Rising government bond yields worry economists – but what does that mean for Bitcoin?


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This week’s correction in Bitcoin price (BTC) showed that a market is not rising in a straight line. Meanwhile, another issue has attracted attention, namely the sharp rise in 10-year US Treasury bond yields.

Over the past few weeks, the 10-year US Treasury bond yield has soared 35% to a new high of 1.44%, the highest point since the asset crash in March 2020.

Government bond yields are recovering from a 60-year low

US 10 Year Return 1 Week Candle Chart. Source: TradingView

The yield on 10-year government bonds has accelerated massively in recent weeks, similar to the lead up to the economic downturns in 2000 and 2008. Therefore, rising yields are typically viewed as a signal of weakness in the economy and can have a major impact on many Markets.

When yields rise, governments will have to pay more for their underlying government bonds. That, coupled with the current post-COVID-19 era economic conditions and record debt levels, are factors that unsurprisingly worry economists.

Looking at the table above from a technical point of view, this entire run can nonetheless be viewed as a simple bearish retest of the previous support level.

One such example is shown in the previous attempt to test the resistor above. This could also happen here, where interest rates will then fall again from 1.53%. It is important to keep an eye on this level, however, as a breakthrough can have a significant impact on the markets.

Government bond yields also affect mortgage markets. Given that the real estate market is massively overheating right now and people are taking on massive debt to buy homes, a surge in interest rates could burst this entire bubble, much like it did in 2008.

However, the returns also affect other markets as gold often reacts to these movements as well. But is it different this time? And how will Bitcoin react to these potential macroeconomic shocks?

A weakening dollar versus Bitcoin

3-day chart of the US dollar currency index. Source: TradingView

The US dollar currency index (DXY) continues to show weakness as yields rise, which is generally good news for bitcoin bulls. This suggests that investors are fleeing the dollar towards higher risk, higher return investments like Bitcoin.

From a technical perspective, however, the DXY saw a bearish retest at 91.50, followed by another downtrend for the dollar as shown in the graph above. Now a retest of the 90 point level is in progress, the main question being whether this level will count as support.

BTC / USD vs. DXY. Source: TradingView

However, it is questionable whether the surge in yields, especially in the past few days, will have a direct impact on the price of Bitcoin. In the meantime, the DXY has often been inversely correlated with the price of Bitcoin, although it has declined in recent months (see below).

Rolling 90-day correlation of BTC against USD, VIX, Gold and S&P 500. Source: Digital Assets Data

After the March 2020 crash, this inverse relationship intensified until September 2020 as a weakening dollar was accompanied by a sharp spike in BTC price.

Of course, assets are only correlated until they are no longer, and many other factors can have a much greater impact on BTC in the short term – for example, miners or whales selling Bitcoin, government regulations, etc.

Why does gold show weakness?

Gold 3 day chart. Source: TradingView

The 3-day chart for the gold price has shown a significant correction since August 2020. More importantly, the surge in yields and the weaker dollar did not affect the gold market as much as the bitcoin market.

Even with the recent surge in yields, people are not buying gold. In fact, increasing yields has historically not benefited gold – at least in the short term – as higher yields would make government bonds more attractive to funds that could be held for liquidation and as a risky asset in their portfolios.

However, as yields continue to rise towards higher levels, so does uncertainty about the economy and investors typically begin to switch from the dollar to gold as a safe haven. This was seen in the 1980s when yields rose to 14% and gold also hit new all-time highs.

BTC has become increasingly important in macroeconomics

In the current state, however, falling gold prices may simply be an immediate reaction to the rise in yields in general. Another possibility, however, is that more and more investors are opting for “digital gold” instead of the precious metal, not just because of the higher upside potential – i. H. Risk-Reward – but also because these positions can be liquidated much more easily.

Another possibility is that more and more investors prefer “digital gold” to precious metal – not only because of the higher upside potential, but also because these positions can be liquidated much more easily on digital trading platforms.

Bitcoin’s market capitalization is only 7% to 10% of the gold price today, which underscores this massive upside potential.

The macroeconomic conclusion that can be drawn, therefore, is that markets are becoming increasingly uncertain about the future of the economy and the dollar, such as rising ten-year government bond yields. However, it is too early to write off the recent correction in BTC price for this macroeconomic move as several other variables are at play.

Ultimately, the rising yields and the weakening dollar are exciting developments to keep an eye on. For example, given that Bitcoin is becoming increasingly important in the macro environment, strategists at JPMorgan Chase believe that BTC could continue to worsen gold market share. This is likely to result in an even higher valuation of Bitcoin, especially in the event of another economic crisis at the expense of gold.

In December 2020, JPMorgan strategists stated:

“The adoption of Bitcoin by institutional investors has only just begun, while the adoption of Bitcoin by institutional investors is very advanced. If this medium to longer-term thesis proves correct, the gold price would suffer from structural headwinds in the years to come. “

The views and opinions expressed here are solely those of author and do not necessarily reflect the views of Cointelegraph. Every investment and trading step is associated with risks. You should do your own research when making a decision.