While Bitcoin’s blockchain data is showing signs of green shoots, the macro environment does not appear to be conducive to a bullish revival.
In particular, the breakup of the reflation trade – or betting that will benefit from spikes in growth and inflation – could keep Bitcoin under pressure, analysts say. Evidence of the dissolution comes from a recent decline in bond yields and weak commodity-linked currencies.
“The processing of the reflation trade affects Bitcoin,” Noelle Acheson, Head of Markets Insights at Genesis Trading, told CoinDesk, adding that many investors assigned the cryptocurrency to their portfolio as an “inflation hedge”.
Reflation refers to an increase in economic activity and inflation after a depression or recession. In anticipation of reflation, investors typically buy industrial commodities, commodity-linked currencies like the Australian dollar, stocks of economically sensitive companies, and perceived inflation hedges like bitcoin and gold. They tend to sell bonds, which drives up returns.
The so-called reflation trade became popular after March 2020 when policymakers around the world promised unprecedented monetary and fiscal stimulus and raised hopes for a V-shaped recovery in economic activity and inflation.
Trading picked up in November following the US presidential election, as the AUD / JPY (Australian dollar / Japanese yen) rally from 72 to 84 in the five months to March and bond yields (bond prices and yields) rise in move opposite directions).
Bitcoin also rallied six times over the period to nearly $ 60,000, moving in lockstep with AUD / JPY. The currency pair could be a better indicator of reflationary sentiment than most traditional assets as the Australian dollar is sensitive to commodity prices and the yen is seen as a haven. Australia is one of the largest exporters of copper and iron ore.
The positive correlation suggests that the reflation theme played a huge role in getting money into the Bitcoin market.
BTCUSD vs. AUD / JPY and 10-year US Treasury yield
Both Bitcoin and AUD / JPY peaked in March and April. Bitcoin fell in May on renewed regulatory concerns and Tesla’s decision to remove cryptocurrency from the list as a payment alternative, and AUD / JPY has been down in recent days, suggesting a breakup and flight of the reflation trade suggesting safety.
The bond market is signaling the same, with longer-term yields having declined sharply in recent days. The US 10-year Treasury yield fell to a 4 1/2 month low of 1.25% on Thursday. “The bond market is telling us that inflation could be temporary,” said Acheson.
Right now there is less incentive for investors to put money into inflation hedges, including bitcoin. The cryptocurrency can come under selling pressure if the markets continue to conduct reflation deals, creating a full blown sentiment to avoid assets classified as risky.
“The reflation rethinking is starting to take a toll on stocks, and if risk aversion worsens, Bitcoin could see a deeper decline,” said Pankaj Balani, CEO of Delta Exchange.
US stock benchmarks fell Thursday, with the Dow Jones Industrial Average dropping more than 250 points and futures losing nearly 500 points at a point earlier in the day. Bitcoin also fell nearly 5% to $ 32,100.
“Bitcoin is still considered an emerging market and is therefore somewhat exposed, at least for the time being, despite the longer-term value proposition,” said Joel Kruger, currency strategist at LMAX Digital.
At the time of going to press, the mood seems to have stabilized. Dow futures are currently trading 0.55% or 180 points higher and Bitcoin is unchanged at around $ 32,900 that day, according to CoinDesk 20.
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