Fantastic Friday to you and I hope you’ve had a great week!
In brief (TL:DR)
- U.S. stocks edged higher towards the end of the week before Christmas with the S&P 500 (+0.58%), tech-centric Nasdaq Composite (+0.84%) and blue-chip Dow Jones Industrial Average (+0.49%) all higher on fresh stimulus prospects .
- Asian stocks were a mixed bag in the morning trading session as investors continued to weigh the prospect of U.S. stimulus against fresh coronavirus cases in Japan and South Korea.
- U.S. 10-year Treasury yields dipped slightly to 0.922% as stimulus prospects had investors continuing to bet on risk (yields rise when bond prices fall).
- The dollar pushed higher on signs of being oversold against other major trading currencies.
- Oil fell with January 2021 contracts for WTI Crude Oil (Nymex) (-0.25%) at US$48.24 from US$48.36 mainly on the back of a rising dollar.
- February 2021 contracts for Gold (Comex) (-0.25%) slipped to US$1,885.60 from US$1,890.40 also on a rising greenback.
- Bitcoin (+6.86%) continued to climb, surging to US$22,787 from US$21,325 as outflows from exchanges surged ahead of inflows and on the back of increasing worry over money printing (outflows typically suggest that investors are looking to hold Bitcoin in anticipation of price rises).
In today’s issue…
- Sorry for South Korea as Covid-19 Strikes Back
- The Fed is Your Friend Till the End
- Bitcoin is the Ultimate Veblen Good
1. Sorry for South Korea as Covid-19 Strikes Back
- South Korea sees the highest number of Covid-19 deaths over the past week
- Resurgence of coronavirus infections in winter demonstrates how the optimism over vaccines needs to be tempered with populations letting their guard down and overall pandemic fatigue
2. The Fed is Your Friend Till the End
- U.S. central bank exudes an air of optimism but helpfully pledges to maintain the status quo both in the composition of its quantitative easing as well as the management of interest rates
3. Bitcoin is the Ultimate Veblen Good
- Bitcoin continues to push higher into uncharted territory, with each subsequent record beating out the previous one and with institutional investors pushing the cryptocurrency ever higher
- As Bitcoin price increases, more investors may be drawn into buying it
A veblen good typically refers to any luxury good, the price of which increases as demand increases.
And judging by the recent run up in Bitcoin’s price over the past few weeks, Bitcoin is turning out to be the ultimate veblen good.
As Bitcoin tested US$24,000 institutional investors and high net worth individuals were phoning up money managers and asking if they’d already missed the Bitcoin boat.
Unlike 2017, Bitcoin’s most recent rally has largely been led by institutional investors, who are increasingly concerned over the unprecedented levels of monetary debasement.
Coupled with demonstrable success of Bitcoin’s deflationary qualities, some analysts are suggesting that there may be continued upside for the cryptocurrency.
The wall of sellers that many had expected for Bitcoin at US$20,000 turned out to be nothing more than traders betting that Bitcoin would not ascend past that level and not “natural sellers” who had bet on Bitcoin earlier on.
In other words, sellers who may have bought Bitcoin close to its previous all-time-high weren’t looking to dump it as soon as they had covered back their losses of the past three years and that in and of itself says a lot about this Bitcoin rally.
As more investors believe that monetary and fiscal stimulus debases fiat currencies, more will consider cryptocurrencies like Bitcoin, which have a fixed supply, attractive inflation hedges.
And as stocks become increasingly overvalued, there will be more than a handful of investors looking to move out of equities and into cryptocurrencies.
But if central banks tighten monetary policy or governments take action to reduce deficits, that narrative could very quickly unwind.
For now, there is no immediate threat of that happening and that’s why Bitcoin continues to climb.
The Fed has already indicated that it intends to keep rates low right through to 2023 and a Democrat-controlled White House and Congress show no indications that they’re likely to want to stop spending anytime soon.
Against this backdrop, populations still bruising from the pandemic will put pressure on their governments to keep the fiscal taps flowing.
And that could see Bitcoin continue to keep setting fresh records.
Novum Digital Asset Alpha is a digital asset quantitative trading firm.
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The information and thoughts laid out in this analysis are strictly for information purposes only and should not be regarded as an offer to sell or a solicitation of an offer to buy any security in any jurisdiction where such an offer or solicitation would be in violation of any local laws.
It does not constitute a recommendation or take into account the particular allocation objectives, financial conditions, or needs of specific individuals.
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