First Mover: The Dollar Drop May Have Helped Push Bitcoin Past $11K

As the U.S. dollar's value slides, prices are suddenly rising for just about everything priced in dollars.

That includes bitcoin, which shot up some 13% on Monday for its biggest gain in almost three months. Prices soared past levels reached in February, prior to the pandemic-induced sell-off, reaching a new 2020 high of $11,180.

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Joe DiPasquale, CEO of the cryptocurrency hedge fund BitBull Capital, told First Mover in an email that the latest move up appeared "in sync" with gold's climb in recent days to a new record. Bitcoin is seen by many digital-asset analysts as a hedge against inflation and currency debasement, similar to the way investors in traditional markets have historically used gold.

"Bitcoin sprung into action," DiPasquale said.

It's a remarkable development in the bitcoin market, where investors, as recently as last week, were despairing that the oldest and largest cryptocurrency had been stuck in a range between $9,000 and $10,000 for the past two months.

So for bitcoin bulls, the jolt out of the doldrums was welcome, especially when the price went up, not down. The day's gain came on strong trading volume, with levels not seen since early June.

“The trend is clear and we are headed higher,” said Jack Tan, of Taiwan-based quantitative trading firm Kronos Research.

Bitcoin is now up 57% year to date, more than double the 28% gain this year for gold, which climbed in recent days to a record. The Standard & Poor's 500 Index of large U.S. stocks, meanwhile, is roughly flat for the year.

"Given gold has just set a new all-time high, and with bitcoin's correlation to stocks breaking down while being replaced by a strong correlation to gold, we envisage further tests to the upside this coming week," the cryptocurrency-trading firm Diginex wrote in a daily market report.

The U.S. Dollar Currency Index, a gauge of the greenback's value versus other major currencies like the euro and yen, has fallen for seven straight sessions; the Wall Street firm Goldman Sachs predicts the dollar could lose another 5% over the next 12 months.

"The U.S. dollar is eroding quickly, and people are starting to notice," wrote Mati Greenspan, founder of the cryptocurrency and foreign-exchange research firm Quantum Economics, in his daily email. "It's plain to see that people are ditching the buck as fast as they can."

That's good for bitcoin and gold: As the Wall Street Journal put it Monday, a weakening dollar "mechanically pushes up the prices of the commodities invoiced in greenbacks."

Investors appear worried the global economic recovery is faltering, with cases on the rise and a death toll globally that just passed 650,000. In the U.S. Congress, Senate Republicans proposed a $1 trillion relief package following negotiations with President Donald Trump, but that amount falls far short of a Democrat-led plan for $3.5 trillion in stimulus.

Jim Reid, strategist for the German lender Deutsche Bank, wrote in a report that the Federal Reserve, which has already expanded its balance sheet this year by about $3 trillion to about $7 trillion, might need to pump another $12 trillion over the next few years.

The Federal Reserve is scheduled to meet this week in closed-door discussions, with a statement due late Wednesday. With interest rates already close to zero, no major policy changes are expected, but the cryptocurrency investment fund Arca noted Monday that a sell-off in the U.S. stock market might provoke the U.S. central bank to respond.

A report on Thursday is expected to show that U.S. gross domestic product declined during the second quarter by a staggering 35% on an annualized basis.

With so much fragility in the economy, and things not improving quickly, "the moral hazard is now so high that the stock market barely even has to blink," Arca wrote.

For bitcoin, according to Arca, "the breakout was just a matter of time."

Tweet of the day

Bitcoin watch

BTC: Price: $10,773 (BPI) | 24-Hr High: $11,395 | 24-Hr Low: $10,215

Trend: Bitcoin is witnessing a low-volume technical pullback on Tuesday.

The largest cryptocurrency by market value is currently trading near $10,850 - down over 4% from the 11-month high of $11,394 reached on Monday.

The drop in price suggests bitcoin may be overvalued. The 14-day relative strength index jumped to 82 as prices surged 11% on Monday. An above-70 reading indicates overbought conditions - meaning excessive demand has pushed prices unjustifiably high.

The pullback may be extended further, as the 14-day RSI is still hovering above 70. In addition, the RSI on the hourly chart has dropped into bearish territory below 50. That said, the bullish bias might be invalidated if prices finish below $10,500 (the February high) at the UTC market close.

That looks unlikely, as the decline from multi-month highs observed so far today is accompanied by a slide in trading volumes (above right). A low-volume pullback is often short-lived.

Besides, some analysts are convinced that Monday's bullish move has put bitcoin on the path toward record highs. "[Monday's] daily close is amazing and could very well resemble April 2019's $1k candle that ended the bear market and fueled a rally to $13,000. Only this time, the rally should lead to new all-time-high for BTC," popular analyst Josh Rager tweeted early Tuesday.