Bitcoin Takes a Breather as Stocks Drop, Inflation-Adjusted Bond Yields Hit Record Low

Deep negative real returns on bonds tend to boost the attractiveness of other assets.

AccessTimeIconJul 27, 2021 at 10:53 a.m. UTC
Updated Sep 14, 2021 at 1:31 p.m. UTC

After rallying for five consecutive days, bitcoin is taking a breather alongside a dour mood in traditional markets. 

The top cryptocurrency is changing hands near $37,000 at press time, having failed to hold Monday's gains above $40,000, according to CoinDesk 20 data. Prices pulled back after e-commerce giant Amazon flatly denied speculation it was adopting bitcoin as a payments alternative. 

Asian stocks hit the lowest point of the year early Tuesday as shares in Chinese internet companies lost more ground owing to the regulatory crackdown. Major European markets are also flashing red, and the futures tied to the S&P 500 are down 0.53%. 

According to some observers, bitcoin and cryptocurrencies are at the far end of the risk curve. So, a worsening of risk aversion in traditional markets would be bearish for cryptocurrencies.  

However, recent price action suggests bitcoin sellers have run out of steam. The cryptocurrency traded higher on Monday even after Bloomberg reported that the U.S. Department of Justice is investigating Tether, the issuer of the largest stablecoin tether (USDT), for possible bank fraud.

Bitcoin has managed to hold on to the $30,000 support in recent weeks despite increased regulatory scrutiny of Binance, the world's largest crypto exchange by volume, persistent concern about stablecoins, and China's ban on mining. 

The market activity is reminiscent of the resilience observed in early October 2020. Back then, bitcoin remained bid above support at $10,000 despite multiple exchange hacks, and a BitMEX lawsuit. The cryptocurrency went on to hit record highs above $20,000 in December. 

Another factor favoring an upside in asset prices is the renewed decline in inflation-adjusted bond yields. The real yield on 10-year U.S. Treasuries sank to a record low -1.11% on Monday – down 51 basis points from the February peak of -0.60%. According to the Financial Times, real yields in the euro region also traded at all-time lows on Monday. 

Deep negative real – or inflation-adjusted – returns on bonds tend to boost the attractiveness of other assets. For instance, assets from equities to gold and cryptocurrencies saw unprecedented rallies in the 12 months through March 2021 as real yields collapsed and central banks pumped trillions of dollars worth of liquidity into the system in the aftermath of the March 2020 crash. 

This time, the bullish impact of the decline in real yields may be tempered by growth fears and central banks looking to scale back stimulus. "There was a big liquidity push back then, but now central banks are thinking of doing the opposite, and there are some growth concerns," David Belle, founder of and growth director at TradingView, said. "So the macro environment is different than the one seen after March 2020."

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