OKEX Investment Research: Global risk assets are sold off, Bitcoin is still uncorrelated with traditional assets
Written by: OKEx analyst Yan Song
Written by: OKEx analyst Yan Song
Global risk assets sold off this week
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global financial market
global financial market
The S&P 500 began a five-session rout after hitting an all-time high on Wednesday, erasing all of the index's gains for 2020. Among them, it fell 3.4% on February 21, the worst single-day performance since February 2018. European stock markets also had their worst trading day since 2016, and major stock indexes in Asia excluding China also fell. Bond yields moved in the opposite direction to prices, with the 10-year U.S. Treasury yield falling to 1.33%, breaking a low set in July 2016 following the Brexit referendum. Gold also rose to a seven-year high on Feb. 24, up nearly 10% so far in 2020.
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China has responded to the impact of the epidemic through a combination of monetary and fiscal policies. The PBOC injects liquidity into the market through reverse repurchase agreements with financial institutions. That is, commercial banks provide the central bank with low-liquidity financial assets in exchange for cash collateral for a certain period of time, so that the central bank can temporarily maintain sufficient liquidity in the financial system. The chart below shows that the People's Bank of China has injected unprecedented liquidity into the market over the past few weeks. This also made the trading volume of the two cities reach more than one trillion yuan for seven consecutive days, and A shares went out of a V-shaped trend after the festival.
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Economists at JPMorgan expect global economic growth to slow to 1% in the first quarter due to the spread of the epidemic, which they believe will be the weakest quarter in the post-2012 economic expansion cycle. Although many factories in China have resumed work since last week after a long shutdown, economic hits are inevitable. For example, according to the China Travel Association, China's auto sales plummeted by 92% in the first two weeks of February. According to Statista, the impact of the epidemic on China's GDP growth in the first quarter is expected to be 1.5%.
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bitcoin price
After falling sharply in the past three days, Bitcoin has dropped from $10,000 to around $8,700. On the morning of the 27th, Bitcoin once fell to the lowest level since January 26 near $8520 (OKEX BTC price index), that is, the current currency price has wiped out the gains in the past month. On the evening of the 26th, Bitcoin fell below the previous important support level of $9100, which basically declared that this round of upward structure since 2020 has been completely destroyed. The only suspense at present is whether the currency price can hold the 200-day moving average, which is the dividing line between bulls and bears , the current 200-day moving average is at $8775. In the contract market, the overall open interest dropped by nearly 20%, and nearly $800 million was liquidated within 24 hours.
Figure 4: Daily trend of OKEX BTC price index- Tradingview
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Bitcoin asset properties
According to Coinmetrics data, Bitcoin’s one-month correlation with gold has turned negative over the past 30 days. While Bitcoin still reacts to certain types of global political and economic events, the spread of the pandemic does not appear to be on that list. OKEX Investment Research has repeatedly emphasized in the previous [Macroeconomic Observation] article that Bitcoin has the attributes of a collection of risk assets and safe-haven assets, but it is still far from traditional safe-haven assets. Its high volatility, small size, and unpredictability make it more of a risky asset uncorrelated with traditional asset classes. The fact that Bitcoin catches up and sometimes lags behind traditional assets also shows that it is not currently a mature macro asset class. We define a mature asset class as one that is driven by macroeconomic and political factors, responds in real time to major macro events, is predictable, and has a long-term consistent correlation with risk.
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Figure 5: Bitcoin vs. Gold 30-Day Volatility - Coinmetrics
But on the other hand, we have hardly observed any price reaction of Bitcoin to the Fed's decision to cut interest rates, although interest rate cuts are generally considered to have a positive effect on gold prices because of the reduction in holding costs. Bitcoin was born after the 2008 economic crisis. The Federal Reserve’s rate cut on July 31 last year was the first interest rate cut in the history of Bitcoin. While there is little data on the impact of rate cuts, with only three samples, none of Bitcoin has shown positive price action in response to rate cut resolutions. According to data from The Block, Bitcoin has seen median returns of -5.0%, -20.9%, and -11.0% in the week, month, and three-month period following the Fed rate cut, respectively.
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In addition, due to the possibility of a significant contraction in global economic growth in the first and second quarters, the market expects the Fed to intervene again in the middle of the year and start cutting interest rates. The injected liquidity matches.
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One of the ways to change the current situation is to attract financial institutions to participate in the Bitcoin market faster and expand the cryptocurrency market. In a 74-page report on cryptocurrencies published by JPMorgan in February, we noted that it was closely watching the bitcoin options market. The report mentioned that although institutional participation in the Bitcoin market is increasing, the participation of mainstream financial institutions is still low because the current price volatility of Bitcoin is still five times that of traditional markets, but volatility is what makes options trading attractive reason. Volatility has a positive effect on option prices. Options are relatively cheap when low volatility is low. Therefore, traders tend to buy options when volatility is low, and reverse operations when volatility reaches its limit. According to statistics from the data website Skew, the trading volume of bitcoin options traded on the OKEX platform exceeded 15 million US dollars on February 26, which is also the highest single-day trading volume since the product was launched. OKEX Investment Research still has enough confidence in the future of the cryptocurrency market, and will continue to pay attention to the impact of macro-political and economic events on this market in the future.
Figure 7: OKEX BTC Options Trading Volume - Skew
Risk warning: This article does not constitute an investment recommendation. Investment is risky. Investment should consider personal risk tolerance. It is recommended to conduct an in-depth investigation of the project and carefully make your own investment decisions.
