Last week was quite an eventful one in terms of action in the markets. We’ve gotten the third quarter GDP growth, Global US manufacturing and services PMI, PCE numbers, Euro area inflation rate and ECB rate hike, all in a single week. On top of it, one of the key figures in the crypto space - Elon Musk officially bought Twitter, which had a significant impact on the crypto market as well. The biggest winner of the news was the meme cryptocurrency, which is widely associated with the billionaire himself. Dogecoin was at one time up over 150% in the span of only 5 days, basically erasing all of the losses from the past half of a year, which helped put some pressure off other cryptocurrencies as well.
What about Bitcoin?
Bitcoin rallied on the news as well, finishing Wednesday up just shy of 4 percent. What is more important, the biggest cryptocurrency by market cap, acted quite resiliently not only throughout the whole week, but over the whole of October. The price candles managed to close above the $19,000 level (approximately) every day in a month. Looking at the two charts below we can see that having rallied Bitcoin has just encountered two major resistances. The daily chart (left picture) shows how the price got rejected from daily MA 100, while the weekly chart (right picture) indicates the last weekly candle closed just below weekly MA 20. As a consequence, a minor retracement in the following days can be expected. Nonetheless, there are quite a few bullish signals pointing towards a continuation of the upward trend. Keep reading to find out what drivers could push BTC higher.
Key factors for Bitcoin
Now let’s get back to the title of this article. Bitcoin continues to shine increasingly like gold, as it moves more and more in sync with gold recently. While Bitcoin’s case for digital gold seemed to fall apart back in May, when the correlation between gold and its digital equivalent fell to the lowest point in over 3 years, Gold 2.0 has been moving increasingly in tandem with its predecessor.
Source: Bank of America
On the one hand it is important to point out that its S&P 500 (BTC-SPX) and Nasdaq (BTC-QQQ) correlations remain notably higher (they peaked on 13th September, but have since retraced mildly) in comparison to (BTC-XAU) correlation, suggesting that lots of investors still perceive Bitcoin more as a risk-sensitive asset instead of a safe haven. On the other hand, we just can’t ignore the obvious trend reversal in gold (BTC-XAU) correlation. Although the relationship between the two assets still remains only mildly strong, it shows that an increasing number of investors are starting to see Bitcoin as a safe haven during these precarious times, which points toward a potential decoupling of crypto and equity markets.
One sign pointing in that direction can be obtained by comparing Bitcoin’s performance with stocks lately. While both crypto and stocks fell, the former held up better. During the third quarter Bitcoin fell only around 1%, while the S&P 500 and Nasdaq dropped 5% and 4%, respectively. Even though all three assets moved in the same direction, the former’s overall outperformance could be interpreted as investors finally starting to see Bitcoin as a safe haven. Taking into account the total supply of Bitcoins that can get mined is capped at 21 million coins, it makes sense that it should eventually start acting more and more as an inflation hedge. Interestingly enough, some events in China are evolving in a way that could help Bitcoin outperform traditional assets during current macro uncertainty.
How can China push BTC higher?
At the beginning of the article, we’ve already outlined major news items regarding financial markets, but we intentionally omitted the most important one. Which one? I believe it was CCP’s 20th National Congress, which ended the previous Sunday, but caused significant weakness across Chinese stocks on Monday, once the markets opened. Alibaba dropped by more than 11 percent, which resulted in Jack Ma (Alibaba's founder) losing $900 million on Monday. According to Bloomberg, the 13 richest Chinese lost $12.7 billion in just one day. So, what spooked the markets to such a degree? As expected Xi secured a third term (after removing a two-term limit from constitution in 2018), but more importantly, he solidified his authority by removing many important officials who helped the country establish as a dominant force, while stacking the organs of government with his loyalists. Additionally, Xi called for ‘great rejuvenation of the Chinese nation’ based on revitalising the Chinese Communist Party’s role as the economic, social and cultural leader.
Source: South China Morning Post
President Xi is expected to unleash a broad range of wealth taxes in his populist battle against ‘inequality’. While many high net-worth residents have been moving their money to safe offshore places for years, the process of Chinese savers moving as much of their assets as possible away from the control of power-consolidating CCP has kicked into higher gear following the congress. According to David Lesperance, who spoke with Financial Times, wealthy families across Hong Kong and China are at a ‘tipping point’ about triggering so-called financial ‘fire escape plans’ to avoid the wrath of Xi and his communist party.
Given that in China companies, banks, and individuals must comply with a ‘closed’ capital account policy (money cannot be freely moved into or out of the country except if it abides by strict rules), moving money offshore can be quite challenging. Luckily there is a decentralised and permissionless solution for Chinese residents in the form of cryptocurrencies, powered by blockchain technology. While CCP can track international bank transfers and even gold movements, they can’t really get their eyes on crypto transactions (technically they can see transactions on the public ledger, however, if you’re cautious and your identity doesn’t get compromised, pseudonymity is good enough). Also, not only crypto can bypass these capital controls and national borders, but it does so with the click of a button. Pretty convenient, right?
Taking into account that there are $55 trillions of deposits in Chinese banks (over 50 times more than the TOTAL crypto market cap), many experts agree that future capital outflows from China could push Bitcoin higher, especially considering current massive Chinese yuan (CNY) devaluations in terms of US dollar (USD). Interestingly enough, CNY was also losing ground against the dollar pretty rapidly from 2015-2017, which tempted many Chinese residents into crypto. Many economists agree that crypto investors from China largely helped propel digital gold to $20,000. Now given that capital flight from China back in 2015 helped the foremost cryptocurrency increase from $250 to $20,000, we can only wonder how high another Chinese capital flight can push Bitcoin (and other cryptos) this time.