Bitcoin: The Case for ‘Digital Gold’ Strengthens as Bond Markets Flash Recession Warning

Bitcoin’s status as global safe haven strengthened this week, as the largest and most influential cryptocurrency maintained its value in the face of trade turmoil, plunging stocks and inverted yield curves.

Astonishingly, bitcoin is the only cryptocurrency in the top five to report gains this week and one of only three in the top 15 to do so. While bitcoin’s dominance is good for long-term holders of the virtual asset, it’s coming at the expense of alternative coins, which have seen their market share dwindle to just over 30%. According to Max Keiser of the Keiser Report, it’s only a matter of time before altcoins die.

Bitcoin Dominance Approaches 70%

To say that bitcoin was the best-performing cryptocurrency of the past seven days would be a huge understatement. The cryptocurrency is up more than 12% over that stretch, with each rally bringing it closer to $12,000. Bitcoin traded above that level multiple times this week, including a high print of $12,325 on August 6.

For the bulls, a clean break above $12,000 is needed to keep the market moving higher. If bitcoin faces rejection at this level, it would mark the the second consecutive lower high since June.

The bitcoin price is trading above $11,700 on Bitstamp Friday morning. | Source: TradingView.

Bitcoin’s allure as a safe haven is not only expressed by its underlying price, but by the share of the cryptocurrency market it controls. The so-called BTC dominance rate, which charts the percentage of total market capitalization held in BTC, peaked near 70% on Friday, its highest in over 28 months.

Bitcoin’s share of the cryptocurrency market continues to grow. | Source: CoinMarketCap.

Earlier this week, Max Keiser tweeted that it’s only a matter of time before BTC dominance hits 80%.

“Don’t be the last to rotate out of alts into BTC,” Keiser said August 6.

Bitcoin’s sustained breakout pushed the cryptocurrency market cap closer to $320 billion on Tuesday. By Friday, the market was valued at just over $302 billion, up $17 billion for the week.

Outside of bitcoin, Binance Coin and Monero, the net contribution from the top cryptocurrencies was overwhelmingly negative.

Top-20 coins by market cap. | Source: CoinMarketCap.

Bitcoin and Gold Move in Lockstep

Bitcoin has proved its worth in the face of central-bank stimulus, global trade wars and plunging stock markets. Now, it’s trading in lockstep with physical gold for the first time in three years.

That’s the central thesis of a new report by Bloomberg titled “Bitcoin Is Dancing in Tandem With Gold Again.”

Using correlation coefficients, where 1 indicates that assets move in perfect lockstep and -1 that they move in exact opposite directions, Bloomberg found the correlation between bitcoin and gold to be 0.496 over the past year. In the last three months, the number spiked to 0.827.  Since May 8, the two assets have moved in lockstep with one another 58% of the time.

For the first time in three years, bitcoin and gold are moving in tandem with one another. | Source: Bloomberg Markets.

The report, authored by Tim Culpan, concluded with the following:

“Sixty-six days of trading data may not be statistically significant, but that doesn’t mean this should be ignored. The evidence is growing that investors – rightly or wrongly – see Bitcoin as a refuge in times of turbulence.”

Gold surged past $1,500 a troy ounce on Wednesday for the first time in over six years. It eventually peaked at $1,519.60 a troy ounce on the Comex division of the New York Mercantile Exchange.

Bond Markets Send Strong Recession Warnings

One doesn’t have to look very far to understand why assets like gold and bitcoin are moving in tandem with one another. Bond markets from Germany to the United States are sending a strong signal that the global economy is barreling toward recession.

For the first time ever, Germany’s entire yield curve is in negative territory. The 30-year Bund yield was the last domino to fall, with analysts warning of a steeper dive into negative territory.

Germany’s entire yield curve is in negative territory. | Source: Bloomberg.

In the United States, the yield curve everybody is worried about is close to flashing its biggest recession warning since the financial crisis. The plot of U.S. interest rates is sloping ever downward, threatening to drag the 10-year U.S. Treasury rate below the 2-year rate. Bank of America warns that this inversion is a “harbinger of elevated recession risks.”

Bond-market volatility is a reflection of investor anxiety over U.S.-China trade tensions, a slowing global economy and central-bank capitulation. On Monday, those fears drove the U.S. stock market to its worst trading day of 2019.

The Week Ahead and Things to Consider

Although bitcoin hasn’t achieved the status of global safe haven yet, its recent performance suggests investors are using it as a hedge against risk. For many investors, this may seem paradoxical given bitcoin’s extreme volatility relative to traditional assets. (Interestingly enough, bitcoin volatility has been declining, not rising, over the years.)

Volatile or not, there’s no disputing bitcoin’s performance over the past ten years. If central banks are committed to destroying the purchasing power of their currencies, assets like bitcoin will become more valuable over time.

Disclaimer: The author owns Bitcoin, Ethereum and other cryptocurrencies. He holds investment positions in the coins, but does not engage in short-term or day-trading.

Featured image courtesy of Shutterstock. Charts via TradingView and CoinMarketCap. 

Chief Editor to and Contributor to, Sam Bourgi has spent the past nine years focused on economics, markets and cryptocurrencies. His work has been featured in and cited by some of the world's leading newscasts, including Barron's, CBOE and Forbes. Avid crypto watchers and those with a libertarian persuasion can follow him on twitter at @hsbourgi