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Bitcoin Becomes A Reserve Asset While Other Cryptos Falter
This post might be stating the obvious for many (particularly Bitcoin maximalists), but I find this very interesting. Recently, I've begun paying more attention to the relationship between cryptocurrencies and the U.S. Dollar. In studying this relationship, I've had to rework some of my initial thoughts. It's not quite as simple as, "USD go up, crypto go down."
Major selling points for Bitcoin are of course that it's borderless, more liquid than gold, and its strong value proposition. Bitcoin's limited supply when combined with the increasing cost of production certainly fosters a hoarding mentality. While this may not be good for the environment or global inequality, it provides a source of economic empowerment for nations or groups that has not yet existed. The reign of the Dollar's grip over the global economy might be ending. Indeed, today, Iran just decided to use Bitcoin for imports. Other countries may follow.
People have been keyed into the observation that Bitcoin seems to exhibit weakness when the USD moves up. This is just confirmation bias. In reality, this is historically not the case. In the above chart, I've circled where Bitcoin has risen along with DXY. On multiple occasions, Bitcoin buyers did not get spooked by strength in the Dollar. In fact, Bitcoin has trended up quite often when the Dollar rises. During these periods, Bitcoin's dominance in the cryptocurrency market also tends to increase. By comparison, Ethereum has been much less likely to increase along with DXY. Just take a look at the below chart:
At best, ETH moves sideways as DXY rebounds (circled in pink). When DXY drops heavily, ETH tends to move up violently.
These observations are further expanded when looking at the relationship between Bitcoin Dominance and DXY:
What does this all mean? Well, it seems that Bitcoin is less correlated with traditional markets and the USD than many are led to believe. It also means that Ethereum and other altcoins seem to exhibit more "risk on" characteristics, meaning they only trend up significantly when the USD declines. Bitcoin has become a thing of its own.
Right now, it seems there are three main possibilities:
1) We are in a similar position to June, 2017, where DXY briefly bottomed and Dominance Increased. This is circled in green. Once Dominance peaks along with DXY, we would then get an influx of money into altcoins. Certainly, it is possible that other cryptocurrencies begin to similar price resilience to Bitcoin, but it may require another market cycle.
2) We are in a similar position to January, 2018 (pink circle on the Dominance/DXY chart), where DXY reached a long term bottom along with Bitcoin Dominance. EXCEPT, this time, Bitcoin will continue up. This would be bad for altcoins in the long term. In this scenario, Bitcoin can cannibalize the entire crypto market as it becomes more of a reserve asset. This does not mean something else cannot take its place eventually....but it does mean it's unlikely to happen any time soon. This, to me, is the most interesting possibility. It means that even in a global economic meltdown, Bitcoin can remain stable and even increase in value as other countries sell their USD debt into the new reserve asset.
3) We are in a similar position to January 2018, and Bitcoin is about to top out for a while, sending alts to new lows. I can see this happening if global markets collapse.
Please share your thoughts! There are of course other scenarios, but these observations have pretty serious implications.
I find technical analysis interesting particularly because it helps me visually understand people's behavior over time. This is not financial advice, and is purely speculative.
-Victor Cobra
Major selling points for Bitcoin are of course that it's borderless, more liquid than gold, and its strong value proposition. Bitcoin's limited supply when combined with the increasing cost of production certainly fosters a hoarding mentality. While this may not be good for the environment or global inequality, it provides a source of economic empowerment for nations or groups that has not yet existed. The reign of the Dollar's grip over the global economy might be ending. Indeed, today, Iran just decided to use Bitcoin for imports. Other countries may follow.
People have been keyed into the observation that Bitcoin seems to exhibit weakness when the USD moves up. This is just confirmation bias. In reality, this is historically not the case. In the above chart, I've circled where Bitcoin has risen along with DXY. On multiple occasions, Bitcoin buyers did not get spooked by strength in the Dollar. In fact, Bitcoin has trended up quite often when the Dollar rises. During these periods, Bitcoin's dominance in the cryptocurrency market also tends to increase. By comparison, Ethereum has been much less likely to increase along with DXY. Just take a look at the below chart:
At best, ETH moves sideways as DXY rebounds (circled in pink). When DXY drops heavily, ETH tends to move up violently.
These observations are further expanded when looking at the relationship between Bitcoin Dominance and DXY:
What does this all mean? Well, it seems that Bitcoin is less correlated with traditional markets and the USD than many are led to believe. It also means that Ethereum and other altcoins seem to exhibit more "risk on" characteristics, meaning they only trend up significantly when the USD declines. Bitcoin has become a thing of its own.
Right now, it seems there are three main possibilities:
1) We are in a similar position to June, 2017, where DXY briefly bottomed and Dominance Increased. This is circled in green. Once Dominance peaks along with DXY, we would then get an influx of money into altcoins. Certainly, it is possible that other cryptocurrencies begin to similar price resilience to Bitcoin, but it may require another market cycle.
2) We are in a similar position to January, 2018 (pink circle on the Dominance/DXY chart), where DXY reached a long term bottom along with Bitcoin Dominance. EXCEPT, this time, Bitcoin will continue up. This would be bad for altcoins in the long term. In this scenario, Bitcoin can cannibalize the entire crypto market as it becomes more of a reserve asset. This does not mean something else cannot take its place eventually....but it does mean it's unlikely to happen any time soon. This, to me, is the most interesting possibility. It means that even in a global economic meltdown, Bitcoin can remain stable and even increase in value as other countries sell their USD debt into the new reserve asset.
3) We are in a similar position to January 2018, and Bitcoin is about to top out for a while, sending alts to new lows. I can see this happening if global markets collapse.
Please share your thoughts! There are of course other scenarios, but these observations have pretty serious implications.
I find technical analysis interesting particularly because it helps me visually understand people's behavior over time. This is not financial advice, and is purely speculative.
-Victor Cobra
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