Bitcoin started its free-fall in mid-December when it traded just under $20,000 until a few days ago when it bottomed right around $6,000. The 70% drop ended just after the Dow 30 Industrials had its first 1,000 point plus decline last week. If there ever was a time for Bitcoin to continue its slide to $1,000 or less this seemed like this was the “right” time. However, Bitcoin outperformed not just the equity markets from Tuesday to Friday but also gold and the U.S. 10 year Treasury bond.
[Ed note: Investing in cryptocoins or tokens is highly speculative and the market is largely unregulated. Anyone considering it should be prepared to lose their entire investment.]
A visual representation of the digital Cryptocurrency, Bitcoin. Photo Illustration by Chesnot/Getty Images
The equity markets had one of the wildest trading weeks in years
The equity markets were on a roller coaster last week with the Dow 30 having two 1,000 plus point drops that were 4.6% and 4.1%. Two of the other days saw increases of 330 and 567 points or 1.4% and 2.3%. For the week the Dow was down 5.2% or 1,330 points. It also “moved” over 22,000 points from its peaks to troughs and back again over the five days.
The S&P 500 and the NASDAQ saw similar trading patterns with declines last week of 5.2% and 5.1%, respectively. Before the equity markets rallied on Friday the Dow, and probably the other Indexes, were on track for their worst week since October 2008.
Something that only Bitcoin bulls thought could happen did
Bitcoin has typically been more volatile than the equity markets. Deutsche Bank’s Global Financial Strategist, Masao Muraki, published a report showing how Bitcoin’s price is inversely related to the Chicago Board of Exchange’s VIX index (nicknamed the Fear Index). The VIX uses options to calculate near term volatility for the S&P 500 and is a good gauge of investor sentiment.
Muraki’s graph starting on December 1 last year until January 18 shows that as the VIX decreases, the white line, Bitcoin’s price moves higher, the orange line. This is the Risk On trade. Conversely, as the VIX increases Bitcoin’s price tends to fall. This is the Risk Off trade.
However, the VIX jumped to levels not seen since August 2015. If Bitcoin had followed its previous patterns the cryptocurrency should have been hit hard. Instead, it rallied and outperformed the equity indexes all four days starting on Tuesday. After falling on Monday Bitcoin more than just held its own.
Bitcoin vs. the Dow last week:
- Monday: Bitcoin down 16.8% vs. the Dow down 4.6%
- Tuesday: Bitcoin up 8.4% vs. the Dow up 2.3%
- Wednesday: Bitcoin up 4.4% vs. the Dow down 0.1%
- Thursday: Bitcoin up 1.4% vs. the Dow down 4.1%
- Friday: Bitcoin up 4.2% vs. the Dow up 1.4%
- For the week: Bitcoin down 0.4% vs. the Dow down 5.2%
- From Tuesday to Friday: Bitcoin up 19.6% vs. the Dow down 0.6%
Other cryptocurrencies such as Ethereum, Ripple and Litecoin also saw similar trading patterns last week as Bitcoin’s.
Gold didn’t move very much last week
Gold can be a safe haven when there is a lot of volatility in the equity markets, especially when inflation becomes a potential issue. For the week gold fell $22 to $1,316, or 1.6%, which is not what you would expect. Bitcoin also outperformed it every day starting on Tuesday.
U.S. Treasuries are the usual safety trade
The 10 year U.S. Treasury bond is the typical go to investment in times of uncertainty. Investors feel very comfortable that they will get their money back, assuming they hold it to maturity, when stocks are falling. The price for a bond will increase and its yield will fall when demand outstrips supply.
This largely wasn’t the case last week. From Friday to Friday the 10 year saw its yield only drop 2 basis points, from 2.85% to 2.83%. Over the same timeframe, the Dow decreased 5.2% while Bitcoin only fell 0.4%.
In some ways, the rise in the 10 year’s yield last Friday, February 2, helped to create the equity sell-off. That morning the U.S. Department of Labor reported that wages rose at a higher than expected 2.9% yearly rate. This helped spook the bond market, which saw the 10 year Treasury yield increase from 2.77% on Thursday, February 1, to 2.85% on Friday.
Equity investors became concerned that higher wages could lead to lower corporate profit margins, inflation could move higher and the Federal Reserve may wind up increasing interest rates faster than what had been expected. Interestingly it was only two weeks ago that a weaker December quarter GDP report led to all-time highs in the stock market.