Reflation-Trade Rethink keeps Bitcoin under pressure

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While Bitcoin’s blockchain data shows signs of green growth, the macro environment does not appear to be conducive to a bullish recovery.

In particular, the unwinding of reflation trade – or bets that benefit from a pickup in growth and inflation – could keep bitcoin under pressure, analysts say. Evidence of the outcome comes from a recent drop in bond yields and weakness in commodity currencies.

“The unwinding of reflation trade is impacting bitcoin,” Noelle Acheson, head of market analysis at Genesis Trading, told CoinDesk, adding that many investors have attributed cryptocurrency to their wallets as “hedge. against inflation “.

Related: Market Wrap: Bitcoin Rises After Volatile Week

Reflation refers to an increase in economic activity and inflation after a depression or recession. When anticipating reflation, investors typically buy industrial commodities, commodity-linked currencies such as the Australian dollar, stocks of economically sensitive companies, and perceived inflation hedges like bitcoin and gold. They tend to sell bonds, which drives up yields.

So-called reflation trade became popular after March 2020, when policymakers around the world promised unprecedented monetary and fiscal stimulus and raised hopes of a V-shaped recovery in economic activity. and inflation.

Trade accelerated in November following the US presidential election, as evidenced by the rally of the AUD / JPY (Australian dollar / Japanese yen) currency pair from 72 to 84 in the five months leading up to March and the rise in bond yields (bond prices and yields go in opposite directions).

Bitcoin also recorded a sixfold rally to nearly $ 60,000 during this time frame, moving in step with the AUD / JPY. The currency pair might be a better indicator of reflation sentiment than most traditional assets, as the Australian dollar is sensitive to commodity prices and the yen is seen as a safe haven. Australia is a major exporter of copper and iron ore.

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The positive correlation suggests that the stimulus theme played an important role in bringing money to the bitcoin market.

Both bitcoin and AUD / JPY peaked in March and April. Bitcoin cracked in May over renewed concerns over tighter regulation and Tesla’s decision to phase out cryptocurrency as a payment alternative, and the AUD / JPY has started to lose altitude in recent days, causing allusion to an unwinding of the stimulus trade and a flight to safety.

The bond market is reporting the same, with longer duration yields falling sharply in recent days. The 10-year US Treasury yield fell to a 4.5-month low of 1.25% on Thursday. “The bond market is telling us that inflation could be transient,” Acheson said.

For now, investors have less incentive to invest money in inflation hedges, including bitcoin. Cryptocurrency may face selling pressure if markets continue to unwind reflation trades, leading to full-fledged sentiment to avoid assets deemed risky.

“The reflation overhaul is starting to take its toll on equities, and if risk aversion worsens, bitcoin could experience a larger decline,” said Pankaj Balani, CEO of Delta Exchange.

U.S. stock indices fell on Thursday, with the Dow Jones Industrial Average losing more than 250 points and futures contracts falling nearly 500 points at some point earlier in the day. Bitcoin also fell almost 5% to $ 32,100.

“Bitcoin is still considered an emerging market and therefore is somewhat exposed in times of intense risk, at least for now, despite the longer-term value proposition reserve,” said Joel Kruger, strategist in currencies at LMAX Digital. .

Sentiment appears to have stabilized at the time of publication. Dow futures are currently trading at 0.55%, or 180 points, higher, and bitcoin is unchanged that day at around $ 32,900, according to data from CoinDesk 20.

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