The price of bitcoin rallied nearly 30% in the month of October as the floodgates opened to push digital assets mainstream (Chart 1.0).
PayPal’s entrance into the digital currency space, allowing users to buy, sell and hold several cryptocurrencies in their PayPal wallets, caused traders to bid up the price of bitcoin as it caused them to reprice the possibility of digital assets being available to over 300 million users on the PayPal platform. Additionally, several multi-billionaire dollar corporations have decided to ditch cash for bitcoin as a reserve asset on their balance sheets as they expect bitcoin to be a better store of value than cash.
Interestingly, while several corporations were adding bitcoin to their balance sheets the funding rate of bitcoin remained fairly subdued compared to the rally in bitcoin we had in July and August (Chart 2.0). In other words, the rally we saw in bitcoin was most likely led by institutions acquiring spot bitcoin rather than retail speculation via bitcoin perpetual swaps. This has signaled not only the start of a major Q4 rally in bitcoin, but is also a sign of health for the digital asset industry as the use case for bitcoin is continually being shifted from a speculative asset to a store of value.
Meanwhile, our in-house implied volatility index, BVIX, dubbed after the VIX, encountered a volatile month, but ended the month nearly flat gaining only 1.95%. Preceding bitcoin’s rally of nearly 7.39% on 10/21/20, the BVIX collapsed from 93.5 to 86.55 (-7.4%). Bitcoin eventually rallied which caused BVIX to “mean revert” and gain 17% within just two days of trading.
It is also interesting to note that bitcoin previously held a moderate to strong 63-Day (Quarterly) positive correlation with QQQ, an ETF that tracks publicly traded technology companies, since the March 12th crisis up to the start of July. In other words, it appeared investors were perceiving bitcoin as a similar risk on asset like publicly traded technology companies. However, since bitcoin’s rally in July and August as well as its most recent rally in October, the strong positive 63-Day correlation between the two assets has fizzled. This could be hinting at bitcoin’s strong positive correlation with QQQ back in Q2 of 2020 was purely driven by a short term global market rebound across asset classes rather than a sustainable idiosyncratic correlation with QQQ (Chart 4.0).
Lastly, looking ahead, the global macro environment is ripe for a continuation of bitcoin’s bull market to all-time highs. Post election disarray has already pushed the price of bitcoin up nearly 13% to start off the month of November as global macro uncertainty continues to be a boon for bitcoin. With Covid-19 cases spiking across the globe and governments, once again, responding with totalitarian lockdowns, a lack of real economic activity will most likely continue to lead to more global monetary and fiscal stimulus; in effect, causing global currencies to further depreciate against bitcoin.
-Edward Puccio, Analyst BKCoin Capital LP