancel the recent correction in the price of BTC to this macroeconomic development, since many other variables are in play.

Ultimately, rising yields and a weaker dollar are interesting developments to watch for moving forward. With Bitcoin becoming an increasingly important player in the macroeconomic environment, strategists at JPMorgan Chase, for example, believe that BTC may continue to eat gold’s market share.. This will likely result in an even higher valuation for Bitcoin, particularly in the event of another economic crisis at the expense of gold.

In December 2020, JPMorgan strategists noted:

“The adoption of bitcoin by institutional investors has only begun, while for gold, its adoption by institutional investors is well advanced. If this medium to long-term thesis turns out to be correct, the price of gold would suffer a structural headwind in the coming years. “

The views and opinions expressed here are solely those of the Author and do not necessarily reflect the views of Cointelegraph. Every investment and trade move involves risk. You should do your own research when making a decision.

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