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The crypto sector suffers a major selloff… par for the course… gold breaks through a critical technical level
Yesterday, the crypto sector crashed…and gold’s price quietly continued climbing higher.
If you’ve been a regular Digest reader, neither should have come as a surprise.
In our April 22nd Digest, we alerted readers about the “monster” of a major bitcoin crash, lurking somewhere out on the path ahead of us. The idea was prompted by a flash crash that had just hit the crypto sector.
From that Digest:
Last weekend, bitcoin suffered what the press are calling a “flash crash.” Top-to-bottom, it pulled back around 16%.
This is not the “monster” I’m talking about.
I’m referring to a full-on bitcoin crash of 50%+. Possibly much more…
Yes, bitcoin and the crypto world are going mainstream. And as this continues, over time, it will reduce bitcoin’s volatility.
But we’re not yet at a point where a 50%+ crash isn’t still very-much in the cards.
Yesterday, bitcoin suffered a 31% plunge…before staging a 33% surge later in the day.
If we expand back to mid-April, we see bitcoin down 34%, which includes yesterday’s whipsaw action. The losses were nearing 50% at one point, as you can see below.
And what about gold?
In Digests over the last year, we’ve featured research from our macro specialist and editor of The Speculator, Eric Fry, that makes a strong case for staying with the gold trade, despite many rough months since last summer. There have been numerous reasons – weakness in the U.S. Dollar, the Fed and its printing press, growing inflation risk, the threat of a significant market correction.
Interestingly, Eric spoke directly to the gold/bitcoin relationship in an interview with InvestorPlace’s CEO, Brian Hunt, nearly one month ago.
From Eric in that interview:
I don’t think there’s any question – anyone who’s been around thegold marketa long time, even a short-time, would understand that linking current government behavior both from the Fed and fiscal policy, meaning all the stimulus packages, to thegold market if you were to take past precedent and apply that to the current situation, you would have a current gold price that’s $4,000 an ounce, or at least something much higher than it is. That isn’t happening.
What is happening is bitcoin is going up…a lot.
Generationally, who buys bitcoin, who buys gold? The gold buyer tends to be older; the bitcoin buyer tends to be younger.
But I’m not yet ready to swear off of gold. I suspect that when the hypey part of the stock market settles down, reverses, craters, or whatever it does, you’ll see a similar settling down in other hypey asset classes.
I would put bitcoin in that category. I’m not saying it’s not legitimate, all I’m saying is it’s overhyped.
Once that settles down, you might see a return to a more-traditional connection between monetary policy, fiscal policy, and the gold price.
If we look at gold’s price over the last year, we see the yellow metal double-bottoming in March, then pushing 12% higher.
It appears Eric’s words are beginning to play out true to form.
***Backing up, what is behind this crypto sector crash?
Bitcoin has been under pressure for weeks now.
First, and perhaps most importantly, there’s its general “too far, too fast” price action.
Over the last 12 months, bitcoin has exploded higher, drawing in many speculators who have little interest in actually owning the cryptocurrency for the long-term.
This sets up conditions for a significant price correction when these “weak hands” speculators run into any price-headwinds, prompting them to immediately sell their positions.
Last week there was the headwind of Elon Musk saying that Tesla had suspended vehicle purchases using bitcoin. He pointed toward environmental concerns over the so-called computational “mining” process as the reason.
Then, yesterday, there was the headwind of China warning financial institutions not to conduct virtual currency related business. This includes trading or exchanging fiat currency for cryptocurrency.
Of course, this type of warning shouldn’t really surprise anyone – China’s chilly attitude toward the crypto sector goes back years.
There are also reports that institutional investors are rotating out of bitcoin and back into gold.
Whatever the reason for the crash, or combination of reasons, the bottom line is this: The crypto sector has needed a healthy pullback after months of stratospheric gains.
Below, look at bitcoin’s parabolic growth curve from January 2019 through mid-April. An asset simply cannot climb at this vertical rate without digesting its gains.
Plus, this recent crash is nothing new for bitcoin.
As we’ve noted before in the Digest, extreme volatility is simply the price of admission for crypto investors. See for yourself…
The below chart comes from Charlie Bilello. In the “% Decline” column, you’ll see how far bitcoin fell in various crashes over the last 11 years. And there are a lot of crashes.
But in the “% Return to New High” column, you’ll see the ensuing percentage return bitcoin tacked on in subsequent months on its way to a new high. And there are a lot of monster gains.
***I reached out to our crypto specialist, Charlie Shrem for his take on yesterday’s drop
For newer Digest readers, Charlie is the analyst behind Crypto Investor Network, where he recommends top-shelf altcoins. I’m looking at his portfolio as I write. Even with yesterday’s crash, I’m seeing open-position gains of 135%, 514%, and 640%.
From Charlie:
In 2017, we had six 30% corrections, two 40% corrections and in the last six days before the top, the Bitcoin price doubled.
Yesterday was only the first 30-40% correction in this bull market.
In Bitcoin and Crypto, markets act and react a lot faster than in traditional finance. Markets are highly liquid and never close so they respond to sensitive touch.
Over the course of its time, volatility will decrease and the market will find an equilibrium. However, our world has never seen a free market experiment on such a global scale that the constant tug of water between buyers and sellers can have a standard deviation up or down (sometimes 50% in 1 day).
The short answer is this: This is the market figuring itself out. It’s not following past decades because it has only one to follow.
Yesterday separated the tourists from the residents.
That’s a helpful mental exercise – do you consider yourself a crypto tourist or resident?
***So, what about gold now? Has it officially begun a new leg higher?
No one has a crystal ball, so we won’t claim to have the answer.
What we can say is that gold appears to have double-bottomed in March, and is now showing strong bullish movement, outpacing the S&P.
More importantly, gold has just broken through its 200-day moving average, as you can see circled below.
This is a significant technical level. If gold can remain above the 200-day and turn it into a support level, then we anticipate a sustained move higher for the yellow metal.
Eric is setting up his subscribers for this type of bullish move.
It was about one week ago that he recommended his Speculator subscribers add a new gold position:
I’ll kick it off today by suggesting that you add some exposure to the Granddaddy of Hedges: gold.
Yes, I know, the ancient monetary metal is “so yesterday” and seems utterly irrelevant in a world dominated by bitcoin and other cryptocurrency marvels.
But I suspect the “barbarous relic” still possesses some relevance in the modern era… perhaps even a relevance that is inversely correlated to bitcoin!
In other words, gold might not only function as a hedge against slumping stock and bond prices, but also as a hedge against slumping cryptocurrency prices, if that were to occur.
Occur it did. And Eric’s subscribers are well-positioned to benefit.
That being said, we’ll once again remind bitcoin and crypto investors to take a breath and hold tight. Yes, these selloffs are painful. But no, it’s nothing we haven’t seen before, and no, nothing about “this time” changes the long-term bullish outlook for the crypto sector.
So, ask yourself – are you a resident or a tourist?
For us, we’re long gold and long bitcoin.
We’ll continue to keep you up to speed on both assets here in the Digest.
Have a good evening,
Jeff Remsburg
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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
