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(Kitco News) – Amid deteriorating global economic conditions and despite a last-minute debt deal that prevented a shutdown of the U.S. government for at least 45 days, the yield on the U.S. 10-year Treasury note climbed above 4.765% for the first time since August 13, 2007 on Tuesday.
While rising yields are often a sign that the economy is growing strong and investors are more willing to take on risk and less interested in holding safe-haven assets like T-bills, the latest bout of higher yields is partially driven by bond sales by the Federal Reserve to fund U.S. government expenses, and investors are starting to demand a better return for the growing risk they are taking as U.S. debt has now surpassed $33 trillion.
As yields rise, many investors have seen this as a great opportunity to secure relatively “risk-free” gains in excess of what is offered by savings accounts at banks, prompting some to reshuffle their portfolios away from risk assets, which is a potential threat to a cryptocurrency market that has been struggling to gain momentum as of late.
According to David Waugh, lead analyst at Coinbits, “Since its inception over a decade ago, Bitcoin (BTC) has primarily existed in an environment characterized by artificially low interest rates, making it attractive in a yield-starved world.”
As such, the Fed’s aggressive rate hike campaign, and the subsequent increase in Treasury yields, “present a new landscape for Bitcoin and the broader altcoin universe,” Waugh said.
“While the natural anticipation was for Bitcoin and other cryptocurrencies to recede in light of rising bond yields, we’ve observed solid resistance, especially when juxtaposed with assets like gold, which experienced a sharp decline last week as 10-year yields surged,” he said.
Waugh suggested that if the Fed continues to increase rates, “higher yields might entice more investors to pivot from Bitcoin and less established altcoins toward treasuries.”
“However, it’s worth noting that recent downgrades by rating agencies concerning America’s creditworthiness, combined with a diminishing appetite among foreign central banks for treasuries, might signal a shift in the longstanding perception of treasuries as a ‘risk-free’ asset,” he said. “On the flip side, Bitcoin and altcoin market sentiment is optimistic, underscored by the potential approval of Bitcoin ETFs – an eventuality made more plausible by the Grayscale ruling and recent Congressional statements toward SEC chair Gary Gensler.”
When compared to “strained commercial bank balance sheets and a federal government grappling with burgeoning debt,” Waugh said Bitcoin’s prospects “appear particularly robust,” and also pointed to next April’s halving event as “another bullish catalyst for Bitcoin that altcoins don’t have.”
“Overall, while rising 10-year yields may exert transient downward pressure on Bitcoin and altcoin prices, intrinsic and extrinsic factors suggest that Bitcoin’s resilience in the face of broader asset volatility bodes well for its future trajectory,” Waugh said.
Mark Venables, owner of The Crypto Merchant, said that while the higher Treasury yields may attract more investors, he doesn’t think crypto holders will dump their digital assets for fixed rates. “It’s cyclical,” he said. “Everyone is expecting 2024 to be the start of the bull run. People won’t forgo crypto, especially if they’ve held out the last two years.”
If the economic situation got to the point where crypto investors needed to sell their assets, Venables said altcoins would likely suffer the brunt of the selling as “People tend to get out of altcoins before mainstream tokens like BTC.”
Bitcoin and the broader crypto market traded higher on Monday after the U.S. government managed to avert a shutdown over the weekend, but the rally was short-lived, as cryptos joined the majority of other assets in heading lower by late Monday afternoon, with the asset sell-off intensifying on Tuesday.
“You can see higher yields impacting non-yielding assets such as Gold today,” said Greg Magadini, head of derivatives at Amberdata. “We saw a massive selloff in risk assets and precious metals as yields rose higher. Although this hasn’t been reflected in BTC yet, it is a headwind that is counteracting hopeful aspirations for a BTC ETF.”
Magadini said that while macro developments aren’t helping the crypto market, it has been supported by industry news, such as the uptick in institutional interest as evidenced by a flurry of crypto-related exchange-traded fund applications.
“Overall I think higher yields will prevent BTC from making new 2023 highs, even if the BTC Spot ETF is approved,” Magadini said. “It’s more likely that any approval will lead to a quick rally that is quickly sold back down, as the Macro environment remains unattractive for risky investments due to higher risk-free yields.”
According to Christopher Alexander, chief analytics officer at Pioneer Development Group, the “incredible returns” crypto has offered to investors have resulted in “BTC, and to a lesser extent, the rest of the market” acting like a liquidity sponge.
“Every time rates stabilize or are cut you see upward movement for the crypto market as new money comes into HODL coins,” Alexander said. “When bond rates rise, this is often accompanied by lower liquidity levels. There is now a perfect storm brewing here. If returns on bonds are as high 20%, as UBS estimates, crypto faces a lack of liquidity and an attractive bond market.”
“For the crypto true believers and those looking for 2x, 4x, and higher returns, the crypto market will remain attractive,” he said. “But the lack of liquidity the bond returns represent, as well as the completely safe and secure returns the bonds offer, may lead to no sooner than a spring thaw next March or April for the crypto winter.”
Akash Mahendra, director of Haven1 Foundation, said there is a growing trend in the world of crypto that centers around the pursuit of the highest yields, which “has the potential to reshape the landscape to both traditional and digital financial markets.”
“The appeal of higher yields is without a doubt, tempting,” he said. “As conventional markets offer tried-and-tested treasury bonds, with the 10-year Treasury now spiking at a 16-year high, these higher yields could potentially reduce the attractiveness of risk assets such as crypto and equities.”
But he suggested that there was more behind the weakness in crypto than investors seeking risk-free yields, including the rising cost to borrow, uncertainty over the trajectory of market increases, and the fact that “Many simply hodl Ether, not just for the yield but because it has a strong investment thesis centered around potential future price appreciation.”
Mahendra said that rather than sell their cryptocurrencies, a different trend is emerging where crypto investors are “moving their stables out of the digital realm to purchase treasury bonds. This shift indicates a broader financial landscape where stability and security are much sought after to avoid increasing volatility,” he said.
He noted that the total value locked (TVL) in decentralized finance (DeFi) currently stands at $38.5 billion, which is “significantly lower than in previous years,” and said he found it “even more intriguing that a substantial portion of stables, worth $124 billion, isn’t even involved in DeFi protocols – which raises many questions over the direct impact of DeFi itself.”
Mahendra also highlighted how crypto projects can take advantage of higher Treasury yields.
“Projects that hold significant cash reserves could find themselves in a favorable position by parking their assets in treasuries,” he said. “Protocols such as Maker (MKR) and Frax (FXS) stand to gain due to the fact that a portion of their protocol treasuries are invested in Treasury bonds.”
Ashton Addison, founder and CEO of Crypto Coin Show, said it is “unlikely” that a majority of crypto traders holding altcoins would dump their tokens, “especially in market conditions like this (what some would consider mid-bear market or a local bottom for altcoins) for multiple reasons.”
“First of all, those invested in altcoins understand they are higher risk, higher reward,” he said. “They want risk because they want to win big. Switching to risk-free yields is like taking your current strategy and then doing the exact opposite.”
“Second, there’s a category of altcoin and overall cryptocurrency holders looking for a decentralized future, one particularly that doesn’t involve them investing their money in the government rather than a decentralized protocol, another paradox,” he said. “There are however cryptocurrency investors that come from the traditional investing world, the macroeconomic investors, that are well diversified out of crypto and have been investing since before crypto even existed. These investors may allocate slightly more of their portfolio to T bills and bonds when the rate goes up, and out of risk on assets, but I doubt they would exit altcoins completely.”
Addison said the fate of altcoins largely depends on “the current state of Bitcoin and its stage of the market. While Bitcoin is expected to provide good returns in ‘Uptober’ (October) and Q4, I’m skeptical that it will provide an industry-wide ‘alt season’ this quarter,” he said.
“As the U.S. dollar loses its purchasing power, other developing nation currencies experience even greater inflation (Latin American countries for example), and citizen of inflating countries look for other ways to preserve their wealth,” he said. “This makes Bitcoin a very appealing option. The prime example of El Salvador making Bitcoin legal tender for the country and then experiencing double-digit GDP growth and overall improved well-being of the nation is a great example.”
He said that as Bitcoin adoption grows, people will “trickle more into the altcoin space, as Bitcoin acts as the main gatekeeper into learning about altcoins and their benefits.”
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