Over the past week, bitcoin has seen its price spike over 12.5% to around the $11,500 level clearly outshining other major cryptos. Is this a coincidence or is there something more important going on. If this action had occurred last summer, the explanation would have been that bitcoin was just part of the unquenchable thirst of the public to own cryptocurrency.
But these days, we believe that lots of the purely speculative phase is behind and that fundamentals will play a more important role moving forward. The recent bitcoin action provides some support for this theory.
Last week’s announcement by the Trump administration of plans to impose steep tariffs on imported steel and aluminum suddenly opens the issue of retaliation and that means trade war worries. In reality steel and aluminum represent exceptional situations. The world is awash in excess capacity yet the prices of these commodities remain artificially inflated by government subsidies.
All this may be true but once the specter of unilateral tariffs is introduced, currency markets get nervous and today was no exception. If you were concerned about the value of any given currency, bitcoin starts looking pretty interesting. Moreover, bitcoin is not only the go to option but the price action over the past week where other cryptos are lagging supports this notion.
Inflation Fears Are Another Contributor
Uncertainty over international trade isn’t the only thing influencing bitcoin prices. Increasingly inflation is showing signs of possibly overshooting the Feds 2% target and that would not be good for conventional assets. Just consider several of today’s major headlines on CNBC.com.
“Inflation threat could significantly slow the bull market , a Citi analyst warns”
“A bond expert thinks investors are in ‘denial’ about soaring yields, which could crack 4% this year”
“Three charts that suggest gold is poised for a breakout, and is heading to $1,400”
“Trump’s plans to turbocharge economy could slam stocks 15%”
For the first time in many years there is genuine concern about inflation and it is easy to see why. The US economy is in the longest period of expansion in modern times. Labor that was once overabundant is now scarce with wages for certain technology skills skyrocketing. Housing price inflation is running almost three times the Fed’s target 2% inflation rate. The Trump plan referred to in the above headline relates the target rate of economic growth at 3% versus what economist Jack Ablin calls a natural 2% rate. Such push he claims adds unwelcome inflationary pressures.
Post Speculative Times Are Here
Since the massive crypto price correction of December and January, we have been watching carefully for signs of rational thinking to take over. The fact that we have been in a stalemate where prices may a few percent either way was a sign that the market was not collapsing but consolidating after a period of “rational over exuberance “ to coin a phrase.
Some pure technical analyst have argued that this sideways drift of prices was a sign of further price weakness in the future. Time is proving this theory a bit suspect. We believe that prices have found a level where investors are looking at fundamental forces as opposed to speculative intoxication.
If we look back to one of the reasons for investing in bitcoin from the start was to insulate our assets from the policies, (inflationary, frivolous or simply ego driven), of any sovereign power. The price action of late in bitcoin offers evidence that investors may be acting on this fundamental concept. In the coming days, keep an eye on the price of gold which has long been the go to asset when inflationary worries drive investors away from financial markets.
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