Bitcoin Plunge Signals Risk-Off

Key Points

• Bitcoin plunged to $71,200, warning that financial markets are becoming risk-averse.
• Brent crude surged to nearly $70 per barrel amid heightened US-Iran tensions.
• Volatility following the CME margin hike, effective Monday, triggered a broad selloff in precious metals and energy transition metals.

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Bitcoin² (BTC) broke support at 85,000, the steep decline warning that financial markets are shedding risk assets.

The S&P 500 index retreated below 6900, but long tails and a rising Trend Index indicate strong buying interest.

However, the Roundhill Magnificent 7 ETF (MAGS) is headed for a test of primary support at 63, while Trend Index peaks at zero warn of selling pressure. A breach of support would be a strong bear signal.

10-year Treasury yields are testing resistance at 4.3%. A breakout would offer a short-term target of 4.4%.

Dollar & Gold

The US Dollar Index is testing resistance at 98, but remains in a long-term downtrend. Respect of resistance will likely signal another decline.

Gold is testing resistance at $5,000 per ounce after Friday’s sharp fall.

The primary reason for the sharp fall in copper and precious metals was not Trump’s nomination of Kevin Warsh as the next Fed Chair. On January 29, the CME announced that it was again increasing margin requirements on futures contracts, effective Monday, February 2.

The increase in CME margin requirements is intended to discourage leveraged speculation in key contracts that show signs of overheating.

Silver had a higher speculative interest, making it more susceptible to the margin hike, with the metal testing support at $70 per ounce.

Energy & Energy Transition Metals

Brent crude is testing resistance at $70 per barrel on heightened US-Iran tensions.

The Dow Jones Global Oil & Gas index is in a strong uptrend, with rising Trend Index troughs reflecting buying pressure.

Copper

The margin hike had less effect on copper, which retreated to $13,000 per tonne from its recent peak of $13,500 per tonne.

Copper miners were more susceptible to the risk-off shift in financial markets, with Sprott Copper Miners ETF¹ (COPP) testing support at 40.

Uranium

Uranium was not directly affected by the CME margin hike but was caught up in the broader selloff, with the Sprott Uranium Miners ETF¹ (URNM) testing support at 70.

Lithium

Lithium suffered a similar fate, with Sprott Lithium Miners ETF¹ (LITP) breaking support at 14.

Critical Minerals

Critical materials experienced a similar selloff, with Sprott Critical Materials ETF¹ (SETM) testing support at 34.

Conclusion

The CME margin hike, which took effect on Monday, was intended to cause a correction in copper and precious metals. However, the selloff spread to uranium, lithium, and critical materials. Risk aversion also spread to financial markets, as evidenced by a steep fall in risk assets such as Bitcoin.

Mega-cap technology stocks have experienced a selloff, with the Roundhill Magnificent 7 ETF (MAGS) approaching its primary support level. A breach of support would be a strong bear signal for the broader S&P 500 index, with market leaders falling behind their second-tier counterparts.

We can expect further CME margin hikes as the exchange seeks to curb speculative excesses. Volatility will likely discourage speculation but have minimal impact on the secular rise in demand for gold, copper, uranium, lithium, and critical materials.

Acknowledgments

• CoinDesk: Bitcoin
• Federal Reserve of St Louis: FRED Data
• Institute for Supply Management: ISM Report on Business
• Multiplo, Seeking Alpha: The Collapse In Gold And Silver Was Not Caused By Kevin Warsh

Notes

1. We analyze exchange-traded funds (ETFs) to determine market sentiment towards a specific sector, industry, or commodity. The analysis is not a recommendation to buy or sell, nor is it a commentary on the merits of the particular ETF.
2. We analyze Bitcoin (BTC) — the most volatile risk asset — to identify risk sentiment in financial markets. Our analysis is not a recommendation to buy or sell, for which we are ill-equipped to express an opinion, nor is it a commentary on the merits of the cryptocurrency.