Bitcoin's Meteoric Rise: A Stark Contrast to Traditional Markets

Bitcoin's Meteoric Rise: A Stark Contrast to Traditional MarketsBitcoin's continued surge after breaching the $100,000 mark is perhaps unsurprising. However, contrasting this highly speculative asset's performance with other asset classes in the US market reveals a striking divergence

Bitcoin's Meteoric Rise: A Stark Contrast to Traditional Markets

Bitcoin's continued surge after breaching the $100,000 mark is perhaps unsurprising. However, contrasting this highly speculative asset's performance with other asset classes in the US market reveals a striking divergence. As of Sunday, Bitcoin has enjoyed a seven-week winning streak, its longest since 2021. Simultaneously, traditional equities and bonds paint a drastically different picture: the Dow Jones Industrial Average suffered a seven-day losing streak, while US Treasuries endured a five-day decline last week.

This divergence is particularly noteworthy. Last week's five-day surge in the 10-year Treasury yield, amounting to a 24-basis-point increasethe largest weekly gain of the yearappears to be dampening the post-election rally in some sectors of the stock market. However, this impact hasn't reached the fringes of the speculative market. Bitcoin and related cryptocurrencies continue to test the limits of speculative fervor.

Speculators are not only driving up cryptocurrency prices but also actively pouring money into leveraged exchange-traded funds (ETFs) and anything Elon Musk-related. Bitcoin's return to and surpassing $100,000, hitting a new high of $106,495, coincided with MicroStrategy, a major Bitcoin holder, exceeding $400 per share, and spawned a meme coin dubbed "Fartcoin," which has surged in market capitalization to over $700 million.

This Bitcoin rally coincides with Donald Trump's visit to the New York Stock Exchange and his pledge to "do great things with cryptocurrency" should he win the presidency. Vincent Deluard, global macro strategist at StoneX, commented, "It seems to be simply due to idle cash and excess liquidity. With the election excitement fading, blowing up meme coin bubbles seems more fun, and Fartcoin is the poster child, now worth more than 50% of US listed companies.

The speculative frenzy is further fueled by a growing preference among younger US investors for high-risk, high-volatility investments. While traditional risk-on trades sputtered last week, with various long trades coming under pressure, meme-asset traders held their ground. Morgan Stanley's basket of momentum stocks, a long-short trade, was down nearly 3.5% over the past five days in its third-worst week of the year. The Russell 2000 and the index of unprofitable tech companies also each fell nearly 3%. The S&P 500 fell 0.6% for the week, snapping a three-week winning streak. Market conditions also worsened, with fewer than half of the index's components trading above their 50-day moving average. The largest long-duration Treasury ETF had its worst week of the year, falling over 4%.

However, in the more distant reaches of the speculative market, the trading frenzy continues. Bitcoin briefly dipped below $95,000 on Tuesday, showing signs of weakness, but quickly rebounded strongly. Many more speculative tokens rose alongside Bitcoin.

The dominance of small investors is increasingly evident. Off-exchange trading venues, such as those run by wholesale stock brokers servicing clients like Robinhood, have seen their market share jump to over 50% and have recently hit record volumes. Musk-related stocks saw almost across-the-board increases. Tesla stock rose 12% last week, adding over $500 billion to its market capitalization since the election. A closed-end fund called DestinyTech100Inc. has soared over 500% since the US election, partly due to holdings of shares in Musks privately held SpaceX, boosting it to over ten times its net asset value.

Marvin Loh, senior global macro strategist at State Street Global Markets, noted, Animal spirits are still there, but the selectivity is increasing. Those names that are more insider-driven are likely the ones that will get hit harder if theres not additional catalyst.

The subdued performance in traditional equity and bond markets is also linked to the upcoming Federal Reserve monetary policy meeting. Wall Street is holding back on major bets ahead of the meeting. The market expects the Fed to cut interest rates by another 25 basis points. However, the dot plot might indicate that rate cuts next year could be significantly reduced due to Trump's presidency.

Dan Suzuki, deputy chief investment officer at Richard Bernstein Advisors, said that while a December rate cut by the Fed would help to boost risk appetite, it might be insufficient to fuel a sustained rally in stocks. Unless Powells tone is super dovish, I dont think it will be a big catalyst in the short term. But it should provide some downside support for the market.

In conclusion, Bitcoin's sustained rally stands in stark contrast to the subdued performance of traditional equity and bond markets, highlighting significant differences in risk appetite and excess liquidity. Younger investors' enthusiasm for high-risk, high-volatility assets, coupled with speculation in meme coins and Musk-related assets, is fueling the cryptocurrency markets boom, while traditional markets await further guidance from Fed policy. This bipolar market situation warrants close attention and caution from investors.