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Bitcoin prices leap as US bond yields turn negative

Posted: 20 March 2020 1:44 pm
News

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The dynamic, unending search for a store of value has picked up the pace.

One of the great things about Bitcoin in recent days is that, after many years, its price movements have finally started to make some sense.

Its massive price plunge of last week can be traced to the recent coronavirus-inspired selloff of everything on the planet that wasn't nailed down, and now it's bounced back with a similarly clear-looking explanation.

This bounce-back correlates tightly with plunging US 3 and 6 month treasury bond yields, and their flipping into negative yields.

Below you can see Bitcoin prices (gold line), and 3 and 6 month US bond yields (in two of the colours of the ocean, to symbolise the serenity they have typically brought investors).

Blue lines go down, gold line goes up.

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BTCUSD chart by TradingView

The whats

Basically, short term treasury bonds are considered highly-liquid, reliable cash equivalents. In essence, buying government bonds means you're lending money to the government.

It pays you "interest" on that money in the form of periodic bond yields, with the principal being returned at maturity.

More demand for bonds and a higher bond price equals a lower yield.

When short term bond yields go into negative numbers, it means people are actually losing money by holding bonds.

The whys

So, why did this (seemingly) trigger a Bitcoin price rise?

Firstly, because bond yields going negative represents the loss of a once-reliable store of value, and implies that people are going to start shopping around for alternatives.

Other classic options are also starting to look uncertain. Commercial bank savings accounts for example are not only paying very low rates, but they're also starting to smell quite bad in the face of the looming debt crisis. The FDIC deposit insurance limit has undoubtedly become a legitimate concern for a lot of people.

At the same time, the value of the US dollar is currently a runaway freight train, which simply can't be allowed to continue. Even without bond yields going negative, there's probably a lot of interest in alternative assets.

The huhs

Buying gold would be the traditional option in this kind of situation, but there seem to be some interesting things happening there as well.

Specifically, as the global economy continues on this runaway roller coaster we're seeing a growing disparity between gold spot prices and gold future prices.

This is clumsily but tastefully illustrated below.

The orange line is gold spot prices, the purple and yellow lines are various gold futures prices, for delivery through 2020 and 2021. The green is the greenback, and the red is the Dow, to serve as a timeline of sorts.

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GOLD chart by TradingView

So as the economy goes to heck, people seem to be increasingly paying more for gold right now rather than gold in the future, and they don't seem to want to sell the gold they have now, even though they could make arbitrage profits by buying it back at a lower price in the future.

Typically it would be the other way around. In addition to the fact that market forces should theoretically iron out kinks like "backwardation" (as this situation is called) in gold, there's also the fact that the simple act of holding gold incurs storage costs, so anyone who wants to take physical possession of gold is better off doing it later rather than sooner.

And yet, here we are. It's weird. What this suggests is that there's a pretty frenetic trade in gold right now, and its apparent price lagging may just be mostly an optical illusion you get when you look at gold prices denominated in US dollars.

What does that have to do with Bitcoin?

One theory maintains that Bitcoin and gold alike are going to offer a similar value proposition in times like these, and that both will go through a harsh sell-off as stock markets crash, followed at some point in the future.

In other words, that Bitcoin and gold track with equities initially, but will then decouple and start skyrocketing on their own.

The ongoing action in gold markets, and the bounce in Bitcoin that corresponds with treasury bonds tipping negative, could be a signal that this decoupling is near.

It's fast, but everything about this crash has been fast... with the notable exception of our response to it.



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Disclosure: The author holds BNB, BTC at the time of writing.

Disclaimer: This information should not be interpreted as an endorsement of cryptocurrency or any specific provider, service or offering. It is not a recommendation to trade. Cryptocurrencies are speculative, complex and involve significant risks – they are highly volatile and sensitive to secondary activity. Performance is unpredictable and past performance is no guarantee of future performance. Consider your own circumstances, and obtain your own advice, before relying on this information. You should also verify the nature of any product or service (including its legal status and relevant regulatory requirements) and consult the relevant Regulators' websites before making any decision. Finder, or the author, may have holdings in the cryptocurrencies discussed.

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