First Mover: ECB Stimulus May Offer Market Hope After Bitcoin Fails (Again) to Break $10K

As bitcoin struggles to break out of the range it's largely been stuck in for more than a month, some investors are looking ahead to Thursday's European Central Bank meeting for fresh monetary stimulus that might underscore the cryptocurrency's potential as an inflation hedge. 

Prices for bitcoin shot up 8% on Monday to a three-month high around $10,200, then quickly reversed on Tuesday, falling back to about $9,500. CoinDesk's Daniel Cawrey reported the price action may have been exacerbated by liquidations of derivatives trades on the Seychelles-based exchange BitMEX. 

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The round-trip disappointed some bulls who had speculated that a break above $10,000 might kindle a longer-term price surge.

"There is a longstanding resistance level just below the $10,400 mark, which has proved to be a tough hurdle several times over the last nine months," eToro markets analyst Simon Peters wrote Tuesday in an email. 

The ECB, led by Christine Lagarde, could decide Thursday to expand its Pandemic Emergency Purchase Programme, or PEPP, by about €500 billion ($560 billion), from an initial target of €750 billion set in March, economists with the U.K. bank Barclays predict.

According to the Financial Times, the program would otherwise run out of firepower by October.  

“If we judge that further stimulus is needed, the ECB will be ready to expand any of its tools in order to achieve its price stability objective,” Isabel Schnabel, a member of the ECB’s executive board, said last week in an interview with the FT. 

The PEPP, like the Fed's quantitative easing programs, is designed to support markets – and inject fresh money into the financial system – through purchases of government bonds and other assets.

Quantitative easing, or QE, was initially an experimental and controversial monetary practice, but over the past decade has become a mainstay of major central banks in lieu of further interest-rate cuts. And with the coronavirus pandemic shuttering economic activity earlier this year, central banks quickly resorted to new rounds of QE, in addition to emergency lending programs.

According to Bank of America, total assets on the balance sheets of six major central banks, including the ECB and the Federal Reserve, have surged to about $20 trillion, from about $15 trillion in 2019. The amount is forecast to reach almost $25 trillion by 2021.

Among crypto traders, a prominent investment thesis is that these massive money injections could eventually stoke inflation, which could be good for the cryptocurrency, since its supply is capped at a maximum of 21 million units. 

"This repeated and literally unlimited use of fiscal and monetary expansion will dramatically push up the quantity of fiat money required to buy non-quantitatively-easible things, like bitcoin and other cryptocurrencies," Dan Morehead, CEO and co-chief investment officer of the digital-asset-focused investment firm Pantera Capital, wrote last week in a monthly letter. 

While inflation is currently muted, due to lagging economic demand, the bet is that the price dynamic could change as countries across Europe and many U.S. states move to relax lockdown restrictions, allowing non-essential businesses like retail stores, bars and restaurants to reopen. 

Pedro Febrrrero, an analyst at the cryptocurrency and foreign exchange research house Quantum Economics, wrote in an article last month that bitcoin, along with other “hard currencies” like gold and precious metals, was likely to benefit considerably from continuing QE.

"QE will eventually push up BTC’s price," he wrote. As government money "becomes extremely abundant, assets with strong network effects and limited quantities tend to rise in price.”

Bitcoin, launched in the wake of the 2008 financial crisis, has only ever existed in the era of cheap money, and QE doesn't look to end anytime soon.

So an additional commitment by the ECB this week could reinforce the bet that as the prospect of inflation grows, more investors will eventually turn to bitcoin. 

Trend: Having trapped bulls on the wrong side of the market with a rapid $800 decline during Tuesday's U.S. trading hours, bitcoin is now consolidating around $9,590.

"Longs were overzealous at the top," tweeted popular analyst @TheCryptoDog in response to the violent pullback from $10,130 to $8,300. Indeed, most analysts and investors were expecting Monday's pennant breakout to power the cryptocurrency on to stronger gains. It seems the bulls paid little attention to trading volumes, which were calling for caution.

"Breakouts seen in bitcoin and other major cryptocurrencies were just spikes that lasted less than an hour, preceded and especially not followed by sustained volume, confirming that they were just triggered by stop-losses without much conviction behind them," said David Lifchitz, chief investment officer at ExoAlpha, a Paris-based asset management firm.

Tuesday's drop was accompanied by a surge in selling volume (red bars on the chart above) and further losses may be seen in the short-term.

Supporting the case for deeper declines is the failed pennant breakout seen on the daily chart. Analysts consider failed breakouts as powerful signals of bearish reversals. On the downside, key support is located at $8,630 (May 25 low), which if breached, would violate the bullish higher-highs setup.

A sustained move back above $10,000 is needed to restore the uptrend. That may be a tough task, as bitcoin has failed multiple times in the last 12 months to establish a firm foothold above $10,000.