Investors looking for clues as to whether Bitcoin’s recovery from last week’s 17-month lows is long-term may want to take a look at what traditional markets have to say.
The leading cryptocurrency rebounded after dropping to $25,338 on May 12 and was last seen trading above $30K. While the double-digit bounce is encouraging, it may be too early to say the worst is behind us. The recent sudden change in the recent trend in the Treasury yields and the Japanese yen indicates a recession in the United States, which is an off-risk economic situation.
Recessions, and consecutive quarterly contractions in GDP, are bearish for growth-sensitive assets such as stocks and industrial metals and risky assets such as bitcoin. It is usually bullish for Treasuries (government bonds) and the Japanese yen. Government bonds and currencies of countries like Japan with low interest rates, strong net foreign assets, and deep and liquid financial markets are safe havens.
While the crypto community regards bitcoin as digital gold, cryptocurrency tends to move more or less in line with technology stocks. Bitcoin’s 30-day relationship with the tech-heavy Wall Street Index on Nasdaq recently soared to a record high of 0.82.
The 10-year US Treasury yield has turned lower recently, rising 150 basis points to 3.20% in the two months through May 9. The benchmark return is seen at 2.80% at press time, according to charting platform TradingView.
The shift comes as the Federal Reserve (Fed) is expected to accelerate monetary policy tightening and raise interest rates by 50 basis points in upcoming meetings. The central bank is likely to increase borrowing costs to at least 2.25%-2.5% by the end of the year from the current 0.75% to 1%. Moreover, the central bank is set to start sorting out the assets from its $9 trillion balance sheet in June.
The drop in the yield on longer-term bonds in the middle of the cycle may be a sign that investors are seeking safety in anticipation of a recession — successive quarterly contractions in gross domestic product.
On Wednesday, David Solomon, CEO of Goldman Sachs, told CNBC that investors should prepare for a downturn in economic activity in the world’s largest economy as the Federal Reserve withdraws liquidity to contain inflation.
The decline in the Japanese yen also ended abruptly despite the BoJ sticking to its supplementary monetary policy amid the ongoing Fed tightening. The yen is trading at 127.20 against the US dollar at the time of writing, up 3.15% from a recent low of 131.35 per dollar.
The safe-haven yen’s shift indicates that the currency market’s focus has shifted from hawkish Fed policy to pricing in the prospects of a recession, just like Treasury yields. Goldman Sachs recently said that the Japanese yen is a perfect hedge against a recession. The yen has risen against the dollar during each of the previous six recessions in the US, Capital.com noted.
All things considered, the overall picture continues to deteriorate, reducing the odds of a significant recovery in the price of Bitcoin and other risky assets. However, readers can take heart from the fact that institutional investors are buying into the dip, which is a sign of the cryptocurrency’s long-term prospects. Low demand can limit losses.
Data tracked by ByteTree Asset Management shows that the number of coins held by closed-end funds in the US and Canada, and Canadian and European exchange-traded funds (ETFs) has increased by 6,539 BTC since May 3.
“It is encouraging to see some inflows into BTC ETFs, but more importantly, institutional money is not intimidating us,” Charlie Morris, CIO of ByteTree Asset Management told Forbes. “Bitcoin has gone from weak hands to strong hands.”