The price of bitcoin (BTC) continued its rise in trading on Thursday, rising 4% despite a negative US 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 is historically 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.
Following Thursday’s report, yields on US Treasuries fell, with the yield on the 10-year bond surpassing the yield on the 2-year. Bond yields have an inverse relationship with prices, meaning that when one rises, the other falls. When the interest rate on government bonds falls, it means that the bonds are bought. Investors often buy safer government bonds (rather than stocks or cryptocurrencies) when they doubt the strength of the overall economy.
In traditional stock markets, the S&P 500 and Dow Jones Industrial Average rose 1.2% and 1.1%, respectively.
The price of Ether (ETH) also rose on Thursday, gaining another 9% after Wednesday’s 16% jump.
Altcoins were also in positive territory, with Cosmos’ ATOM token jumping 8%, while Polkadot’s DOT token was up 9%.
●S&P 500 daily close: 4,072.43 +1.2%
●Gold: USD 1,774 per troy ounce +3.2%.
●Daily closed ten-year Treasury yield: 2.68% -0.05.
The prices for bitcoin, ether and gold are taken around 16 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 in the US economy portend a rise in asset prices?
Bitcoin continued higher on Thursday, rising above $23,000, despite a GDP report that showed declines rather than growth in the second quarter. The negative 0.9% reading follows the 1.6% decline in the previous quarter and missed projections for 0.5% growth. See the article: Good news if you have ETH in your wallet: Ethereum breaks above $1600 despite record inflation. Still, asset classes responded positively, with traditional financials and cryptocurrency prices rising as investors see signs that the economy is slowing to a slower, more desirable pace rather than plunging into recession.
Bond markets were more skeptical, with yields on two-year Treasuries exceeding those on 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. Buying Treasury bills is essentially a loan to the US government with the expectation that the loan will be repaid with interest (ie the rate of return).
When the interest rate on a two-year loan is higher than on a ten-year loan, the bond markets demand a higher interest rate for a short-term loan than for a longer loan.
Historically, such scenarios in the US 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 narrowing since March 2021. Shaded areas indicate recessionary areas, which have historically produced 12 to 18 months after reversals.
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 suggest markets expect the Federal Reserve to take a softer approach to reducing inflation and possibly implement price-friendly policies.
Meanwhile, the Commitment of Traders (COT) report shows that speculators are building their long bitcoin positions. This report provides a weekly snapshot of positions held by traders in the futures markets and is published by Commodity Futures Trade Commission (CFTC).
The positions of small speculators are shown in blue (see below), while the positions of “large speculators” (ie 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 crossed the center line (0.0) thus moving into positive territory.
In the past, small and large speculators have often clashed (ie October 2021), with institutions likely to run out of BTC when retail investors are long.
Options markets have also shown signs of BTC bullish recently. 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 certain 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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