First Mover: Stimulus Tests Bitcoin in Real-Time, and It Passes $20K

First Mover: Stimulus Tests Bitcoin in Real-Time, and It Passes $20K
Bitcoin prices crossed above $20,000 on Wednesday for the first time.
(Unsplash, modified by CoinDesk)

Bitcoin (BTC) surged 6% Wednesday to a , clearing the key psychological threshold of $20,000 that had acted as a market ceiling in recent weeks.

“If history is any indication of future performance, some kind of pullback in the overall market confidence should appear sooner rather than later,” the Norwegian cryptocurrency analysis firm  wrote Tuesday in a report. 

In , European shares rose and U.S. stock futures pointed to a higher open as investors cheered prospects for a vaccine rollout and more economic stimulus while awaiting an expected announcement from the Federal Reserve at 2 p.m. Washington time on the latest monetary-policy decisions.   

Analysts at Deutsche Bank and Bank of America say the Fed might adopt “” guidance as a way of determining how long to maintain its stimulus-focused purchases of government bonds, ongoing at a pace of $120 billion a month. Led by Chair Jerome Powell, the Fed already has added about $3 trillion to its balance sheet this year, roughly three-fourths the amount of money previously created in the 107-year-old institution’s history. 

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(Editor’s note: This is the third installment of First Mover’s recap of how the bitcoin market evolved over the course of 2020 and what it means for the future. Today we cover March and April, when the fast-spreading coronavirus began to take its toll on the global economy, sending markets into a tailspin and leading to an unprecedented financial response from governments and central banks around the world.) 

It started off in late February as just another thread in the market commentary. Global authorities were  outbreak from spreading beyond China. 

Bitcoin, fresh off a five-month high around $10,500, racked up three straight days of price declines greater than 3% each. Initially, it seemed like , especially since global stock markets were getting hit, too. 

“There’s certainly a bit of fear in the bitcoin market, but it’s not anything close to the panic we’re seeing on Wall Street today,” Mati Greenspan, founder of the analysis firm Quantum Economics, which specializes in cryptocurrencies and foreign exchange, said Feb. 24. “Three percent is a very different figure for stocks and for bitcoin.”   

What happened next was one of the  in the history of global markets, dragging down bitcoin to as low $3,850 by mid-March. 

Which of course was followed by a dramatic push by U.S. lawmakers, the Federal Reserve, the ,  and authorities around the world to ply markets and the economy with trillions of dollars of stimulus money, bringing asset prices . By the end of April, bitcoin had more than doubled to about $8,600. 

And that’s when the calls apparently started pouring into cryptocurrency startups from Wall Street. Bitcoin, whose ultimate supply is famously hard-capped at 21 million under the underlying blockchain network’s 11-year-old programming, had been cast as a potential hedge against central-bank money-printing and currency debasement, a modern and theoretically more portable version of gold.   

“I’m getting calls from real big investors we’ve never seen before, saying, `,’” Michael Novogratz, CEO of the cryptocurrency firm Galaxy Digital, told CNBC on April 2. 

Economists wrestled with the question of , based on the expectation that coronavirus-related lockdowns would decimate consumer and business demand. On a more abstract level, financial historians rekindled discussions over whether the new crisis might precipitate a change in the dollar-dominated global monetary order, similar to the  accord toward the end of World War II. 

“I wouldn’t rule out anything at this point,” Markus Brunnermeier, a Princeton University economics professor who has advised the International Monetary Fund, Federal Reserve Bank of New York and European Systemic Risk Board, told CoinDesk in late March.

Stephen Cecchetti, who headed the monetary and economic department at the Bank for International Settlements in Basel, Switzerland, in the early 2010s, articulated a key concept that has lurked in the bitcoin market commentary ever since: In times of deep turmoil, the presumption of central bank independence is largely ignored, allowing money printing to finance government budget deficits racked up due to emergency relief spending. “The central bank has to be a part of the war machine,” Cecchetti, now a professor of international economics at Brandeis University, told CoinDesk.  

The dynamic helps explain why bitcoin has been  in Washington over a . 

Some 10 months after the coronavirus pandemic first started to infect global markets and the economy, the Federal Reserve is still using freshly printed (electronic) money to buy U.S. Treasurys and government-backed mortgage bonds, currently at a rate of $120 billion a month. 

In doing so, the central bank is indirectly financing the U.S. government’s budget deficit, which surged to a  in the fiscal year ended Sept. 30, more than twice the prior record of $1.4 trillion set in 2009. The Congressional Budget Office has forecast a  for the current fiscal year, remaining above $1 trillion every year through 2030. 

U.S. government debt held by the public, which started 2020 at an already-lofty $23 trillion, has now surged to about $27 trillion, and some bond-market analysts predict the Federal Reserve might need to keep monetary policy unusually loose for years to come – just so the Treasury Department can afford its interest payments.    

The dynamic, set in motion in March and April, continues to prompt more of those phone calls to crypto startups from Wall Street. On Tuesday, Bank of America published a survey of fund managers showing that “long bitcoin” was one of the most “crowded trades” in global markets, along with “long tech” and “short dollar.”  

“Over the course of 2020, many institutions have started to endorse bitcoin,” according to a report Tuesday by the cryptocurrency analytics firm Coin Metrics. “One of the most commonly cited reasons for this change of tune is the growing narrative that bitcoin could serve as a good hedge against inflation.” 

With bitcoin prices now above $19,000, the story doesn’t seem to be going away. 

– Bradley Keoun

After testing investor patience for three weeks, bitcoin has finally crossed above $20,000 to reach fresh all-time highs.

The No. 1 cryptocurrency by market value jumped over the key psychological threshold during the early U.S. trading hours, surpassing the previous peak price of $19,920 recorded Dec. 1. At the current price of $20,374, bitcoin is up 5.4% over 24 hours, according to CoinDesk’s Bitcoin Price Index (BPI).

Breaking above $20,000, which represented a significant hurdle in the mindset of most traders, is entirely new ground for bitcoin and opens the doors for a climb to $100,000 over the course of 2021, .

While bitcoin is now up over 180% on a year-to-date basis, gold has added just over 22%. Bitcoin, often touted as digital gold, has decoupled from the yellow metal this quarter with a more than 80% rally. Meanwhile, gold has suffered a 1% drop, with investors  exchange-traded funds. 

– Sebastian Sinclair and Omkar Godbole

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