In the chaotic market context, Bitcoin's "positioning" becomes clearer

Source: Scallion Blockchain

The Federal Reserve made another emergency rate cut before the Asian session. The Fed stated that in order to respond to the social and economic damage caused by the public health incident to many countries including the United States, the Fed will cut interest rates by 100 basis points to 0-0.25 from now on, and launch a $700 billion quantitative easing program.

The Federal Reserve brought forward the time of its regular interest rate meeting originally scheduled for Wednesday local time, and carried out the most intensive monetary policy intervention in a single meeting in history, hoping to effectively control the current crisis. Federal Reserve Chairman Powell said that policymakers need to do everything they can to alleviate the difficult situation. Powell also said that today's decision will support the US economy and boost the market and restore the market to normal; the Federal Reserve will not hold a planned meeting this week, and today's Federal Open Market Committee meeting replaced the meeting on Tuesday or Wednesday.

The Fed's unexpected rate cut has increased market concerns about the novel coronavirus outbreak in the United States. Coupled with the further deterioration of the epidemic in Europe during the weekend, risk aversion has once again erupted in early Asian trading. Spot gold prices soared 3% to $1,575/ounce in early trading, the U.S. dollar index plummeted, U.S. stock index futures fell by about 5%, and U.S. crude oil continued to fall rapidly after hitting the largest weekly drop since 2008 last week, falling more than 6% in early trading and falling below the $30 mark.

After the Fed’s emergency rate cut, central banks in Canada, the United Kingdom, New Zealand and other countries also cut interest rates urgently. Italy and Australia announced fiscal stimulus plans, and Japan announced a second set of epidemic prevention measures. Although the European Central Bank did not cut interest rates, it launched a stimulus plan including increasing the scale of bond purchases. The “swarm” stimulus policies of major economies further exaggerated the panic in the market.

Demand for the dollar is weakening as investors pull money out of the U.S. stock market amid concerns that the coronavirus pandemic will hit economic growth. Crude oil prices have plunged as the oil price war between Russia and Saudi Arabia intensifies. But while investors are no longer buying stocks because of concerns about an economic downturn, a large amount of money refuses to leave the U.S. market, so U.S. bonds are in hot demand, leading to record lows in U.S. bond yields. The complex market environment has led to a strong positive correlation between the dollar, U.S. bond yields, and international crude oil prices, which is extremely rare in recent times.

However, it is precisely in this extremely special situation that some subtle chemical reactions have occurred between Bitcoin, which has previously been criticized for its lack of logic, and some traditional major asset classes that were once extremely difficult to form effective connections with.

This morning, immediately after the Federal Reserve announced an emergency rate cut, the cryptocurrency market represented by Bitcoin ushered in a long-awaited collective surge, showing that the "safe haven upstarts" that have disappointed the market in the past few weeks still have a certain transmission effect when major events occur in the traditional financial market. It is actually not accurate to position Bitcoin as a safe haven asset with the same properties as gold. The following lists the changing trends in the correlation between Bitcoin and some traditional major asset classes since the beginning of the year:

Bitcoin-Spot Gold

Bitcoin-U.S. Dollar Index (DXY)

Bitcoin-US crude oil

Bitcoin-10-year U.S. Treasury yield

Bitcoin-S&P 500

Bitcoin-Shanghai Composite Index

As shown in the figure, in the first 75 trading days of 2020, which is also a special period when the global financial market was "bloodbathed", the positive correlation between Bitcoin and gold has rebounded in recent times, but the positive correlation between Bitcoin and US crude oil, 10-year US Treasury yields and the S&P 500 index is much stronger than its correlation with gold. Compared with traditional safe-haven assets such as gold, the market performance of Bitcoin after the crisis is more similar to those "risk assets" that rely more on risk preferences or market sentiment. Therefore, it is obviously not accurate to define Bitcoin as "digital gold".

As stated in the latest analysis released by Binance Research, the spread between BBB-rated corporate bonds and Treasury bonds in the United States hit a new high since 2016, and the Bank of America Merrill Lynch Global Financial Stress Index (GFSI) hit a new high since statistics were collected in 2010. At the same time, the crypto asset market was also implicated, which confirms the judgment that cryptocurrencies are more like a "pro-cyclical" commodity.

For Bitcoin, its short life cycle makes it difficult for the market to obtain enough samples for reference when analyzing the market, and the accuracy of the conclusions drawn from small sample analysis is naturally difficult to guarantee. This is why the Bitcoin "risk-averse theory" that once emerged last year was completely overturned in just half a year. It is true that the global crisis is not a good thing for everyone, but for Bitcoin, the special environment brought about by the crisis may just be a great opportunity for this emerging asset to find a more accurate positioning.