Crypto’s Performance In 2020 So Far

Bitcoin has broken $10,000 for the first time since September (excluding its brief spike in late October), pushing its 2020 gains over 40%. The $10K mark is more significant from psychological perspective than a technical one, but it’s certainly generated headlines and enthusiasm among the crypto community. Bitcoin’s 14-day RSI hit its highest level since June, adding further support for BTC’s latest uptrend.

However, the rapid surge may have pushed some traders to take a bit of profit. The recent uptrend in BTC is still intact despite the recent pullback, though a sizable sell-off below $9,600 or so may be cause for concern in the near term.

On a brighter note, Bitcoin completed another golden cross – a bullish technical pattern characterized by its 50-day moving average crossing above its 200-day equivalent – for the first time since April 2019. The golden cross has bullish implications; BTC initially sold off, falling nearly 10% over the following week, before ripping 150% through the final week of June. On the flip side, we saw similar price action in summer 2015 where BTC dropped 35% in the five weeks after experiencing a golden cross. Given its limited history, BTC has only exhibited this pattern a handful of times, but in general this indicator is regarded as bullish for the trajectory of an asset’s price even if it experiences a short-term pullback, which helps explain the recent surge and subsequent drop.

Fueled by the halving and the bullish expectations of a golden cross, we should expect to see Bitcoin return to $10k and push higher. 

Bitcoin is not the only crypto asset about to experience this bullish technical pattern; ETH’s 50-day moving average is on the cusp of crossing above its 200-day equivalent as well. Like bitcoin, ETH experienced a golden cross back in April following its 25% price jump to start Q2 2019. ETH also sold off roughly 15% over the following week before continuing its rise through late June; ETH surged more than 120% over the period. ETH’s price has more than doubled this year, hitting its most overbought level since January 2018 this week as measured by its 14-day RSI.

This surge in price is having implications for global interest.

The crypto market’s latest surge is piquing interest among a wide array of investor types; wealth managers, financial advisors, global macro hedge funds – the list goes on and on. Global interest in crypto is on the rise, at least according to Google Trends, which currently show searches for “Bitcoin” at their highest level since August. 

One might think gains of this magnitude make crypto assets more attractive to traditional money managers, especially over such a short time period. I mean, investors will be thrilled if the S&P 500 produces half the returns it did last year in 2020, so how could someone possibly shy away from a market that’s gained more than 50% in the first six weeks alone?

Well, for starters, many of this year’s best performing names have run up with little to no fundamental catalyst, exacerbating their already exorbitant valuations.

Every asset class experiences the ebbs and flows between fundamentally or sentiment-driven cycles, but this market in particular always seem to have a target on its back; some people would love nothing more than to see crypto crash and burn, so broad-based rallies where certain assets double or triple in value in a matter of weeks only adds fuel to their fire.

Looking Ahead

The current stance of U.S. monetary policy is appropriate to support the Fed’s employment and inflation objectives, or at least that’s the message Powell & Co. tried to convey in the central bank’s latest semi-annual update on the outlook for monetary policy. But markets are less confident the Fed will remain neutral as the year goes on; the probability of at least one Fed rate cut in 2020 has increased substantially since the start of the year. The odds of two or more rate cuts is nearly 50% compared with less than 15% just six weeks ago. Real yields on 10-year U.S.

Treasury notes also sank back into negative territory at the end of January, hitting their lowest level in almost seven years (-0.14%). Currently, real yields are still hovering around -0.06%.

Contrary to recent commentary from Fed officials, it’s difficult to deny the downstream effects the central bank’s latest round of bill purchases has had on risk assets. The Fed’s $400 billion balance sheet expansion over the last five months coincided with a 15% rise in the S&P 500, pushing the index to fresh record highs. In fact, since the second week of October, the S&P 500 and the level of Fed assets have moved in the same direction 85% of the time. In other words, if the Fed’s balance sheet rises week-over-week, odds are the S&P 500 is moving higher with it.

The Fed announced another reduction in the size of its repo agreement operations starting next week in a continued attempt to slowly pair back its latest intervention.

 Money markets appear to have stabilized, giving policymakers the confidence to decrease the size of repo operations going forward.

 Historically, risk assets have not responded favorably when such liquidity provisions wind down, causing some concern the party in stocks may be nearing its final hour.

 Discussions around a standing repo facility, however, are ongoing, which would help alleviate investors’ fear of a market sell-off or correction.