New Restrictions, More QE, Higher Bitcoin Prices

Introduction

The past few weeks were marked by a tremendous acceleration in bitcoin price, that recently broke the 18,000 level, nearly doubling in value since early December. We previously saw that the massive liquidity injections from major central banks and especially the Federal Reserve has led to a sharp recovery in most of the asset classes since mid-March and a sharp consolidation on the US dollar, with the DXY down 10%. Figure 1 shows the performance of a diversity of assets since the market reached its low on March 20th; Bitcoin is by far the asset that experienced the most drastic recovery, up 380%, followed by the ‘FANGs’ stocks, up 125% since their bottom.

Hence, investors have been asking themselves the following question: is the move done on bitcoin or should we experience much higher prices in the medium term?

Figure 1

Source: Eikon Reuters

Investors are pricing in a costly winter

With most of the European nations under national lockdowns, which is also expected to be announced in the US in the near term, investors have been speculating that economies will strongly rely on governments’ support in the next few months, which implies a significant increase in central banks’ assets. We saw that assets from the top major 5 central banks (Fed, ECB, BoJ, PBoC, and BoE) have grown by over 7 trillion USD this year, which has clearly supported most of the markets and resulted in a sharp recovery in asset prices and fundamentals. Figure 2 shows a very strong relationship between the annual change in CBs assets and the price of Bitcoin; as more restrictions imply more debt financed by central banks (i.e. QE), the cryptocurrency has surged as some investors have been looking at bitcoin as a hedge against currency ‘debasement’.

Figure 2

Image

Source: Eikon Reuters, RR calculations

Decoupling from FANGs

Another interesting development has been the strong divergence between bitcoin and FANGs stocks in recent weeks; figure 3 shows that while the FANG+ index has been oscillating around 5,300 since the start of September, bitcoin has surged from $10,000 to $18,000. We saw that in the past, bitcoin prices were very sensitive to equity moves (especially the mega-cap growth stocks) and were strongly correlated during upside momentum but also during equity drawdowns. Bitcoin went down 60% during the February/March episode and was also down nearly 20% during the early September bear consolidation.

Hence, investors will be curious in the future to see if bitcoin prices can hold if tech stocks start to fall.

Figure 3

Source: Eikon Reuters

Negative yielding debt back to new highs

Even though US real interest rates seem to have found their low back in August, with the 5Y real IR trading at -1.4% back then (currently at -1.25%), the amount of negative-yielding debt has continued to surge in recent months. After peaking at 17tr USD in August 2019 (when the 2Y10Y US yield curve inverted), the amount of negative yielding debt had fallen dramatically until March 2020 to 8tr USD and then started to skyrocket again. The negative-yielding debt could be seen as a ‘real-time gauge’ of the economic activity; more debt yielding below 0 percent simply means growing concerns over the economic outlook. Therefore, we could also link the rise in bitcoin to the constant increase in the amount of negative-yielding debt around the world.

Interestingly, gold, which has also shown a strong co-movement with the negative-yielding debt in the past few years, has been following the US real rate in recent weeks and constantly testing new lows, which implies that the precious metal is still very sensitive to US real rates in the current environment.

Figure 4

Source: Eikon Reuters

LT outlook on Bitcoin

In the medium to long term, we are strongly bullish on bitcoin as we think it could act as a strong hedge against currency depreciation and inflationary pressures. In figure 5, we look at the equity curve of the top asset in each decade of the past 50 years; we first had gold in the 1970s due to the unexpected sudden rise in inflation coming from the oil shocks, then came the Japanese stocks in the 1980s with Japan’s economic miracle, then the US boom in the 1990s led to a titanic performance in US growth stocks, then the double-digit growth in China led to an outperformance of consumer staples in the 2000s, and then the prominent growth of new Internet companies led to a strong performance in Tech stocks in the past decade. If we look at the cumulative returns of each asset in the past 50 years, a person who invested $100 would have accumulated over USD 1.3 million of wealth, averaging 22.2% in annual return for a volatility of 25.3% (Sharpe ratio of 0.88).

We are strongly convinced that cryptos (especially bitcoin) could be the best pick for the next 10 years and that investors should hold some bitcoin in their portfolio as it could eventually act as a good diversifier and generate significant returns from current levels.

Figure 5

Source: Eikon Reuters, RR calculations

In the short run, we could see a small consolidation as bitcoin approaches its ST resistance at 19,500 (December 2017 high) as investors start to take profit on the cryptocurrency. We think that any significant bounce on bitcoin should be considered as a good opportunity to buy the dip.

Disclosure: I am/we are long BTC, GBPUSD. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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