What You May Have Missed in the Crypto News: Bitcoin Soars Despite Negative US GDP Report

The price of bitcoin (BTC) continued its ascent in trading on Thursday, rising 4% despite a negative U.S. gross domestic product (GDP) report.

The quarterly growth rate fell 0.9% from estimates of a 0.5% increase. This decline marks the second consecutive quarter of negative GDP growth, which historically is a sign of an economic recession.

Officially, the National Bureau of Economic Research determines when the United States entered a recession, based on a series of factors.

After Thursday’s report, US Treasury yields fell, with the yield on 10-year notes outpacing that of 2-year notes. Bond yields have an inverse relationship with prices, meaning that when one rises, the other falls. When Treasury bond yields fall, it means the bonds are being bought. Investors often buy safer Treasury bonds (rather than stocks or cryptocurrencies) when they doubt the strength of the overall economy.

In traditional equity markets, the S&P 500 and the Dow Jones Industrial Average rose 1.2% and 1.1%, respectively.

The price of Ether (ETH) also rose on Thursday, rising another 9% after Wednesday’s 16% jump.

Altcoins were also in positive territory, with Cosmos’ ATOM token jumping 8%, while Polkadot’s DOT token rose 9%.

●S&P 500 daily close: 4,072.43 +1.2%

●Gold: $1,774 per troy ounce +3.2%.

●Daily closing ten-year Treasury yield: 2.68% -0.05.

Prices for bitcoin, ether, and gold are taken at around 4 p.m. New York time. Bitcoin is CoinDesk’s Bitcoin Price Index (XBX); Ether is CoinDesk’s Ether Price Index (ETX); gold is the COMEX spot price. Information about CoinDesk indices is available at coindesk.com/indices.

Do the potential difficulties of the US economy herald a rise in asset prices?

Bitcoin continued higher on Thursday, surging above $23,000, despite a GDP report that showed decline rather than growth in the second quarter. The negative 0.9% reading follows the 1.6% decline in the previous quarter and missed projections of a 0.5% increase in growth. See the article: Good news if you have ETH in your Wallet: Ethereum breaks above $1600 despite record high inflation. Still, asset classes reacted favorably, with traditional finance and cryptocurrency prices rising as investors see evidence that the economy is slowing to a slower, more desirable pace instead of plunging into recession.

Bond markets were more skeptical, with yields on two-year treasuries outpacing those on 10-year treasuries, resulting in an inverted yield curve. An inverted yield curve is an interest rate environment in which long-term debt instruments underperform short-term debt instruments of the same credit quality. Buying treasury bills is essentially a loan to the US government, with the expectation that the loan will be repaid with interest (i.e. the rate of return).

When the yield on a two-year loan is higher than on a ten-year loan, bond markets demand a higher interest rate for a short-term loan than for a longer-term loan.

Historically, in the United States, such scenarios have been a precursor to recession. The image below shows the spread between 10-year and 2-year Treasury yields, and how the spread has been falling since March 2021. Shaded regions indicate recession areas, which are are historically produced 12 to 18 months after reversal.

10-Year Constant Maturity Treasury Bond minus 2-Year Constant Maturity Treasury Bond (Federal Reserve Bank of St. Louis)

Rising asset prices following negative economic data suggests markets expect the Federal Reserve to take a softer approach to reducing inflation, and may implement price-friendly policies actives.

At the same time, the Commitment of Traders (COT) report shows that speculators are building up their long positions in bitcoin. This report provides a weekly snapshot of positions held by traders in the futures markets and is published by Commodity Futures Trading Commission (CFTC).

Positions of small speculators are shown in blue (see below), while positions of “large speculators” (i.e. asset managers) are shown in green. Starting around July 11, the COT report shows that small speculators are net buyers of BTC, as they have crossed the center line (0.0), thus moving into positive territory.

In the past, small and large speculators have often clashed (i.e. October 2021), with institutions likely to run out of BTC when retail investors are long.

Options markets have also shown signs of BTC bullishness, for the time being. Looking at BTC by strike price, there is a high concentration of call option volume and open interest at the $25,000 price level. As a reminder, a call option gives the buyer the right but not the obligation to buy BTC at a specific price level (the strike price). The existence of a large volume at a strike price higher than the current price can be taken as an indication of bullish sentiment.

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Thomas E.
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