Paper Dollars Are not Obsolete Yet
Traders, analysts, and commentators have been buzzing about the correction in BTC and other crypto assets. While some new investors are experiencing their first drawdowns, other seasoned traders are quick to call the pull back from recent highs everything from inevitable to downright healthy. And because no investor is comfortable with randomness, we quickly scramble to look for explanations and reasons why prices dipped more than 25% from peak to trough in such a short time frame Sunday night into Monday this week. A good portion of the need to find reason is simply to Monday morning quarterback, but we also genuinely thirst to find signals that we missed so that next time we might pay them heed.
It is my firm belief that, like snowflakes in a winter storm, no two selloffs are entirely the same. However, many of them have quite a bit in common. As the saying goes, “History doesn’t repeat itself, but it rhymes”. While I sit here with the advantage of 20/20 hindsight, I’d like to point out one signal that I haven’t heard much of the crypto world talking about since the start of the bull run in the early Fall, and that is the strength (or lack thereof) of the US dollar and the yield on US Treasuries.
So much of the fuel that has fed the fire of this rally is the nearly universal opinion that, due to the global pandemic followed by unprecedented monetary easing and an increase in money supply, the dollar is in for a rough patch. The frailness of fiat currency in general, and the US dollar in particular, is pretty much the entire reason Bitcoin exists, and this year has been a case study in what happens when we fire up the money printer. Bond and equity markets were saved from disaster, the financial system didn’t grind to a halt, but the cost is a weaker dollar and a staggering amount of public debt. As early as this Spring, as soon as it was obvious that the economy was going to essentially stop but that the Fed would do whatever it takes to keep markets afloat, many investors started piling into stocks and gold. But some of the savviest players jumped into BTC as well.
The downtrend in the US Dollar has been steady and relentless, and at the same time US treasury yields have been pegged at historic lows. However, as the new year started, we saw a big hiccup in treasuries, with the 10 year yield jumping from 90 bps to 118 bps late last week. Then, with a very slight delay, the US dollar started ticking up. This wasn’t a BIG rebound by any means, and it had been trending down so steadily that the bounce only took it back to levels from early December, but it was enough to catch attention.
The backdrop at this time included treasury yields (which directly influence lending and borrowing rates) rising along with the dollar, growth stocks taking a hit on the chin as investors rotated into value stocks amidst a round of profit taking, and talk that with the vaccine being rolled out and democrats ready to push stimulus. All of this created a backdrop that maybe, just maybe, we could be optimistic about the future of the economy.
I don’t believe that the momentary strength of the dollar was the only thing at play to start the BTC selloff, and maybe not even the most important catalyst. But it was another signal for profit taking in a sea of signals. Since Monday, the dollar bounce has not seen follow through, and BTC prices have stabilized, though remain choppy. There is still a bit of back and forth to work through before BTC takes its next leg, wherever that may be. But when it does happen, I’ll remember to be watching the dollar to see if it flashes a yellow light next time we have a big run.
CrossTower Inc. provides this content for general information purposes, to better inform you on your digital asset investment journey. We do not provide investment recommendations or provide tax advice. Please consult your investment professional or tax advisor if you require assistance in these areas.