What you may have missed in the cryptocurrency news: Bitcoin soars despite the negative US GDP report

The price of bitcoin (BTC) continued its rise in exchanges on Thursday, up 4% despite a negative report on US gross domestic product (GDP).

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 has historically been a sign of an economic recession.

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

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

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

The price of Ether (ETH) also rose another 9% on Thursday after a 16% jump on Wednesday.

Altcoins were in positive territory too, with Cosmos’ ATOM token climbing 8%, while Polkadot’s DOT token was up 9%.

● S&P 500 daily close: 4,072.43 + 1.2%

● Gold: $ 1,774 per troy ounce + 3.2%.

● Ten-Year Daily Closing Treasury Yield: 2.68% -0.05.

The prices of bitcoin, ether and gold are taken around 4:00 pm 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 on CoinDesk indices can be found at coindesk.com/indices.

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

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

Bond markets were more skeptical, with yields on two-year Treasuries exceeding those of 10-year Treasuries, resulting in an inverted yield curve. An inverted yield curve is an interest rate environment where long-term debt instruments underperform short-term debt instruments of the same credit quality. The purchase of treasury bonds 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 that of a ten-year loan, bond markets require 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 the recession. The following image shows the spread between 10-year and 2-year Treasury yields and how the spread has fallen since March 2021. Shaded regions indicate areas of recession, which are historically produced 12 to 18 months after the reversal.

10-year constant-maturity Treasury bill minus 2-year constant-term Treasury bill (Federal Reserve Bank of St. Louis)

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

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

The positions of the small speculators are shown in blue (see below), while the positions of the “big speculators” (ie the wealth managers) are shown in green. As of around July 11, the COT report shows that small speculators are net buyers of BTC, as they have broken out of the center line (0.0), thus moving into positive territory.

In the past, speculators big and small have often clashed (i.e. October 2021), with institutions that risk running out of BTC when retail investors are long.

The 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 and open interest option volume at the $ 25,000 price level. Recall that a call option gives the buyer the right, but not the obligation, to buy BTC at a certain price level (the strike price). The existence of a large volume at a strike price above the current price can be considered an indication of bullish sentiment.

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Thomas E.
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