The ongoing U.S. government shutdown has deprived traders of the latest economic data releases, injecting a sense of directional uncertainty into the markets. In such situations, it's useful to look back at how markets have reacted to previous shutdowns.
Interestingly, the previous U.S. government shutdown, which lasted from late December 2018 to January 2019, coincided with Bitcoin’s bear market bottoming process that unfolded through late 2018 and early 2019.
Here is how it played out: The previous shutdown lasted 35 days between Dec. 22, 2018 and Jan. 25, 2019. Bitcoin fell from around $6,000 in mid-November 2018 to just over $3,000 by December, marking the final capitulation event.
The week starting Dec. 17 marked the bottom, with BTC's price hitting its lowest point, before embarking on a strong recovery that saw seven consecutive green weeks between February and April, following the U.S. government’s reopening, pushing prices above $5,000.
Note that the timing of the market bottom does not necessarily imply that the previous government shutdown and subsequent reopening played a direct role in bitcoin’s bearish to bullish trend change. Moreover, since the latest shutdown began, bitcoin has declined over 1%, consistent with the swoon on Wall Street, where the tech-heavy Nasdaq index has fallen 1%.
That said, the question remains whether BTC will follow the 2018 analog and embark on a new rally. It's anybody’s guess, but the recent flush-out of excess leverage, coupled with hopes for Fed rate cuts, could provide a healthier foundation for new leg higher.
BTCUSD Price, 2018-2019 (TradingView)
Leverage reset
On Friday, the largest liquidation event in crypto history occurred, taking out a total of $20 billion in leveraged futures bets tied to bitcoin, ether and the broader altcoin market.
BTC's price crashed to as low as $107,000 on Coinbase, with other exchanges recording even lower levels. The $107,000 mark is bitcoin’s lowest price since July.
CoinMetrics described the event as the stress event that has left the market in a much healthier state.
"In the end, the great de-leveraging was a stress event rather than a systemic failure. While disruptive, it helped flush out excess leverage and leaves the market on a healthier footing going forward," the firm said in its weekly newsletter.
Gold offers bullish cues
Another factor supporting the bullish case in BTC is the relentless rally in gold, which is widely regarded as an inflation hedge and safe-haven asset.
The yellow metal has surpassed 4,200 per ounce price for the first time, rising 61% year-to-date and 10% since the shutdown began. Other precious metals like silver, palladium, platinum have been on a tear as well.
Data shows that bitcoin usually folows gold higher, with BTC's own appreciation typically starting after gold rally stalls.
Analyst Joe Consorti notes that bitcoin typically lags gold by roughly 100 days, and based on JPMorgan’s volatility-adjusted fair value model comparing bitcoin to gold, this would imply a bitcoin price of around $165,000 by the end of the year.
