If 2020 was a year when the investing community put fiscal and monetary stimulus on the first spot, things will gradually change in 2021, especially since there is consensus on higher inflation and thus a pick up in yields. The combination of monetary tools like QE and flows towards bonds kept interest rates lower, yet as there is light at the end of the tunnel in terms of the pandemic, a shift could occur. Today we want to talk about what could higher yields mean for the crypto market and whether that could be one of the variables for a topping formation.
Implications of rising yields on crypto
When you have an environment where interest rates are 0% or even negative, capital is flowing towards riskier assets, where yields can be generated. That’s what happened during the past year and in combination with a weakening US dollar, both retail and institutional actors had been pilling into crypto. For the first time in history, the global market cap reached $1 trillion, an astonishing figure, given the conditions we had a year ago.
However, if yields continue to rise during the next few months, that will mean there will be new investing alternatives, far less risky and at more attractive prices as compared to overbought cryptocurrencies. Traders and investors will need to become more attentive to this aspect since it could start to act as a drag on the bull run continuation.
A change in risk appetite
Interest rates are like the gravity force. When rates are low, financial assets rise, and when they are high, a repricing of assets will need to occur. A change in risk appetite will put a dent on the crypto market, but the trickiest thing to do would be finding the tipping point, where interest rates start to weigh heavily on valuations. Some analysts believe that if yields on the 10Y US treasuries reach 1.4-1.5% that could be a place where riskier financial assets, including crypto, could start to be under pressure.
The end of pandemic -a top in crypto enthusiasm?
Even though COVID-19 was a damaging pandemic, creating both economic and human hardships, 2021 is expected to be a year when things get closer to normal. With vaccine deployment and as the weather will get warmer in the Northern Hemisphere, economic activity will increase.
Lockdowns had contributed to a rise in trading and investing interest and when that won’t be the case, capital won’t flow to the crypto market as it did during last year. The next several months are shaping to be very interesting for valuations and we should get more indications on whether the rally can continue.