In brief
- Protestors stormed Capitol Hill after Democrats win Georgia Senate.
- Bitcoin hits new record highs as S&P closes at record highs.
- Increased fiscal spending is seen as a key reason for optimism in the markets.
It was an odd day for Bitcoin to be breaking more records. On Wednesday, the state of Georgia had turned blue, giving the Democrats majority control in the Senate and paving the way for President Biden to have a free hand in enacting new policies.
A few hours later, as the Senate was about to certify the election results in Washington DC, an angry mob broke in to disrupt proceedings.
While both events were happening, Bitcoin’s momentum picked up quickly. As news broke of the Capitol building being stormed, around 7 pm GMT on Wednesday, Bitcoin’s price jumped from $34,493 to $36,095 within an hour and kept climbing.
Ethereum’s price had a similar sharp uptick during that critical hour lifting the whole market to the $1 trillion mark for the first time in its history. Coincidence? Not exactly. What happens in US politics has a profound effect on cryptocurrency prices.
As we’ve argued several times before in Market Watch, US market movements are becoming more correlated with what happens with Bitcoin. The reason? The institutional investors and hedge fund managers that have moved into the space have skin in both games: that of the US economy and that of Bitcoin. As a result, their performance is drawn closer as investors treat Bitcoin like any other asset.
Biden is good for Bitcoin
While the scenes of chaos and violence dominated the headlines, the markets had a very different take. US traders, especially those who have benefitted from the boom in tech stocks powered by Facebook, Apple, Amazon, Netflix and Google were hoping that the Republicans held onto the Georgia Senate seats.
The thinking, market watchers say, is that the old-economy stocks in the Dow would benefit from a bigger economic stimulus - which Biden is in favour of - but tech stocks could be hurt by higher corporate taxes and stricter antitrust scrutiny - something Biden is also in favour of.
Indeed, all of those tech stocks were down yesterday with Apple down by as much as 3%, Facebook 2%, and Amazon 2.5%.
However, over on the Dow and S&P 500 - exchanges that aren’t as tech-centric - the news that Democrats now have a (tiny) majority in the Senate and a slim majority in the House, saw the Dow close at a record high on Wednesday, and the S&P 500 was up 0.6%.
The assumption being that a unified Democratic government would advance more virus-relief stimulus and increase infrastructure spending.
As happened last year, when the government stepped in to prop up the US economy, stocks went wild - and so did Bitcoin.
“Our US economists have indicated that a Democratic Senate would likely lead to another large fiscal stimulus package, possibly including some priorities of the new administration such as infrastructure,” Deutsche Bank economists said in a note Wednesday.
The other impact of more stimulus in the US economy is the continued weakening of the US Dollar. As the US government pumps cash into the economy, so the absolute value of the greenback declines.
Since March 2020, its lost 10% against a basket of currencies, creating opportunities for traders to go short on the dollar increasing that downward pressure.
According to a Bank of America Fund Manager Survey, when asked the question, “What do you think is currently the most crowded trade”, 217 fund managers put Bitcoin in third behind Long Tech and Short US Dollar. In essence, assume the dollar is going down, and bet on Bitcoin going up. Yesterday's events were a continuation of that theme.
Joe Biden is good for Bitcoin because Joe Biden is good for the US economy - at least from a stimulus point of view. While the disturbing scenes in Washington DC painted a stark picture of America in disarray yesterday, the markets interpreted the news as a sign of brighter days ahead.
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