Crypto Wobbles, with more 'Puts' than 'Calls'; Dollar Ticking Down

CryptoCorner

For Bitcoin and other cryptocurrencies, May was the cruelest month.

Prices plunged after a series of tweets from Tesla CEO Elon Musk and increased scrutiny from governments worldwide.

Prices have recovered from the lows, but investors remain cautious.

Genesis Volatility Newsletter said "puts" outnumber "calls" in the option market, creating an "interesting opportunity" for gutsy investors willing to buy the dip in Bitcoin's price.

A "put" option gives the holder the right to sell while a "call" secures the right – but not the obligation—to buy at a future date. Option volume is down from its previous high, suggesting the market has calmed—at least for now.

However, option traders have priced in "spot price consolidation" and this suggests the market won't quickly roar back but will instead trade within a narrow range in the immediate future.

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"While a number of more negative tweets from Elon Musk contributed to the decline [in cryptocurrency values], the main cause has been the increasingly negative tone from authorities across multiple countries towards crypto-assets," Jim Reid, a strategist for Deutsche Bank in London, said in a research report. In the photo, a woman with a umbrella passes a logo of Deutsche Bank on January 29, 2013 in Frankfurt am Main, Germany. Thomas Lohnes/Getty

"Cryptocurrencies were best avoided in retrospect, with one of the biggest stories (in May) being a major collapse in their price," Jim Reid, a strategist for Deutsche Bank in London, said in a research report. "While a number of more negative tweets from Elon Musk contributed to the decline, the main cause has been the increasingly negative tone from authorities across multiple countries towards crypto-assets."

The price collapse has raised questions about the future of crypto, he said.

"In turn, this is raising questions as to their long-term viability and has put strong downward pressure on valuations," Reid said. "As a result, Bitcoin plummeted by 35.4% in May, marking its worst month since November 2018, and other cryptocurrencies including Ethereum (-5.9%), XRP (-37.0%) and Litecoin (-31.6),similarly fell back."

The crypto "Fear & Greed Index" registered "extreme fear." A month ago, it registered "extreme greed."

"Extreme fear" may indicate that investors are overly concerned about future price movement. This could mark a buying opportunity for long-term investors willing to accept short-term manic price swings.

"Extreme greed" may indicate a frothy market due for a correction.

The index reviews volatility, market volume, social media, trends and Google searches for "Bitcoin" to assess the current state of the market. It's a gauge of market sentiment—not an algorithm intended to forecast future pricing.

In broad terms, the Fear & Greed Index accurately sized up the crypto market prior to and during the recent downturn.

New York Digital Investment Group (NYDIG), a subsidiary of Stone Ridge, a $10 billion alternative asset manager, said a "large portion" of those who sold during the market correction had held Bitcoin for one to six months.

This suggests some neophytes panicked during the downdraft and sold in an attempt to cut their losses. Bitcoin's value dropped about $4.5 billion on May 19, the largest single daily loss ever reported.

The day before, electric carmaker Tesla said it would no longer accept Bitcoin as payment. In a following series of ambiguous tweets that further rattled the market, Musk appeared to say the company had sold some of its $1.5 billion investment in Bitcoin. It hadn't.

At the deepest point in the downdraft, Bitcoin fetched about $30,000 and was off nearly 54% from its high. But long-term investors—those who buy-and-hold Bitcoin as a bet on future price gains—generally sat tight.

"Movement from long-term holders, those that have owned Bitcoin for more than one year, were subdued, indicating they did not rush to sell coins," Greg Cipolaro, NYDIG's head of research, said in a report. "On-chain analysis reveals that transactions from long-term holders ticked up during the sell-off, but just slightly. Our opinion is that long-term holders were largely unaffected by the price action and continued to hold."

China announced that it would clamp down on Bitcoin mining operations, but this apparently had little effect on the cryptocurrency's price, NYDIG said. Some miners sold a small portion of their Bitcoin, but volume totaled just 0.04% of total holdings, the researcher said.

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In this photo illustration, a visual representation of Bitcoin cryptocurrency is pictured on May 21, 2021 in London, England. Mark Case/Getty

"The past few weeks have exhibited extraordinary volatility on the back of numerous news items," Cipolaro said. "Based on our analysis of blockchain data, it appears that most of the selling was due to short-term holders, while long-term holders remained relatively unfazed."

Cipolaro said that crypto investors who are it in for the long haul aren't bailing out.

"Our interpretation of that dynamic is that for long-term holders, the case for Bitcoin remains unchanged despite the short-term market volatility.," he said. "The China news seems to have gotten more attention than the underlying trends suggest."

It's unclear what May's downturn means for Bitcoin's future.

The price of Bitcoin fell about 70% between December 2017 and February 2018, dipping below $6,000. Major investors and institutions then moved into Bitcoin, sending its price higher.

MicroStrategy is often credited with sparking the last bull market, and Musk had a hand in both bolstering the rally and gutting it. Do investors want to hold an asset that can be heavily influenced by a few, especially a charismatic, if sometimes slightly uneven, entrepreneur like Musk?

The optimistic view is that Bitcoin is maturing as an asset and the influence of any one investor or institution will diminish over time. Some analysts believe Bitcoin may yet climb above $100,000 before retreating into a "crypto winter" or prolonged downturn.

It's hard to chart Bitcoin's future trajectory because as one analyst said, the crypto is held aloft by the "Tinkerbell effect." The real crunch may come from increased regulation worldwide, simply because governments don't want to give up their monopoly on issuing money.

If so, Bitcoin's strength, and its fatal flaw, or at least its unpardonable sin, may be that it operates independently of the government.

In mid-day trading Tuesday, Bitcoin changed hands at $36,243.75, down 1.92% in the last 24 hours but up 24.48% for the year. The 24-hour range is $35,715.74 to $37,908.96. The all-time high is $64,829.14. The current market cap is $678.59 billion, CoinDesk reported.

MarketPulse

The Personal Consumption Expenditures (PCE) index, or prices excluding food and energy, rose 3.1% in April—the largest annual increase since July 1992.

Consumers expect prices to go higher.

The University of Michigan's survey of consumer sentiment showed one-year inflation expectations increased to 4.6% in May from 3.4% in April. In short, the public expects inflation to outstrip the Federal Reserve's target of 2% in the immediate future.

Federal Reserve headquarters in Washington, D.C.
Federal Reserve headquarters in Washington, D.C. Smith Collection/Gado/Getty Images

Deutsche Bank said silver and gold were the top performing assets in May as investors bought the precious metals to hedge against inflation.

The dollar has fallen about 3% since March. A weak dollar means its value declines when compared with other currencies, especially the euro.

On Tuesday, the dollar fetched 0.82 euros.

A declining dollar buys a smaller amount of foreign goods and raises prices at home. But it also means that U.S. exports are cheaper and boosts domestic manufacturing.

A nation that imports more than it exports typically favors a strong currency. The U.S. consistently runs a trade deficit and imports more than it exports.

The Federal Reserve, the nation's central bank, will hold its next regularly scheduled meeting June 15 and 16 and is likely to offer insights on its response to inflation.

The Fed held rates low to support the economy during last year's lockdown and to spur the recovery this year. It expects inflation to exceed its target, but believes the increase will be "transitory" and is largely the result of restarting the economy.

Many consumers are now dipping into their savings and buying big-ticket items. Kinks in the supply chain have limited the flow of goods and driven up prices amid strong demand.

Consumer spending represents about two-thirds of the U.S. economy.

If economic growth remains strong, the Fed could reduce bond purchases. While important to the overall economy, the action probably wouldn't mean much to the general public because most people are focused on the value of the money in their pocket.

The U.S. Bureau of Labor Statistics will release its monthly payroll report Friday. Wall Street analysts expect 650,000 jobs to be added, but only 266,000 jobs were added in April—well below the 1 million anticipated.

The job miss eased pressure on the Fed to raise interest rates to cool what some feared would be an overheating economy.

The U.S. Energy Information Administration (EIA) said gasoline prices in May rose $1.14 a gallon from a year ago and were the highest since 2014. Nationwide, the price of unleaded regular gasoline averaged $3.02 a gallon.

The EIA expects the nation's gross domestic product, the value of all goods and services, to be 8.5% higher this summer compared with last summer. That means higher demand for fuel.

Gasoline consumption dropped 14% during the COVID-19 pandemic as personal driving and commuting fell, but use of diesel fuel declined only 8%.

The EIA expects demand for diesel fuel to increase 11% from last year as the economy rebounds. Gasoline consumption may not rise as sharply because more people are working from home.

Stronger demand for fuel will boost prices and higher freight transportation costs are likely to send consumer prices higher.

In early trading Tuesday, the price of West Texas Intermediate Crude, the guide for U.S. prices, rose 2.71% or $1.80 to $68.12 a barrel.

On a year-to-date basis, oil was the best performer as investors bet on higher demand as economies worldwide reopened after the COVID-19 lockdown, Deutsche Bank said in a research report.

If rising inflation and the falling dollar have got you down, here's a feel-good statistic: The dollar traded at 19.88 Mexican pesos Tuesday.