Record contraction of GDP in the USA adds to the record drop in the US dollar. The rally of the main cryptocurrency occurs after almost three months of low volatility.
In a new bullish rally, the monetary and fiscal policy of the US Federal Reserve (FED) pushed Bitcoin over USD 11,000. This agency has recently warned of a negative impact on the economy in the short and medium-term. Among the reasons for this weak outlook for the economy (although it has been favorable for Bitcoin), the supposed outbreak of COVID-19 in the country is the most prominent.
The US dollar fell to its lowest value in two years after the FED’s announcements. Besides, the Bureau of Economic Activity (BEA) published the economic figures for the second quarter, confirming the fear of a record contraction of Gross Domestic Product (GDP) by 32.9%.
With this reduction in GDP, there has been the largest quarterly decline since the BEA began its records in 1947. Before this pandemic, the worst decline in GDP occurred in the first quarter of 1958, when it fell by 10%.
On the other hand, the Federal Reserve announced last July 29th that it would keep interest rates close to zero. The next day, the US Dollar Index (USDX) fell to 92.63, a value that it had not recorded since May 2018.
This index shows the strength or weakness of the US dollar compared to a basket of currencies including the euro, the Japanese yen, the British pound, the Canadian dollar, and the Swiss franc. At the time of writing this article, USDX is at 93.46, which can translate into a depreciation of the US dollar close to 7% against its base value of 100.
Precisely in this context, with USD declining in the background, Bitcoin left its almost three-month phase of stability, which kept it in the range of USD 9,000 to USD 10,000. The same reasons that led investors to seek refuge assets such as gold, which reached an all-time high on July 27th, also favored the Bitcoin boom. The price of gold continues to climb and currently exceeds USD 1,973 per ounce.
In recent days, Bitcoin approached USD 12,000, while Ether touched USD 400. After this rebound, there was a sudden drop in Bitcoin’s price to USD 10,500 and in that of ETH to USD 325, before returning to USD 11,050 and USD USD. 361, respectively. The sharp decline took traders by surprise and there were long position liquidations of more than USD 1.3 billion.
Tweet of the Week
In this tweet, Investment consultant Yassine Elmandjra discusses the correlation between the capitalization of Bitcoin and Ether, usually close to the unit, but which has declined sharply in recent days. Before Bitcoin’s recent rally, Ether showed a better appreciation than BTC.
By superimposing the correlation between ETH and BTC and the combined market capitalizations, Elmandjra highlights that a sharp drop in that correlation has preceded a major bullish boom. An example of that is the one that led the price of these cryptocurrencies to all-time highs in December 2017. This suggests that a significant rebound in prices is approaching.
BTC Futures Soar
In line with Bitcoin’s bullish momentum in recent days, futures markets and open interest related to this cryptocurrency have also boomed. The Bakkt and Chicago Mercantile Exchange (CME) markets have reported new caps on the number of contracts negotiated and the amounts traded.
Bakkt, a subsidiary of the Intercontinental Exchange (ICE), is the company behind the New York Stock Exchange. It had been settling a daily average of USD 23 million worth of futures contracts in July, until it managed to settle contracts for USD 134 million on July 27th.
For its part, the average daily trading volume of Bitcoin futures on CME increased to USD 1.3 billion, 10 times higher than that traded on Bakkt.
By Willmen Blanco