Opinions are mixed over how the US elections and other significant developments will affect Bitcoin, but one thing is for certain – we’re in for a bumpy ride over the next couple weeks.
Back in 2016, the vast majority of political commentators and news outlets predicted a high probability of a Clinton victory. However, as pointed out by analysts at JPMorgan, part of the dissonance likely is not caused by the inaccuracy of polls, but rather the disconnect between the popular vote margin and the winner-take-all Electoral College, which delivered President Trump a solid 77-vote margin of victory despite him losing the popular vote. This ‘silent majority,’ the group of people many refer to as those supporting Trump behind the scenes, is what causes the unpredictable outcome of this year’s elections, and traditional financial markets do not like uncertainty. Bitcoin, however, does not seem to mind it as much.
As it stands, a Biden victory is seen as representing a return to a more predictable approach to international policy, specifically when it comes to trade agreements and the country’s relationship with China. This view was clearly illustrated when Chinese markets re-opened after a week-long holiday, with Chinese Yuan posting its biggest daily jump vs the USD in almost 15 years. It is not just the aforementioned trade negotiations that are on the agenda but also Covid-19 relief stimulus package.
According to a recent WSJ report, Trump administration officials including Treasury Secretary Steve Mnuchin, and House Speaker Nancy Pelosi, broached the possibility of passing a second pandemic relief package after the Nov. 3 election, indicating that a deal might not be able to be reached before then. More to that point, White House economic adviser Larry Kudlow said on CNBC that negotiators were running out of time to get a deal passed before the election, as talks went on past a Tuesday evening deadline set by Pelosi.
These factors aside, it is also worth highlighting recent comments by Federal Reserve (Fed) Chairman Jerome Powell on the topic of Central Bank Digital Currencies (CBDCs). Powell explained that the Fed is open to collaborating with the private sector on a possible digital U.S. Dollar, but reiterated that the central bank has not yet committed to actually launching one. Powell further emphasized that any possible digital dollar would serve as a “complement” to physical cash — not a replacement. This stance is similar to that of other central bankers around the world.
Furthermore, on the subject of CBDCs, in a recent report titled “Payments and the Pandemic“, which was produced by Cleveland Fed President Loretta J. Mester, it is noted that “the experience with pandemic emergency payments has brought forward an idea that was already gaining increased attention at central banks around the world.”
Mester went further, adding “legislation has proposed that each American have an account at the Fed in which digital dollars could be deposited, as liabilities of the Federal Reserve Banks, which could be used for emergency payments.”
Other proposals would create a new payments instrument, digital cash, which would be just like the physical currency issued by central banks today, but in a digital form and, potentially, without the anonymity of physical currency. Depending on how these currencies are designed, central banks could support them without the need for commercial bank involvement via direct issuance into the end-user’s digital wallets combined with central-bank-facilitated transfer and redemption services.
Does any of this matter for Bitcoin?
Like it or not, macro narratives matter, although the visibility on the extent and longevity of correlation is less clear. Something that has transpired for Bitcoin this year is its reaction to events that have a significant impact on the price action in the S&P 500. This is especially evident when S&P 500 posts significant losses in a very short period of time, sometimes referred to as ‘flash crashes.’ Bitcoin and other assets often sell off in tandem with traditional assets because traders liquidate almost everything as they go risk-off to cash until the dust settles.
That said, ardent proponents of Bitcoin’s non-correlated status will argue that such bursts of correlation tend to be short-lived. This may be true when looking at very short-term timeframes, but not all market participants focus solely on basis trading or arbitrage opportunities, and those with longer-term outlooks will look at different time frames – such as one year. This is where it gets a little bit more complicated because Bitcoin vs S&P 500 realised correlation (1-year) has risen by almost 50 percent this year, whilst relative to gold, the correlation metric has crept into the mid 10 percent. It remains to be seen whether this trend is sustainable but, in the short-term, the data implies that if the S&P 500 suffers a correction in the wake of election results, Bitcoin is likely to follow suit.
However, the news that PayPal is to finally open up its network to cryptocurrencies, has led many to speculate that Bitcoin could finally decouple from the aforementioned risk trade. As per the press release, the service will enable its customers to buy, hold, and sell Bitcoin, Ether, Bitcoin Cash and Litecoin, all directly within the PayPal digital wallet. Digging deeper into the announcement, it is worth noting that PayPal’s service does not allow Bitcoin or other cryptocurrencies to be withdrawn or deposited. Once users buy the coins, they stay in your account until they are sold. It is, without a doubt, an incredibly strong vote of confidence in the growing cryptocurrency market. Such a move would not have been made lightly unless the longevity of assets were strongly scrutinised.
Not to diminish the significance of this development for broader adoption, there is one key caveat – merchants will not receive payments in virtual coins. In terms of what this means for the market, Bitcoin and other assets may gain on growing positive sentiment, but the real winners will be the proponents of tokenized assets, including the fast-growing market for NFTs which are expected to undergo an exponential growth phase as platforms seek to extract capital value using Decentralised Finance (DeFi) platforms.
Its relevance to the current correlation to S&P 500 is such that if network effects rise from activity related to various payment gateways, then, by default, the price action and, subsequently, valuation of the said assets, will be less impacted by swings in the S&P 500. Thereby Bitcoin and the rest of the digital assets may actually regain some of the non-correlation appeal that Bitcoin was once known for.
Back to the elections one last time. It’s worth reiterating that no matter who wins, there will be some level of calamity. A Trump win continues the pattern of unpredictability at home and abroad, leaving markets jittery and uncertain. A Biden win would result in long-term calm but it is highly unlikely Trump will go quietly and chaos will reign into the new year. Expect volatility in traditional markets and opportunity in digital assets.
Denis Vinokourov, Head of Research, BEQUANT
Crypto AM: Technically Speaking in association with Zumo