Bitcoin saw a contraction in September of 2020, declining nearly 9%, as the dollar gained ground. The dollar benefited from risk aversion and profit-taking in riskier assets, despite a decline in US treasury yields. The technicals in bitcoin versus the greenback, reflect consolidation, but as investors begin to accumulate positions, there is a possibility that BTC/USD rises back to fresh 2020 highs.
The Dollar Drives Bitcoin Losses
The retracement in bitcoin during September was driven by gains in the US dollar and declines in riskier assets. Traders took profits in riskier assets in September, driving down equity prices along with bitcoin. During September, equities and bitcoin were highly correlated moving in tandem with one another. The correlation between the S&P 500 index and bitcoin reached 80% in September, which means that 80% of the movement in BTC/USD was related to the movement in the S&P 500 index. To offset the losses in a riskier asset, traders moved to safe-haven assets, such as the US dollar. Since May of 2020, the dollar has lost approximately 6% but rebounded slightly more than 2% in September.
Asset Managers Remain Short The Dollar
The gains in the dollar have not deterred assets managers who remain short the greenback. According to the most recent commitment of traders report released for the date ending September 22, asset managers remain very long the Euro and short the greenback. The open interest for asset managers shows that they are long 446K contracts compared to short only 15K contracts. The view that assets managers are confident that the greenback can continue to move lower will be helpful to bitcoin bulls.
Bitcoin Reverse Continue to Fall
The Bitcoin reserves on exchanges are falling, which reflects that retail investors might be accumulating bitcoin. According to data from CryptoQuant, all exchanges’ reserves dropped to 2.4 million BTC, which is equivalent to $25 billion. This compares to reverse levels that were seen in October 2019, where all exchanges had around 2.8 million BTC, currently worth $30 billion. The decline in the reverse of BTC is approximately 5-billion.
The bitcoin reserves on exchanges rise when investors deposit Bitcoin on an exchange and decline when they are purchased off an exchange. Deposits of bitcoin on exchanges reflect selling pressure as investors are purchasing sovereign currency and selling BTC. This is because traders have to send BTC to exchanges to sell the cryptocurrency. So, when exchange inflows of BTC begin to decline and reserves begin to fall it describes a situation where investors are less interested in selling BTC. According to CryptoQuant, during the past 8-weeks, net inflows have contracted by approximately 20,000 BTC per month. Net inflows dropped sharply as BTC sharply rebounded.
The technicals show that BTC/USD is consolidating just below resistance near the 10-week moving average at 11,100. Support is seen near the 50-week moving average at 8,919. The 10-week moving average crossed above the 50-week moving average which means that a medium-term uptrend is in place. Volatility has declined and is now near the lowest levels seen in 2020. The Bollinger bandwidth has contracted which means that volatility in bitcoin trading has declined substantially.
Short-term momentum has turned positive as the fast stochastic generated a crossover buy signal. The fast stochastic is a momentum oscillator that measures accelerating and decelerating momentum. It also measures overbought and oversold levels. The current reading of the fast stochastic is 53, in the middle of the neutral range which reflects consolidation.
Medium-term momentum has turned negative as the MACD (moving average convergence divergence) index generated a crossover sell signal. This occurs as the MACD line (the 12-week moving average minus the 26-week moving average) crosses below the MACD signal line (the 9-week moving average of the MACD line). The MACD histogram has also generated a crossover sell signal moving below the zero-index line. The MACD histogram is printing in the red with a downward sloping trajectory which points to lower prices.
The Bottom Line
The upshot is that investors appear to be bearish US dollars and accumulating bitcoin. The CFTC commitment of traders reports showing that asset managers are continuing to bet that the dollar is going to decline, and reserves on exchanges are declining which shows that investors are purchasing bitcoin and now selling back to the exchanges. The decline in riskier assets during September has weighed on bitcoin and has helped buoy the US dollar which has acted as a safe-haven. The technicals show that the trend in BTC/USD is positive, as a moving average crossover recently occurred but momentum is negative as the MACD recently generated a crossover sell signal. This scenario likely points to continued short-term consolidation.