Uncertain times and doubt are the worst enemies of cryptocurrencies investors. What is worst is that we have months of uncertainty ahead of us, which can change the course of history. It’s all about the U.S. elections…
Author: Deniz Dertsavar
Building up to the election
The November U.S. presidential election could be controversial, yet the bitcoin market is pricing little event risk. According to data source Skew, the three-month implied volatility of Bitcoin fell to a two-month low of 60% over the weekend, having peaked at 80% in August. Implied volatility indicates the market's expectation of how volatile an asset will be over a specific period.
The declining price volatility expectations in the bitcoin market cut against the growing fears in traditional markets that the U.S. election’s outcome may not be decided for weeks. Traditional markets are pricing a pickup in the S&P 500 volatility on election day and expect it to remain elevated in the event’s aftermath.
“Implied volatility jumps around election day, pricing an S&P 500 move of nearly 3%, and the term structure remains elevated well into early 2021,” analysts at investment banking giant Goldman Sachs recently said.
One possible reason for the decline in bitcoin’s volatility expectations ahead of the U.S. elections could be the leading cryptocurrency’s status as a global asset. That makes it less sensitive to country-specific events. “The U.S. elections will have relatively less impact on bitcoin compared to the U.S. equities,” said Richard Rosenblum.
Denis Vinokourov, head of research at the London-based prime brokerage Bequant, expects re-pricing the U.S. election risk to happen following this week’s options expiry. A re-pricing of event risk may happen next week, said Vinokourov. Still, traders are warned against interpreting a potential spike in implied volatility as an advance indicator of an impending price drop.
The reason is that in the past, bitcoins' implied volatility has risen during both uptrends and downtrends. The metric rose from 50% to 130% during the second quarter of 2019, when bitcoin rallied from $4,000 to $13,880. Meanwhile, a more significant surge from 55% to 184% was observed during the March crash.
Since that massive sell-off in March, the cryptocurrency has matured as a macro asset and could continue to track volatility in the stock markets and U.S. dollar in the run-up to and post U.S. elections.
The election of Joe Biden could lead to tax increases and more regulations. Both factors could increase the pressure on the economy and the stock market. Also, Biden, together with the US Federal Reserve, could continue to pursue a loose monetary policy and send the USD dollar further downhill. This could benefit Bitcoin in particular, which is valued against the dollar.
On the other hand, if Donald Trump wins the November election, the American stock market will be very, very bullish because it likes Donald Trump for such reasons as he cut taxes for the super-rich, cuts taxes mostly for the stock market and leads to the stock market being very bullish. On the night of the election, if Trump wins, then the dollar will rise along with the stock market and gold will retrace. However, it would likely be temporary because the monetary crisis will explode even more with Donald Trump. Also, in the short term, Gold will correct with Trump's victory, followed by the collapse of the US dollar and explosion of gold to $5,000 faster with Trump than with Biden but up irrespective of Trump or Biden. Both are bearish for US dollars.
And finally, the American stock market could experience a 5% setback after the elections. As the FED's fiscal policy had not had any noticeable effect, neither on the stock market nor on the US dollar, the continuous trend of a falling dollar and a stable stock market could boost Bitcoin and gold sentiment in the long run.
DeVere CEO Nigel Green believes that the U.S. election will boost the price of bitcoin. "Bitcoin is already one of the best-performing assets of the year, up around 70% year-to-date," he said. "We can expect the world's largest cryptocurrency to be further fuelled for the rest of 2020 by the U.S. presidential election and the weakness of the U.S. dollar, which will serve as high-octane price drivers." Citing the growing level of political uncertainty coupled with the coronavirus pandemic, the CEO furthermore stated: “As uncertainty heightens, investors will pile into safe-haven assets, in particular those not tied to any specific country, such as bitcoin and gold.”