BTC proving to be resilient, trading at US$9,450 after a robust V-shape recovery of 6% this week.   

By Lennard Neo

Optimism for Bitcoin resurfaced late this week after the digital asset took a 10% nosedive from US$9,900 over the weekend. This comes on the back of a muted session in the previous week, as volatility rippled through the markets with US equities posting the worst decline since the March flash crash. 

However, BTC has shown itself to be resilient, posting a robust V-shape recovery of 6%, where it currently trades around the US$9,450 handle.

Basis points on Bitcoin futures are also trading in the green across the board, in particular, the 3-month and 6-month tenors, signalling bullish sentiments towards year-end. In the shorter term, we expect increasing volatility in Bitcoin with a further pullback likely as we inch towards 2H 2020.

Nevertheless, Bitcoin’s strengthening foundation with higher lows since last month further substantiates our confidence that a pullback to sub US$7,500 level is highly unlikely with an end of year rally imminent. 

Bitcoin trading more like bonds than equities or gold

Espousing economic optimism this week is Morgan Stanley’s call for a V-shaped recovery. Predicting the incoming recession to be a “sharp but short” one, the banking giant expects economic output could revert to pre-COVID levels by the end of the year. 

This view  prices in the possibility of a second wave of infections occurring, but is also  contingent on government policies being implemented swiftly and decisively. Many market participants share this optimism, as evidenced by  how strongly markets rebounded after a weekend decline.

Further supporting the rally in US equities and bonds was the announcement made by the Fed that it would be extending its purchasing program to include US corporate bonds. 

The move erased half the losses which had eroded the S&P 500 since last Thursday as the index swung from a 9% loss into a 7% gain. Bitcoin followed suit, as it rebounded from an 8% loss to a 4% gain.

Correlations spiked between both assets — with Bitcoin trading closely with the S&P over the past few days. However, recent data suggests that Bitcoin is trading more like bonds post-halving, as compared to equities and gold.   

Hypothetically, this could be due to the distinction built upon the mining rewards generated by bitcoin that mimics bond coupon payments, but we do not see any causal relationship there. 

On the other hand, Bitcoin price action has been tracking closely that of equities, which again makes it is significantly evident that in times of distress a spike in the correlation of both assets is highly likely. 

However, recent data suggests that Bitcoin is trading more like bonds post-halving, as compared to equities and gold. 

Despite these movements, we have observed a declining magnitude in the correlation coefficient between Bitcoin and equities. 

The correlation peaks have been narrowing from 0.5 to 0.2 since the March flash crash, suggesting that traditional markets are creating less of an impact on digital assets than before. 

The continuation of this trend will only strengthen Bitcoin’s position as an uncorrelated alternative asset.    

Lennard Neo is head of research at Stack Funds, a Singapore-based institutional-grade platform for cryptocurrencies and digital assets launched by a team of financial industry veterans previously from institutions such as JP Morgan, Merrill Lynch, and HSBC.