Hello. Analysts are reporting gloomy short-term projections for bitcoin as the U.S. Labor Department reports muted inflation over 2020. Here's the story:
A new, physically backed bitcoin exchange-traded product (ETP) has hit the SIX stock exchange in Switzerland. Developed by ETC Group, this is the 34th bitcoin ETP on SIX. Meanwhile, the Winklevoss-owned Gemini Trust company is backing the latest bitcoin exchange-traded fund (ETF) application filed in Canada. Arxnovum Investments’ bitcoin ETF could conceivably trade on the Chicago Mercantile Exchange, if approved. U.S. regulators have long been skeptical of these “high risk” investment vehicles, which many point to as hampering institutional interest (by the way, check out Blockwork’s new editorial site).
Stopping bitcoin ‘funny business’...
European Central Bank (ECB) President Christine Lagarde has called for bitcoin to be regulated at the international level, during a Reuters event. The “highly speculative asset” has led to "some reprehensible activity," including money laundering, and any loopholes need to be closed, according to a report from Reuters. Meanwhile, crypto’s favorite regulator, Brian Brooks, the acting head of the U.S.’ top bank regulatory agency, is reportedly ending his term this week, while crypto-knowledgeable Wall Street and Commodity Futures Trading Commission vet Gary Gensler is rumored to be named chairman of the Securities and Exchange Commision.
Analysts are gloomy about bitcoin’s short-term price outlook, with several pointing to increased flows onto exchanges and cooling institutional demand. Some 57,000 BTC moved onto exchanges Tuesday, the biggest-single day change since the markets crash on March 12, 2020. A Goldman Sachs exec said institutional investors are “key” to curbing bitcoin’s volatility. Neither bitcoin’s 20% drop on Monday, nor its volatility, have stopped “whales” from buying the dip.
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Bitcoin and ether prices are about 87% and 78%, respectively, of their all-time highs, though the majority of altcoins (smaller market cap cryptocurrencies) are languishing. While some altcoins have spiked during the recent market run-up, retail investors have largely ignored these cheaper, and riskier, cryptos. That said, Messari found tokens embedded in the decentralized finance (DeFi) market – like maker (MKR), compound (COMP), aave (AAVE) and uniswap (UNI) – are seeing robust growth.
Much of bitcoin’s growth in 2020 was driven by institutional investors turning to the hard-capped, deflationary asset as an inflation hedge. Hedge fund legend Paul Tudor Jones, MicroStrategy’s Michael Saylor and Guggenheim Partners Chief Investment Officer Scott Minerd, among others, have all spoken on bitcoin’s prospect as “digital gold.”
Fiscal stimulus and looser monetary policy in response to the coronavirus pandemic drove up inflation projections. Indeed, rates for U.S. Treasury bonds have been ticking up higher in recent days, crossing 1% last week, on calls for additional government spending – such as President-elect Joe Biden’s plan to inject “trillions of dollars” through an economic recovery package.
But the line of sight on inflation is anything but clear. The U.S. Labor Department reported today that a key measure of inflation, the Consumer Price Index (CPI), only increased 1.4% in 2020, the smallest yearly gain since 2015. For reference, 2019’s CPI rose 2.3%, while the 10-year average is estimated at 1.7%.
This is far below the Federal Reserve’s 2% inflation target. Last year, Fed Chair Jerome Powell signaled it would reverse course and allow the economy to run hot – above 2% – for periods, acknowledging the economy has missed this target for the last decade. Some investors and analysts are skeptical of any forthcoming change. Kathy Bostjancic of Oxford Economics, for one, is quoted in Barron's casting doubt on the prospect of a rate increase before 2024.
Bloomberg urged readers to “Get Ready for the Great U.S. Inflation Mirage of 2021,” with economists Carl Riccadonna and Yelena Shulyatyeva quoted as saying, “2021 will be a year plagued by numerous unwarranted inflation scares. Consumer inflation will remain weak over the medium term -- until the economy fully absorbs the slack resulting from the pandemic.”
Still, St. Louis Federal Reserve President James Bullard said Wednesday that inflation is likely to rise. Speaking at a Reuters conference, Bullard said the “money supply has ‘exploded,’ fiscal deficits are ‘off the charts’ and a hot economy may either already be here or ‘just around the corner,’” according to a Reuters report.
Ian Shepherdson, chief economist of Pantheon Macroeconomics, told CoinDesk over email he projects “a clear uplift to 2.5%-plus in Q2.” Though, “the key question of what happens when the economy reopens fully remains unanswerable at this point.”
So what does this mean for bitcoin and the rest of the crypto market table?
Well, unlike highly liquid and tradable assets like U.S. Treasury bonds that reflect any minute change in inflation projections, bitcoin often does its own thing.
Correlated with stocks and other traditional assets, bitcoin has largely followed the herd in price swings, although in a bull market, with the highest volatility in three years, anything is possible. On Monday, bitcoin shed 20% only to bounce back. And while analysts have grim short-term outlooks, many are convinced there’s still money sitting on the sidelines.
“Recent institutional investors have long horizons and will absorb near-term price shocks,” while retail investors would buy at discounted price levels for fear of missing out, Jehan Chu, managing partner at Hong Kong-based Kenetic Capital, told CoinDesk’s Omkar Godbole. “Expect temporary volatility and then a jump back to the $40,000 level, followed by $50,000 as the bitcoin percentage land grab continues.”
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