Crypto drops in Asia trade but stock rout is bullish for bitcoin

Bitcoin gave up $300 in early Asia trade, declining to $6288 as at 9.45am UTC+1, while the bloodbath in global equity markets deepens and spills over into crypto.

Hopes that crypto might emerge as a rare oasis of calm have been dashed for now.

True to form, altcoins are being hit twice as hard as bitcoin, with many down more than 10%.

The protracted tight trading range near resistance at $6,600 was pregnant with energy, but it turned out it was to the downside.

Suffice to say bitcoin has failed again to break from the near-term downward trend. Brief weak excursions to $6,700 (red dashed line in the 1-day chart below) were a sign of the weakness of bulls, as today’s early action confirms.

The market should find strengthening support if it nears $6,118 (purple dashed line), formed by the previous low on the 10 August and 8 September.

btc i-day 11 oct 2018

(1-day chart, 11 October 2018, courtesy TradingView)

Warnings from the IMF in its annual report about the potential of crypto to threaten the financial system may not have helped sentiment.

But the big story is equities and bonds. Here’s why it matters for crypto’s next move.

Strange happenings on stock and bond markets

Something strange happened in the stock markets yesterday and is persisting so far today – there has been no rush into traditional safe haven assets such as gold and, most importantly, bonds.

That means investors are either not frightened  enough yet or the safe haven assets are not sufficiently attractive.

Perhaps it is a bit of both and that could be broadly good news for crypto.

However, as far as individual investors are concerned, the reality is that those holding crypto, especially high-net worth individuals, will have large equity portfolios.

Crypto would likely be less than 2% of such portfolios but if the equities correction deepens, then the crypto assets will be one among all of the positions in the portfolio that are actively rebalanced and/or re-set for the “normalisation” of  the monetary environment as the era of cheap money  – pretty much free  if you are a bank.

Portfolios are being adjusted in bias from growth to value stocks – which for this market means targeting a tilt from tech to consumer non-discretionary.

Having said that, we still expect crypto to begin a bull run and that it may have a negative correlation with stocks going into this more volatile and less frothy valuation reappraisal period.

With investors lowering their sights in equities, it shows that the landscape for income and capital returns has narrowed. That is crypto’s opportunity.

Dislocation or disruption in the main markets appears in the consciousness of the ordinary person as further evidence of the fragility and suspectness of the financial system and its current incarnations of money forms.

And then there’s the “bottom-up” part of the argument – what’s happening on the ground.

In those places where the real economy, and the financial system above, are in deep trouble – as in Venezuela – crypto adoption is in fact growing in its primary use case as store of value (ok you’re 5% down on btc today) and means of payment.

As emerging market economies in Asia start to feel the stress, it should be noted by crypto watchers that this is the region that is perhaps the most receptive to crypto. No wonder the Chinese government has been working so hard to keep crypto (trading) in its box because they suspect the potential for explosive growth in response to systemic worries could be dramatic. All those “soft hands” retail investors that dominate the stock markets in China have got to go somewhere, if they’ve got any money left.

Word on the street that a lot of the selling in te market emanated from Chinese clients bringing back money in response to margin calls at home.

Lets see a bit later today if crypto continues to fall with stocks or starts to buck the trend.

Whatever happens, traders and exchanges will be welcoming the return of volatility. 

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