Week by numbers
Last week has been marked by a downward trend in the cryptocurrency market. The price of the largest cryptocurrency, Bitcoin, fell by about two percent, and the price of the second-largest cryptocurrency, Ether, by about 4.5 percent. The total value of the rest of the cryptocurrency market (excluding the largest stablecoins) decreased by about 5.5 percent.
During a down week, it is typical for Bitcoin to hold its price slightly better than the rest of the market, which was reflected in a slight increase in Bitcoin dominance and a decline in the ETH/BTC ratio.
Among the tokens in Kvarn X trading service's selection, the strongest gainers during the overall downward week were Immutable X's IMX token (+12%), Akash Network's AKT (+10%), and Tron's TRX token (+4%). On the other hand, particularly sharp declines were seen in Polygon's MATIC (-19%), Uniswap's UNI (-16%), and DYDX (-15%).
Headwinds from dollar strengthening ?
In recent weeks, one of the defining characteristics has been the relative weakening of the US dollar. A weakening dollar has traditionally been a favorable condition for risky assets, and its presence has helped the stock and cryptocurrency markets recover from the brief market panic that hit at the beginning of August.
In the graph below, we illustrate the weakening of the dollar with the EURUSD currency pair, which has clearly strengthened. The correlation in the lower panel shows that EURUSD and BTCUSD have typically correlated positively.
Exceptions to this correlation have mainly been caused by a) the general upward trend in Bitcoin’s price, during which it may have risen even when EURUSD was falling (albeit more slowly) b) momentary market-spesific events within the crypto sector, such as the forced selling by authorities in July, which drove prices down even as EURUSD was rising.
A clear exception to the positive correlation has also been this month of August, during which EURUSD has pushed strongly upward as the dollar weakened, but Bitcoin's price has mainly moved sideways. What should be made of this?
The fact that Bitcoin's price does not rise when EURUSD rises is not a particularly positive signal. Typically, Bitcoin makes its strongest moves when EURUSD is providing it’s tailwind, and when EURUSD turns downward, price development is often relatively weaker.
What makes the current situation interesting is that such a turning point may be around the corner. EURUSD, after a strong rise last week, has turned sideways and, in the last few days, sharply downward, falling below its 10-day simple moving average (SMA). The graph below shows that during this year, a drop below the EURUSD 10D SMA has typically been followed by a weaker period in Bitcoin's price development.
What might this turning point mean for the crypto market this time?
First, we note that crossing below the 10-day SMA is not yet a convincing signal of a trend reversal. Our confidence in the end of the uptrend would increase significantly if EURUSD falls below its 20-day SMA. As the graph below shows, there is still some way to go to reach this point.
The same graph also shows that a turn in EUR/USD does not necessarily mean an immediate downtrend for Bitcoin’s price. In March-April 2024, Bitcoin moved sideways for several weeks, coming close to the all-time high set in March. In July 2024, Bitcoin made a new local high 12 days after the EURUSD peak.
Thus, we are not suggesting that the cryptocurrency market is necessarily heading into an immediate downturn. A 12-day lag between the EURUSD and BTCUSD peaks would suggest that Bitcoin would find its local to no sooner than September 7th.
It is also worth noting that the bottom seen in Wednesday's price drop was clearly a "higher low" compared to the drop below 57,000 dollars seen two weeks ago. Therefore, there are no convincing signs of a downtrend in Bitcoin’s price yet.
In last week’s Pulse newsletter, we also presented the hypothesis that increasing market risk appetite could manifest last, and thus with some delay, in the prices of cryptocurrencies which are at the far end of the risk curve. During the last week, the BTC/NDX ratio has oscillated sharply up and down, making it somewhat difficult to draw conclusions. However, it should be noted that at the time of writing, the BTC/NDX ratio is slightly higher than a week ago.
Therefore, in the past week, we have not seen a clear downward trend in Bitcoin’s dollar price or in the BTC/NDX ratio, which means we cannot yet completely rule out the possibility of a timing discrepancy between the stock and cryptocurrency markets.
All this said, it should be noted that the perspectives presented above are just sparks of hope in a situation that overall looks somewhat bleak. A downward trend in EURUSD has traditionally been a significant headwind for crypto prices, and if it is indeed beginning, we would have to significantly lower the probabilities of strong upward movements in the immediate future.
What should one do while monitoring the situation?
We recommend keeping an eye on the EURUSD pair's 20-day moving average, which currently sits around 1.102. A drop below this level would serve as confirmation of a further strengthening dollar.
Secondly, we suggest monitoring Bitcoin's two-week-ago bottom around 56,100 dollars. If this support level does not hold, it opens up the possibility for price movements significantly lower and would, for the time being, lower any hopes of a Bitcoin uptrend.
With these two tips, we leave our readers into the next week on the cryptocurrency market.
For long-time readers of the Pulse newsletter, we would also like to mention that we are quite aware that in this crypto-themed newsletter, we have written about the EURUSD currency pair probably to the point of exhaustion for the reader (sometimes even for the authors) over the past six months. However, since last spring, it has served as an excellent compass in the otherwise somewhat hard-to-read zig-zag of the crypto market, so we feel obliged to report on its possible turning point this time as well.
PAXG brings gold into the crypto portfolio
Kvarn X trading service’s selection expansion in August increased the token selection to well over a hundred tokens. One interesting addition to the selection is Paxos Trust Company’s PAXG token. PAXG acts as tokenized gold. For each PAXG token issued, the issuer Paxos claims to hold an ounce of physical gold, and PAXG tokens can be exchanged for gold.
PAXG offers crypto investors an interesting opportunity to achieve real diversification within their crypto portfolio. Typically cryptocurrency prices, regardless of category, correlate strongly and move in the same direction with the general market risk appetite. As a gold-backed asset, PAXG forms an interesting exception to this, as gold prices are driven by different factors than cryptocurrencies and technology stocks that usually express market’s risk appetite.
As an investment, gold has performed very well in 2024, with its price rising about 25 percent since the beginning of the year. Gold prices are typically driven by economic and geopolitical uncertainty, high inflation, and/or low real interest rates. For crypto investors, gold offers the opportunity to reduce risk when seeking to hedge against potential price declines.
PAXG is an ERC-20 token, meaning it operates on the Ethereum blockchain.
Please note that nothing in this newsletter constitutes a recommendation to invest in the PAXG token or any other cryptocurrency.
The material contained in the Kvarn Pulse is produced solely for the purpose of marketing communication. Any information conveyed through Kvarn Pulse should not be construed as an offer or an invitation to make any purchase or sale decisions, or as an encouragement to make investment decisions about any investment object. Copying or borrowing the content of the newsletter without Kvarn's express permission is prohibited. The information presented in the newsletter pertains to the situation prevailing at the time of writing, and the information may or may not have changed. Kvarn Capital Oy does not guarantee the accuracy or completeness of the information contained in the newsletter or referred to in the newsletter.
