The ongoing U.S. government shutdown deprives traders of the latest economic data, creating directional uncertainty in the market. In situations like this, it’s useful to look back at how the market has reacted to past shutdowns.
Interestingly, the last US government shutdown, which lasted from late December 2018 to January 2019, coincided with the Bitcoin bear market bottoming process that unfolded from late 2018 to early 2019.
The previous closure lasted for 35 days from December 22, 2018 to January 25, 2019. Bitcoin fell from around $6,000 in mid-November 2018 to just over $3,000 by December, the final capitulation event.
The week starting December 17th was the bottom, and the BTC price hit its lowest price, but it turned into a strong recovery with the price exceeding $5,000 during seven consecutive Green Weeks from February to April as the U.S. government restarted economic activities.
Note that the timing of the market bottom does not necessarily mean that the previous government shutdown and subsequent reopening played a direct role in Bitcoin’s bearish-to-bullish trend change. Additionally, Bitcoin has fallen more than 1% since the latest shutdown began, coinciding with a swoon on Wall Street that saw the tech-heavy Nasdaq index drop 1%.
That being said, questions remain as to whether BTC will follow a similar pattern in 2018 and embark on a new rally. That’s anyone’s guess, but the recent flashout of overleverage and expectations for Fed rate cuts could provide a sounder basis for new leverage increases.
BTCUSD price, 2018-2019 (TradingView)
leverage reset
On Friday, the largest liquidation event in crypto history occurred, with a total of $20 billion lost in leveraged futures bets related to Bitcoin, Ether, and the broader altcoin market.
BTC price plummeted to $107,000 on Coinbase and hit even lower levels on other exchanges. The $107,000 level is Bitcoin’s lowest since July.
CoinMetrics described this event as a stress event that returned the market to a healthier state.
“Ultimately, the massive deleveraging was a stress event rather than a systemic failure. While destructive, it helped purge the excess leverage and put the market on a healthier footing going forward,” the firm said in its weekly newsletter.
Gold Provides Bullish Clues
Another factor supporting the BTC bull market is the relentless rise in gold, which is widely seen as an inflation hedge and safe-haven asset.
Prices for the yellow metal exceeded $4,200 an ounce for the first time, up 61% since the beginning of the year and 10% since the shutdown began. Other precious metals such as silver, palladium and platinum have fallen as well.
Data shows that Bitcoin typically follows gold’s rise, and BTC’s own rise usually begins after gold’s rally stalls.
Analyst Joe Consorti notes that Bitcoin typically lags gold by about 100 days, suggesting a Bitcoin price of about $165,000 by the end of the year, based on JPMorgan’s volatility-adjusted fair value model comparing Bitcoin to gold.
