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A Strengthening Renminbi Casts Further Bullish Spells on Bitcoin

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A robust exchange rate policy by the Chinese leaders has prompted the renminbi to log its best quarter in 12 years. And it may help Bitcoin surge as well.

The onshore renminbi added approx 4 percent in the three months ending September 30, its best since 2008. Meanwhile, its offshore counterpart gained more than 4 percent, signaling further weakening of the US dollar against the euro and other major currencies.

China’s preference for a weaker renminbi has inversed in the wake of the coronavirus pandemic. The second-largest economy is now looking to develop the domestic consumption market. Analysts, including Essence Securities Chief Economist Gao Shanwen, said that yuan, a unit of the renminbi, would appreciate further.

“In the future, the yuan will enter a longer process of appreciation,” he said. “Maybe it will start soon.”

Renminbi Predicts the US Dollar Crash

Timothy Moe of Goldman Sachs also sees the renminbi strengthening to 6.5 per dollar in the next 12 months. The chief Asia-Pacific equity strategist credited the US dollar’s “structural period of weakening” for boosting yuan’s demand in global markets, calling it a “loss of US exceptionalism.”

Mansoor Mohiuddin, the chief economist at the Bank of Singapore, said in his latest op-ed that China’s growing trade imbalance with the US made the renminbi a de-factor indicator to gauge the dollar’s strength. In retrospect, if China’s currency rise, then it signals that the US economy is attracting fewer capital inflows.

The Chinese Yuan strengthens against the US dollar. Source: TradingView.com

The signs are already on the horizon. In the last 18 months, the Chinese government has increased its efforts to allow more foreign institutions to pour money into its domestic market. The coronavirus pandemic has further accelerated those inflows, given the rising yields on 10-year Chinese government bonds.

In contrast, the US 10-year Treasury is returning lower yields due to the Federal Reserve’s near-zero interest rate policy.

“It does look as if Chinese government bond yields will stay higher than developed markets’ bonds,” said Mr. Mohiuddin, citing the lower size of monetary stimulus provided by the Chinese government against the coronavirus pandemic.

That expects to create further downside pressure on the US dollar.

BTC to Benefit?

Analysts at Morgan Stanley predict that the renminbi’s share in the global reserve currency circuit could increase from 2 percent to 10 percent in the next decade. Meanwhile, with the US fiscal deficit rising, people anticipate a stronger bearish bias in the US dollar market.

Sitting as a bystander of the so-called currency war is Bitcoin, a decentralized cryptocurrency that also serves as a hedge against falling traditional markets. Its exchange rate against the US dollar surged by 200 percent amid the pandemic, much higher than the renminbi.

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BTC/USD is trading upwards towards $11,000 in a choppy session Thursday. Source: TradingView.com

Bitcoin is likely to benefit from a stronger renminbi, given the Chinese currency keeps building downside pressure on the US dollar. Investors with huge exposure in the greenback may choose the scarce cryptocurrency to park their funds.

Read further: MicroStrategy Stock Jumps 9% Following Bitcoin Investment; Red Flags Ahead?



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3 things traders are saying about Bitcoin and the state of the bull market

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Bitcoin’s (BTC) dip below $29,000 on June 22 rocked the markets a handful of analysts to call for a potential drop below $20,000. 

Many traders on crypto Twitter were focused on the formation of a death cross on the Bitcoin chart as an omen for another potential drop in the price but analysts with a more contrarian point of view look at this chart pattern as a signal that it is time to buy the dip. 

Three reasons why some traders still see a bull case for Bitcoin include the appearance of the “spring” stage of the Wyckoff accumulation model, steady buying by long-term holders and the formation of a bear trap at the golden ratio that is similar to moves seen during previous bull runs.

The Wyckoff model says spring has arrived

The Wyckoff accumulation model has been all the rage amongst cryptocurrency analysts over the past month as the price action for Bitcoin has been tracking the pattern relatively closely since the May 19 sell-off.

As seen in the tweet above, Bitcoin’s plunge below $29,000 and the subsequent recovery above $32,000 has some analysts suggesting that the “spring test” seen in phase C of the Wyckoff pattern has been fulfilled. This would indicate that the bottom is in for the current correction and now begins the choppy climb higher.

If this turns out to be true, BTC would enter phase D, also known as the “markup phase” where a new uptrend is established and “pullbacks to new support offer buying opportunities” that are often seen as opportunities to buy the dip.

Related: Bitcoin drops below $36K as century-old financial model predicts big BTC crash

In phase D a breakout to new highs is expected as the cycle completes and prepares to potentially begin again once the move higher is exhausted.

Long term holders are still bullish

Another bullish sign cited by analysts is the steady accumulation by long-term holders.

The Bitcoin long-term net holder position shows that investors actually began to reaccumulate back in late April and they began to significantly increase their activity in May as the price fell into the $30,000 to $40,000. On-chain data shows that these investors have continued to buy into the most recent dip.

This activity suggests that more experienced crypto traders are familiar with Bitcoin’s market cycles and view the current range as a good level to open long positions when fear is high and the sentiment is low. 

The biggest rewards go to those who take the risk to buy an asset amid plunging prices and sentiment, and these are the types of situations where the contrarian traders thriv.

A bear trap lurks at the golden ratio

The third scenario some analysts are focusing on suggests that the current price movements have set up a bear trap that echoes a move seen during the last cycle which involves a pullback to the 1.618 golden ratio extension level which will then be followed by a breakout to new highs.

From this perspective, the market is currently in the awareness phase of the four psychological stages of asset bubbles. After the bear trap occurs, Bitcoin will enter the mania phase where widespread media coverage attracts the attention of new market participants who then chase the price to ever-increasing heights “based on the delusion that the asset will keep going up, forever.”

Previous calls for the possibility of Bitcoin reaching a price of $200,000 by the third or fourth quarter of 2021 by veteran trader Peter Brandt, who was far from alone in predicting its value to surpass the $100,000 mark this year, would suggest that the long-expected blow-off top is yet to come.

The views and opinions expressed here are solely those of the author and do not necessarily reflect the views of Cointelegraph.com. Every investment and trading move involves risk, you should conduct your own research when making a decision.