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How Has Bitcoin Faired During the Coronavirus Crisis?

The coronavirus has hammered global economic output and created a risk-off environment. Stocks, commodities and even cryptocurrencies have fell prey to the deadly virus. While bond prices have surged, around the globe, it has been the US dollar that has immerged as the currency of choice. Volatility has also returned to the currency markets. The dollar has whipsawed up and down at least 5% over the past 4-weeks. This has led to volatility for bitcoin, which tumbled more than 60% in March, only to rebound 67%.

Bitcoin is Viewed as a Risk Asset

Bitcoin along with Ethereum and Litecoin was rocked in March, but the decline in the exchange rate began to fall in February as the coronavirus spread throughout China. Crypto trading fell off a cliff in mid-March dropping from 8,000 to 5,000 in one day. A 38% decline in one trading session is nothing to sneeze at and while prices have retraced more than half of the losses, the damage to price action will be hard to recapture.

Ahead of the decline which started in February, bitcoin had rallied in tandem with global stock markets. The upward momentum and then quick reversal lead one to believe that the market view bitcoin as a risk asset. 

The dollar Remain Strong

While bitcoin has declined reverse most major currencies, most of the damage is in US dollars. This is because the dollar index, which is a basket of currencies versus the US dollar, has increased by approximately 5% since March 1, 2020. The dollar has become the defector risk-off asset, and therefore assets that are priced in US dollars, have suffered. The rise in the dollar is from asset rotation out of riskier assets and into dollars. 

The dollar has also been very volatile. Implied volatility on the dollar versus the Euro, which makes up approximately 28% of total forex trading, surged up to 19% in March up from 6% in mid-February. Implied volatility measures how much options traders believe the exchange rate of the EUR/USD will move over the next year. The spread of the coronavirus has buoyed implied volatility which has more than doubled during the past 6-weeks.

The Technicals

The technicals point to additional headwinds for BTC/USD. Prices have rebounded sharply after tumbling in mid-March. Prices are now hovering near former support which is now resistance near 6,750. A close above this level for a few weeks would signify that prices have recovered their potential upward trend. The downward trend in the 20-day moving average has decelerated and now appears to be forming a bottom. There is likely strong resistance near the 50-day moving average at 7,716. 

Medium-term momentum is upward sloping. The MACD (moving average convergence divergence) histogram has recently generated a crossover buy signal. The index crossed above the zero-index level with an upward sloping trajectory which points to accelerating positive momentum. The relative strength index (RSI) has rebounded from extremely oversold territory in mid-March which points to accelerating positive momentum. The trajectory has slowed, which could lead to additional consolidation.

Short term momentum has turned negative, as the fast stochastic generated a crossover sell signal. This points to accelerating negative momentum.

The Bottom Line is that a strong dollar and the lack of risk-on sentiment will likely weigh on BTC/USD until the coronavirus clouds clear. The technicals are mixed, and though medium-term momentum is positive, short term momentum is negative. This mixed picture and the recent rebound in prices should keep many traders on the sidelines until a clear picture is observed.

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