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BTC outperforms amidst historical bonds crash
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This week we continue to explore Bitcoin’s increasingly relevant role in the uncertain macroeconomic environment. Specifically, we evaluate its proposition as a “flight to quality”, given the liquidity implications of the recent bond crash and Bitcoin’s scarce dynamics.
Network Fees — Sum of total fees spent to use a particular blockchain. This tracks the willingness to spend and demand to use Bitcoin or Ether
- Bitcoin fees dropped by 29% as the number of daily transactions decreased
- Ethereum fees increased by 7% bouncing slightly from the 3-year lows recorded last week
Exchanges Netflows — The net amount of inflows minus outflows of a specific crypto-asset going in/out of centralized exchanges
- Exchange flows for both Bitcoin and Ether picked up this week, with both assets seeing $170M-180M in outflows, potentially suggesting buying activity
Bitcoin’s “Flight to Quality” Proposition
US bonds are experiencing one of its largest sell-offs in their history. Long-term bonds have been hit the worst, as 10-year yields reached as high as 5% yesterday, the highest levels since 2007. Recall that as bond yields rise, the price of existing bonds fall as there is less demand for the lower yielding bonds in circulation.
Via ITB’s Capital Markets Insights
Sell-off Accelerates — Long-term bonds (TLT) are down nearly 20% in the last six months
- Despite being recognized as risk free, long-term treasuries are now down by 53% since March 2020
- The sell-off has led to hundreds of billions in unrealized losses, with Bank of America alone recording $131.6B on paper losses due to the depreciation of bonds
- Simultaneously, US debt continues setting record highs, climbing by $604B in the last month
- This creates structural problems for the economy since the rates the government pays on their debt continue rising along with the size of their debt
“Flight to Quality” — Bitcoin’s recent rally was described in such way this week by Larry Fink, Blackrock’s CEO
- Both Bitcoin and gold are up about 7% in October
- Bitcoin has been increasingly cited as an attractive alternative asset among Wall Street veterans, and its recent price performance appears to be reinforcing its value proposition
- Just how Bitcoin increased as Silicon Valley Bank and other banks collapsed, it has performed strongly in the midst of the bond crash
Perhaps more surprisingly, not only Bitcoin is outperforming, it is has also been less volatile than treasuries.
Via ITB’s Capital Markets Insights
Less Volatile than Treasuries — Bitcoin’s volatility has fallen below that of long-term US bonds (TLT)
- Volatility is typically a measure of risk in traditional markets
- Despite Bitcoin being famously volatile, it has been less risky in this sense than US treasuries over the past month
- These conditions, along with the likely approval of a Bitcoin spot ETF, have helped support BTC’s price
Long-term holders also help reinforce Bitcoin’s scarce dynamics.
Via ITB’s Bitcoin Network Analytics
80% of Bitcoin is Owned by Addresses Holding for Over Six Months
- The share of Bitcoin held by long-term investors has continued to rise, reaching new highs in October
- With long-term holders historically accumulating until prices reach new highs, the supply of Bitcoin available to be readily sold is likely decreasing
- The upcoming Bitcoin halving will decrease annual inflation from 1.72% to 0.86%, further amplifying its perceived scarcity
Overall, the bond sell-off appears to be showing cracks in the traditional finance system. As bond prices continue to fall, many macro experts believe the Fed will have to eventually intervene and directly or indirectly buy them. Though this will likely be a different version of quantitative easing due to the still-high rates of inflation, it is increasingly likely that global liquidity will increase.
This is likely one of the main drivers for Bitcoin’s recent outperformance. As the probability of the proverbial money printer being resuming increases, Bitcoin’s scarcity is being sought by more investors in a flight to quality.
Bitcoin’s “Flight to Quality” Proposition was originally published in IntoTheBlock on Medium, where people are continuing the conversation by highlighting and responding to this story.
Disclaimer
The views and opinions expressed in this article are solely those of the authors and do not reflect the views of Bitcoin Insider. Every investment and trading move involves risk - this is especially true for cryptocurrencies given their volatility. We strongly advise our readers to conduct their own research when making a decision.