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Q4 Fireworks in Store? Bitcoin Surges by 40% as the S&P 500 Hits New All-Time Highs
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Q4 Fireworks in Store? Bitcoin Surges by 40% as the S&P 500 Hits New All-Time Highs


By Paul Orford October 29, 2019
Q4 Fireworks in Store? Bitcoin Surges by 40% as the S&P 500 Hits New All-Time Highs

Things look as though they may be heating up in this fourth quarter of 2019. We had some interesting developments over the past few days that suggest we can expect a general increase in volatility into the end of the year. Since Friday we have seen Bitcoin surging by some 40%, then on Monday, the S&P 500 finally broke through that stubborn 3000 level, gapping-up on open to trade at new all-time highs.

Tomorrow the FOMC meets again to set the target Federal funds rate. The market has priced in a further 25 basis point cut, with the CMEs FedWatch indicator showing a 95% chance of a rate cut. But how will markets react when they are given what they expect? Particularly since this is the third such rate cut in a row? Is it a tacit confirmation of what the weak manufacturing indicators are suggesting? That the US is sliding into recession? Or will a booming stock market once again allay investor’s fears and confirm that it’s all still business as usual?

Bitcoin, a tale of two halves

Bitcoin’s story this year has been divided into two parts. The first half of the year saw the cryptocurrency searching for a bottom after 2018’s painful bear market that saw it losing more than 80% of its value. Between January and July, it rallied from a yearly low of around $3600 per coin to a high just below $14,000.

Q4 Fireworks in Store? Bitcoin Surges by 40% as the S&P 500 Hits New All-Time Highs

Was this the disbelief rally of infamous Wall Street Cheat Sheet fame? Or is this rally doomed to fail like all the others, signaling a more prolonged bear market? This has been precisely the question that the crypto market’s largest name has been trying to answer all of this year. Bitcoin’s price topped-out just under that key $14,000 level in July and has been trending back down ever since, once again searching for a bottom to confirm that the bear market is finally over and that a new bull phase is upon us.

This has seen the price hit a low of just above $7300 on October 23. On Friday October 25, it surged by around 40%, going from around $7391 to $10,358 in around 16 hours. This move was significant for a number of reasons. Firstly, it marks the cryptocurrency’s first higher-high since June of this year. Second, it broke the hugely psychological $10,000 mark. Third, it was also the 3rd largest daily move in the entire history of the asset.

Why did bitcoin rally?

Hot on the heels of the price rally, an avalanche of articles claiming to explain the move hit the digital presses. The most popular reason provided was Chinese president Xi Jinping’s positive comments regarding blockchain. Keep in mind that China was formerly the largest cryptocurrency market before it banned cryptocurrency exchanges back in 2017. Note that Xi’s comments were about blockchain not bitcoin.

Despite this, the markets seem to have read the terms as being interchangeable. Another prominent explanation for the price move was attributed to Bakkt, the NYSE-backed bitcoin futures exchange that crypto traders have been eagerly anticipating since 2018.  Last week it was reported that Bakkt had almost doubled its previous volume record with almost half the trading day still remaining.

Another explanation is the popular leveraged derivatives exchange, BitMEX, on which more than 150 million dollars of shorts were liquidated in a 20-minute period as the bitcoin price made an initial $800 surge. While these liquidations can’t be used to explain the initial move itself, they certainly helped to give it a head of steam when it finally got going. But what can explain the sudden turn in sentiment that led to the rally in the first place?

Perhaps Bitcoin isn’t as uncorrelated as people think

My initial reaction was to assume that Bitcoin traders were taking the S&P’s failure to break all-time highs on Friday as a sign that it was time to exit the stock market and pile into safe haven assets. It seemed to line up. Bakkt being available to serve US investors this time round, allowing them to easily allocate capital to this market. Its massive increase in volumes seemed to testify to this theory. Then as the weekend wore on and it became almost certain that the S&P 500 would surpass its previous all-time highs on Monday I started to revise my thesis.

Checking what the S&P 500 was doing back in December of 2018, when Bitcoin was surging to its all-time highs, revealed that the S&P was also at all-time highs, fresh off the “Trump Trade” that would take it all the way to 2874 in February of 2018. Similarly, when bitcoin rallied to just under $14,000 back at the end of June, the S&P was also just scraping past its former all-time highs, kissing 2964 after having dropped to 2728 earlier in the month. As the S&P 500 surges past the former highs of 3027, is more capital likely to come back to crypto in general and to bitcoin in particular?

Q4 Fireworks in Store? Bitcoin Surges by 40% as the S&P 500 Hits New All-Time Highs

This messes up the story

What’s particularly intriguing about this situation, is that it completely flies in the face of the “bitcoin as digital gold” narrative. If bitcoin really were the digital store of value that its adherents have been claiming it is of late, then it shouldn’t be a beneficiary of stock market highs, but rather the risk-off trade.

Then again, there’s not a lot about the present situation that makes all that much sense. Gold too, the original safe haven asset, is still trading at yearly highs last seen in 2013, while the S&P 500 continues to extend the longest bull market in history. Markets are expecting a continuation of this week’s highs in the S&P, perhaps even a new leg up as the Fed makes it clear that it’s returning to accommodative policies and a type of quantitative easing. Is bitcoin and gold set to rally along with it? Or will cooler heads prevail?

 

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October 29, 2019