A Worrisome Gold Warning Puts Bitcoin At Risk of Plunging; Here’s How

Bitcoin was trading lower ahead of the New York opening bell Friday as the US dollar rebounded despite its prevailing bearish setup.

As of 0649 EST, BTC/USD was changing hands for $10,289, down 0.53 percent from its daily open. The pair surged during the Asian and European session as a strengthening EUR/USD kept dollar bulls at bay. Investors bought euro as the European Central Bank left its existing monetary policy unchanged on Thursday.

Prospects of a weak US economic recovery also pressured the dollar, a move that benefited the safe-haven assets. Gold, for instance, rose in the early Friday session, with its spot rate rising 0.3 percent during the European trading session. Bitcoin, like Gold, surged on similar sentiments.

BTCUSD is trading inside a considerably narrow trading range. Source: TradingView.com

Dump Ahead?

But skeptics doubted whether the rally in safe-haven markets would extend any higher, especially as the US stocks experience sell-offs at their local tops. James Hyerczyk of FXStreet noted that investors are more likely to offset their losses in the stock market by dumping their profitable gold positions. By doing so, they would either move back to the US dollar or cover their margin calls.

The analogy borrowed fat from March 2020, a month that saw investors dumping their safe-haven positions to seek cash. It also impacted Bitcoin, a perceivable hedging asset, that lost more than 60 percent of its market capitalization in just two days of trading.

Mr. Hyerczyk didn’t mention Bitcoin, but the risks he discussed kept the cryptocurrency under the risk of extended downside trends.

Enough Liquidity for Bitcoin

The only thing that separated the March 2020 crash from today was the involvement of the Federal Reserve and the US government. They ensured that the market does not run out of dollar liquidity by introducing aggressive stimulus measures.

While the Fed committed to purchase bonds endlessly and cut interest rates to near zero, the US Congress dispatched a whopping $2 trillion aid to help the American households and individuals through the COVID19 pandemic.

Gold and Bitcoin traders are now watching policymakers introduce the second round of stimulus. Nevertheless, negotiations between the Republicans and the Democrats have hit a wall over the size of the aid. That has further strengthened the US dollar for the short-term.

The result is a Bitcoin market in a bias-conflict. The cryptocurrency has failed to establish a breakout move below $10,000 and above $10,400 in the last six daily sessions. It means that traders are watching as to where the negotiations reach in the near future.

That leaves the safe-haven asset like gold and Bitcoin under the influence of the US stock market.