What You May Have Missed in Crypto News: Bitcoin Rising Despite Negative US GDP Report

The price of bitcoin (BTC) continued to rise in trading Thursday, rising 4% despite a negative report on US gross domestic product (GDP).

Quarterly growth was down 0.9% versus estimates of an increase of 0.5%. This decline marks the second consecutive quarter of negative GDP growth, historically a sign of an economic recession.

Officially, the National Bureau of Economic Research determines when the United States enters a recession based on a range of factors.

After Thursday’s report, US Treasury yields fell, with 10-year bond yields ahead of 2-year bond yields. Bond yields have an inverse relationship to prices, meaning when one goes up, the other goes down. When interest rates on government bonds fall, it means that the bonds are bought. Investors often buy safer government bonds (rather than stocks or cryptocurrencies) when they doubt the strength of the overall economy.

In traditional stock markets, the S&P 500 and the Dow Jones Industrial Average rose 1.2% and 1.1%, respectively.

The price of Ether (ETH) also rose on Thursday, rising another 9% after Wednesday’s 16% jump.

Altcoins were also in positive territory, with Cosmos’ ATOM token rising 8% while Polkadot’s DOT token rose 9%.

●S&P 500 Daily Close: 4,072.43 +1.2%

●Gold: $1,774 per troy ounce +3.2%.

●Daily closing yield on ten-year government bonds: 2.68% -0.05.

Prices for bitcoin, ether and gold are taken around 4 p.m. New York time. Bitcoin is CoinDesk’s Bitcoin Price Index (XBX); Ether is CoinDesk’s Ether Price Index (ETX); gold is the COMEX spot price. Information on CoinDesk indices is available at coindesk.com/indices.

Do the potential troubles of the US economy herald a rise in asset prices?

Bitcoin continued higher Thursday, rising above $23,000, despite a second-quarter GDP report showing a decline rather than growth. The negative 0.9% value follows the decline of 1.6% in the previous quarter and missed the projections of a growth increase of 0.5%. See the article: Good news if you have ETH in your wallet: Ethereum breaks above $1600 despite record high inflation. Still, asset classes responded favorably, with traditional financial and cryptocurrency prices rising as investors see evidence that the economy is slowing to a slower, more desirable pace rather than sliding into recession.

Bond markets were more skeptical, with yields on two-year government bonds exceeding those on 10-year government bonds, resulting in an inverted yield curve. An inverted yield curve is an interest rate environment in which long-term debt instruments underperform short-term debt instruments of the same credit quality. Buying Treasury bills is essentially a loan to the US government, with the expectation that the loan will be repaid with interest (i.e., the rate of return).

When the yield on a two-year bond is higher than on a ten-year bond, bond markets charge a higher interest rate for a short-term loan than for a longer-term loan.

Historically, such scenarios in the United States foreshadowed a recession. The image below shows the spread between the 10-year and 2-year government bond yields, and how the spread has been declining since March 2021. Shaded regions indicate areas of recession, historically occurring 12 to 18 months after the turnaround.

10-year constant-maturity government bond minus 2-year constant-maturity government bond (Federal Reserve Bank of St. Louis)

Rising asset prices after negative economic data suggest that markets expect the Federal Reserve to take a softer approach to curb inflation, possibly adopting price-friendly policies.

Meanwhile, the Commitment of Traders (COT) report shows speculators building their long bitcoin positions. This report provides a weekly snapshot of traders’ positions on the futures markets and is published by Commodity Futures trade Commission (CFTC).

Small speculators’ positions are shown in blue (see below), while “large speculators” (ie asset managers) positions are shown in green. As of about July 11, the COT report shows that small speculators are net buyers of BTC as they have crossed the centerline (0.0) and are moving into positive territory.

In the past, small and large speculators have often collided (ie October 2021), with institutions likely to run out of BTC if retail investors are long.

The options markets are also showing signs of bullishness for BTC for now. Looking at BTC by strike price, there is a high concentration of call option volume and outstanding interest at the $25,000 price level. As a reminder, a call option gives the buyer the right but not the obligation to buy BTC at a certain price level (the strike price). The existence of a large volume at a strike price that is higher than the current price can be taken as an indication of bullish sentiment.

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