Global cryptocurrency markets lost $6 billion in value last week, as digital assets continue to be correlated to traditional markets. Due to the renewed surge in COVID-19, the Dow Jones suffered -3.3% declines. What will it take for Bitcoin to decouple from S&P 500 price action?
Global crypto markets fell $6 billion in value last week, as a majority of digital assets in the top 25 by market capitalization saw losses. Global market capitalization hovered around $261 billion on Friday, which was down from $267 billion on Monday. Bitcoin market dominance stayed fairly stable last week, still controlling about 64.50% of the market.
Weekly Market Outlier
Despite most digital assets experiencing losses last week, a few managed to record double digit gains. Basic Attention Token, Compound, and Chainlink all experienced strong upward momentum last week, with Basic Attention leading the way ( rallying +21%). Last week, it was reported that leading cryptocurrency exchange, Paybito was listing Basic Attention Token on their platform. This seemed to be the catalyst behind the BAT momentum last week. Paybito exchange has received some additional publicity the last couple weeks, due to expansions into India, and listing XRP.
Bitcoin Price & Correlation
Bitcoin fell -1% last week, which was not the worst case scenario since traditional markets fell -3%. Since late February, Bitcoin has continued to follow traditional market sentiment, specifically following S&P 500 trends. At this point, it seems difficult to see a scenario where Bitcoin reduces its correlation to traditional markets. If we look at data provided by Skew, Bitcoin / S&P 500 realized correlation is stronger than ever. Despite weak price action this month, it is still important to note that Bitcoins price is +27% year to date.
The problem right now starts with the correlation between Bitcoin and the US dollar. Historically speaking, Bitcoin has been a hedge against USD, meaning BTC tends to rally when the dollar index goes down. What many people forget is that the dollar index tends to rise when market risk increases. As market risk increases, people flock to USD due to its “reserve status” in the U.S. This has historically put pressure on Bitcoin, since it tends to perform well when the dollar is losing value. With COVID-19 / market risks potentially heating back up, you could very well see the the USD index rise, ultimately putting more pressure on Bitcoin in the short term.
Bitcoin Hash Rate
We also continue to follow the hash rate. Ever since the 3rd Bitcoin halving, we have stressed the importance of hash rate to determine miner sentiment post halving. Bitcoin rejected the yearly high in its hash rate following the 3rd halving, and quickly fell to December 2019 lows. As of recent, Bitcoin hash rate is moving up, but we still believe the next bull market won’t initiate until the yearly high is surpassed in its hash rate. Right now, Bitcoins hash rate is 112M TH/s , and the yearly high is around 123M TH/s.
Last week, stocks fell -3% across the board as the Dow Jones suffered -3.3% losses and the S&P 500 fell -3%. Renewed surges in COVID-19 has the market in panic mode as many investors fear a “second wave” hitting many states. In addition, markets fell -700 points Friday, following bank stress test results that raised a lot of concern across the financial sector.
Last Week’s Surge In COVID-19 Cases
In early June, many states were beginning to open up, with the belief that Coronavirus was finally fading away. Arguably speaking, many of these states were engaging in more outdoor activities, especially with temperatures warming up. Based on last week’s data, many professions believe that states started to “soften up” way too early. States like Arizona, California, Texas, Florida, Oklahoma, and South Carolina all reported new record highs in daily cases last week. Additionally, cases continue to surge in more than half of the U.S. states.
During a hearing with Congress, Dr. Anthony Fauci stated that parts of the U.S were experiencing a “disturbing surge” in COVID-19 infections. This shocked investors, who were preparing for a potential end of year recovery. With last week’s data, sentiment took a drastic turn. Many would argue that the economy is not in a position to enter another shutdown. Steve Mnuchin of the Treasury even stated that “we can’t shut down the economy again.” With brutal data coming in last week regarding elevated cases, it’s hard to believe positive momentum will reside until investors see clarity.
Bank Stress Test
In addition to COVID-19 worries, investors reacted to stress test results as well. Last week, the Fed shared bank stress test results on Thursday. The point of stress tests is to evaluate a bank's ability to survive prolonged economic downturn. The results are more important than ever, given the environment banks are dealing with right now. Unlike past stress tests which have been relatively positive, this time the stress tests showed that a handful of banks could enter a “worst case scenario” if the pandemic continues. With this being said, the Fed restricted bank buybacks through the third quarter, and also limited the amount of dividends they can pay out.
The Fed essentially wants banks to rebuild capital which is a bad sign in a zero interest rate environment. In a zero interest rate environment, banks should be lending like there is no tomorrow, to ultimately speed up the economy. Instead, banks' financial standings are raising red flags, forcing them to rebuild capital in a zero interest rate environment. In order to rebuild capital, banks will be forced to reduce lending and dividends. These are activities the world has rarely seen in a near zero interest rate environment, which goes to show the position the financial sector is in.
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