At its high, bitcoin had rallied close to 280 percent in the first six months of 2019 with much of that move occurring in June alone. If this move had occurred in a vacuum it would certainly be significant. However, when we add in some other interesting macro movements and events it begins to unlock the mystery of what bitcoin is and what it could eventually be.

Easy Money Cycle

Both gold and bitcoin were hovering near cycle lows in December of 2018 when the first hint was given that the Fed's hiking cycle was near completion and a different direction would soon be adopted. A movement to easier monetary policy, in most cases, would be accompanied by a weakening dollar. That's not what happened. The dollar remained relatively strong through May, bolstered by the counterbalance of concurrent increasing monetary stimulus in Europe.

Since November the German 10-year yield has moved from 0.4 percent to negative 0.3 percent. During this same period, U.S. 10-year yields went from 3.2 to a current level of 2.01. So basically we've had seven months of cratering global yields and all three major central banks in synchronized easy money cycles. This has not gone unnoticed in the gold and bitcoin markets. Gold was up a perfectly reasonable 18 percent in the seven months since the Fed pivot.

Gold and Bitcoin Move Higher

The far more interesting developments, however, have occurred in the last several weeks. On June 1, the U.S. dollar, after a valiant fight, turned and began heading lower. This was both significant and ominous when viewed against the euro and the yen and their respective central banks vying for the title of the world's greatest dove.

In June, both gold and bitcoin had explosive moves higher with bitcoin up 70 percent at its high and currently up 45 percent and gold having a 10 percent gain in this short time. The undercurrent of this move is that both gold and bitcoin have established themselves as a potential proxy for fiat currencies and a store of wealth against over aggressive central bank policies.

I suppose we've always known that this characteristic existed for gold but the surprise, to me, is how quickly bitcoin fell in line. This move was interesting enough for me to consider adding bitcoin to my long-term portfolio as a potential hedge against aggressive inflation. The reality is that the market seems to believe a need exists to hedge against potential currency problems that may be in our future.

A Viable Currency Proxy?

A discussion of bitcoin becoming a currency proxy anytime soon should also include the 15 percent drop that occurred in a couple minutes on June 26. This underscores the massive volatility that still exists in bitcoin. Before something can be considered a viable currency proxy it probably has to establish a history of price stability to inspire some investor confidence. All part of the maturation process.

In the last few months trading volumes have predictably increased in CME bitcoin futures with May being a record average daily volume. My technical opinion on bitcoin futures is that the move above the 9,000-10,000 level will create enough fear of missing out to propel it back to the 15,000 level.

Gold futures have recently broken out of a long-term trend channel with an upper band at 1,400. I believe that time spent above this level bolsters the long case for gold with an upside target of 1,600. Both of these moves need to be supported by a weak dollar.

As is usually the case, small shifts in central bank policy have large ripples in many asset classes. Bitcoin, we're learning, is no exception.

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