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Rainbow and Stay Home Stay Safe chalk drawings on pavement during Covid19 in UK.

On Thursday, bitcoin price dropped approximately 8% off the back of equities falling the furthest since March following fears of a second wave of COVID-19. Furthermore, the day prior, the Fed Chair Jerome Powell stated his intention to keep interest rates close to zero through 2022, while pumping at least $120 billion a month into the financial system for the foreseeable future, which spooked the V shaped recovery expectation.

If the economy has to operate at less than full capacity for an extended period of time from COVID-19, several high profile macro strategists like Raoul Pal expect the end of the relief rally (V shape recovery hopes) before transitioning into an insolvency crisis, i.e. firms will not have the cash flow to service their debts if the global economy remains hampered by COVID-19.

Pal stated that, Bond yields are about to sound the fire alarm for The Insolvency phase and the end of The Hope phase. Bond yields are the truth. Keep an eye on this.

Bloomberg.com

Pals warning signal is bond yields sliding into negative territory, signaling deflation and increasingly extreme monetary and fiscal measures enacted to stave off the destructive tide of dollar swelling.

In 2020, the persistent question of whether bitcoin has transitioned to a true store of value asset from a risk asset, has been on full display. The general proxy market participants look at is the correlation between bitcoin and S&P 500. The correlation was elevated in early 2020, dissipated after the liquidity crunch, and has since re-coupled considerably, spiking to near all-time highs.

Skew.com

The tandem plummet of bitcoin and equities has re-ignited risk asset claims again, i.e. if equities continue to decline, so will bitcoin. The simplest way to analyze this notion is by looking at bitcoins data metrics and long-term resiliency, and overall economic outlook.

Bitcoin is 100% being used as a store of value by citizens and market participants around the world, including Paul Tudor Jones. However, it still tracks risk asset movements given its transition to preferred store of value (displacing Gold) is still underway. Its nascency, coupled with panic selling during insolvency phases, could produce price weakness for bitcoin in the short-term.

Hurst Exponent, a measure of market momentum, has fallen from 0.70 to 0.69, but remains elevated despite recent price weakness. A value above 0.65 signifies a reversal in bullish momentum whereas a value of 0.35 signifies a reversal in bear momentum.

At the time of writing, Hurst appears to be in the initial phases of rolling over, which would produce further downside for bitcoin price.

Valiendero Digital Assets, blocktap.io

Additionally, hourly estimated volatility has risen slightly from 24 basis points to 24.4 basis points. The increase is too small and early to offer a declarative signal, but volatility might be in the early stages of expansion. This notion coupled with the current Hurst value, appears to be signaling that further downside is on the horizon.

Valiendero Digital Assets, blocktap.io

The current data metrics are suggesting that bullish momentum for bitcoin is waning. This notion coupled with economic fears might continue to drag bitcoins price down in the short-term.

The mere fact that bitcoin is still alive given how far it has come in such a short period of time without any governmental assistance or corporate preferential treatment, i.e. a true grassroots adoption campaign, is remarkable. A principal contributing factor is bitcoins viral narrative properties which have translated into real-life economic resiliency.

Bravenewcoin.com, Fox-Lent, Cate & Bates, Matthew & Linkov, Igor. (2015).

In particular, global markets over the past decades have become increasingly fragile given their interconnectedness, complexity, and persistent government intervention.

Bravenewcoin.com, OECD, Resilience Strategies and Approaches to Contain Systemic Threats

Historically, bitcoin has proven to be quite resilient in terms of recovery and absorption (top left corner), whereas traditional financial assets have drifted further towards the bottom right corner.

Thus, bitcoins price may fall in the interim given its data metrics and potential economic headwinds, but its resilience, especially amidst zero government assistance, suggests its store of value utilization will only be expedited in the longer term.

The author owns bitcoin and ethereum at the time of writing.

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COVID-19 And Jerome Powell Will Test Bitcoin's Resilience - Forbes