Tuesday 15th January 2021, Market Overview

From alchemists to prospectors the search to become wealthy by making, finding, or owning gold has been part of history.  In 2021 the latest rush has been for what is being called Millennial gold – Bitcoin, but is this just like iron pyrite, a fool’s gold?

There are two questions which we must answer now.

The first is whether we can or should refer to Bitcoin in the same way as gold?

Gold for many years, alongside the Japanese yen or Swiss franc, has been a safe haven asset.  Its inverse correlation with risk-on assets allows investors to diversify and hedge for periods of stress.

Since 2017 gold has shown a negative correlation with the US dollar, however Bitcoin has swung between a weak correlation which has been negative/ positive/ negative – so clearly, they are not maintaining the same reliable behaviour.

 

 

 

Through 2019 and into 2020 it was widely reported that as markets switch to risk-off and traders sought out safe havens, some institutions started placing small allocations into cryptocurrencies.  The relative size of these allocations was large enough to move the price, which in Bitcoin is always volatile and dramatic, and for limited risk the moves offered traders strong returns.  But this does not make BTC a true safe haven.

Historically, other things held constant, correlation data do not back the idea that Bitcoin is millennials gold. A look at weekly correlation of (BTC, Gold) from 2015 up to 2020 show BTC flipping signs 5 times, while correlation (BTC, DXY) was negligible.

However, BTC has maintained a positive and strengthening correlation (daily) with gold after Bitcoin passed the US$30K mark, hitting a high positive of 0.78.  Unfortunately, this correlation has been weakening despite BTC topping the US$1 Trillion market value but is worth keeping an eye on.

 

 

This leads us to the second question.

Will it be a store of value people should invest in?

This is more difficult to answer.  BTC in our view is not a safe haven, but there are other similarities.  Bitcoin and gold are both mined, there is a finite supply of each asset and they tend to be a buy and hold investment.

For millennials in the last 12 months, their investment has increased 338% and they are up 30% on the year.  If BTC is not gold, it is certainly pretty ‘shinny’ and at the moment most people are very happy to have it in their portfolios.

You might say we lack the “courage” of leading investment banks or global CIO’s (i.e.: will not attempt to throw a $400K target in your face) however we can say with a clear conscience – despite the nature and volatility of what we are analyzing – that the long-term direction remains positive.

Technical Outlook

As at 14/01/2021 Bollinger bands on the daily chart are set up for further bullish momentum, with the RSI indicator now having more room to step into overbought conditions after bottoming at 60 and currently printing a tat below the 70 mark.

On the hourly timeframe, MACD and RSI indicators are giving a mixed read, with BTC disregarding bearish divergences so far on the former.  An hourly close above $40166 is needed to maintain strong bullish momentum with $41522 (highest hourly close), $43650 (Fibo 3.618 Target) and $46000 (midpoint of two Fibonacci levels) as the next resistance targets.

Takeaway

As central banks start talking about fiscal tapering and the prospect of inflation, cryptocurrencies become even more attractive.  You cannot just print more BTC and dilute value, like gold the limited supply should support the long-term price

For many investors, Bitcoin is the anthesis of a fiat-currencies which is why they are buying and holding the digital coins.  BTC may not be a new safe haven but it is certainly not fool’s gold.  It is now becoming an asset of choice despite the strength of equity markets as indices keep hitting new highs.

If, and when, cryptocurrencies are adopted by central banks and we see the issuing of Central Bank Digital Currencies, there may be a question as to the role Bitcoin will have, but today BTC is millennial gold.

 

 

Karim Maalouf, FRM

Senior Market Analyst at SquaredFinancial

Karim started his career in financial risk at a top bank, but quickly developed a passion for high frequency trading. Enrolling in an algorithmic trading program helped Karim go through the learning curve of the fascinating world of trading under the mentorship of leading industry experts. Karim believes that deep education is essential before risking any money. He joined Squared Research in 2018 as an Equity Analyst, but continues to trade on a discretionary basis, using successfully developed methodologies coupled with effective risk management and a winning psychology. Karim obtained a Bachelors’ Degree in Economics from the American University of Beirut (AUB) in 2011, is FRM© certified with the Global Association of Risk Professionals (GARP) and is a Chartered Market Analyst (CMT) since 2017.

 

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