Bitcoin bulls are on the march, while the bears are running for cover. Defying its worst critics and technical protestations that a major pullback was in order, the world’s oldest and largest cryptocurrency bounced back from a temporary setback, only to continue its meteoric rise to loftier territories. For those traders that like a rollercoaster ride and violent swings of volatility, Bitcoin has offered both and more. Momentum shows no signs of letting up, and advocates have set their sites on $10,000 and beyond.
For those that have followed the 2019 perturbations of BTC, excitement has been the name of the game. January was a downer, as cynics pronounced that cryptos were “dead meat”. Their pictures of the future were of gloom and doom. Bitcoin was to plummet below $2,000, some said as low as $1,250, before slowing down to catch its breath. As far as these folks could see, “Crypto Winter” would never end.
Thankfully, the “Bitcoin bashers” did not have their way, hopefully enduring a short squeeze as the forever-resilient token took off in February towards $4,000, recording its first positive monthly gain in over eight months. March brought more of the same, but April and May were outstanding, first blasting through formidable resistance at $4,000, then $5,000, then $6,000, then $7,000, and then $8,000, as well. It has hovered about this benchmark, recovered from one attempt at price manipulation, and now sits just above $8,040 at the time of this writing.
Crypto enthusiasts are beside themselves. Champagne corks have been popping, while analysts keep scratching their heads, trying to explain what they had not seen in their collective crystal balls. Not only has Bitcoin displayed resilience to the max, it has also withstood the shock of not one, but two industry “black swan” events.
- First, a scandal flooded crypto headlines about a possible fraud in the handling of reserves that support the Tether “USDT” stablecoin. It was alleged that over $700 million had been used to cover up a loss at Bitfinex, an associated company under the same management structure.
- Secondly, the Binance crypto exchange, the largest in the world and one known for its top-of-the-line security protocols, was compromised by a professional hacking gang to the tune of 5,000 BTC or roughly $40 million. Luckily, there were no cash flow implications, since the management team, through its intuitive foresight, had set aside enough funds in an internal insurance fund to cover such a contingency.
Bitcoin barely skipped a beat, continuing along its “diagonal corridor”, as depicted in the chart below, courtesy of Bloomberg:
The narrative from the analyst community suddenly reached a consensus that “Crypto Winter” had concluded in late December, a firm bottom had formed at the $3,130 level, and now all bets were off. Forget Winter and Spring, too – The scene was set for Summer and a hot one at that.
What are the fundamental drivers supporting this BTC run for glory?
We are taught early on in our forex tutorials that technical information does not determine how prices react in an active market. Fundamental forces are what truly drive price behavior in our equity markets, our foreign exchange market, and also in our cyrptocurrency market, which is still in its nascent development stage where liquidity, volatility, and the potential for price manipulation will be common for a while longer.
But Bitcoin has confounded even its most enthusiastic supporters over the past four months. What had been considered as supremely formidable resistance levels fell by the wayside, as Bitcoin blew by them and left them in its wake. The $6,000 level, which had stood as support from August through almost the end of November in 2018, fell early in May and now seems a distant memory.
As analysts grab for single causes for the Bitcoin miracle, it is becoming very apparent that the thrust upward is due to the combination of several favorable fundamental themes that are independently paving the way for broader awareness, acceptance, and accessibility, which, when added together, have catapulted BTC forward and upward. Here is a brief summary of these favorable storylines:
- Whales: Although the term has no defining limits, the top ten account addresses in the BTC network control $7 billion, or roughly 5%, of the action. These account holders are active again, moving nearly $700 million in one weekend. There is also nearly $4 billion stashed away in stablecoins, a holding area, so to speak, until the time is right to return to the market;
- Fidelity Digital Assets: Much has been written about the $7 trillion money management giant making ready its crypto trading platform, together with top-tier custodial services, ready for institutional clients. “Within weeks” is the latest news of the launch, which will gradually impact 30 million customers;
- Other Major Trading Platforms: TD Ameritrade and E*Trade are preparing to launch, as well, opening up another 10 million investors to the mix;
- Bakkt and ErisX Exchanges: Institutional traders want hedging tools, and they primarily use futures contracts for this exercise. Bakkt and ErisX intend to service this market, along with a few other competitors, as well;
- Facebook: The social media giant continues to excite the market with a few tidbits here and there about its Project Libra, a major crypto initiative that will involve cross-border payments and possibly many other support services for its 2 billion plus global customer base;
- Other Corporate Activity: The list of major corporate household names that are actively pursuing crypto/blockchain projects keeps growing day by day. Forbes recently released its “Top 50” list, which included Amazon, Microsoft, IBM, a number of global banks, and a host of infrastructure companies that expect to leverage the benefits of all things crypto in the near-term future, if not already.
These seven categories of crypto support are working on the market, both directly and indirectly, to create a level of momentum that has no bounds. There is another event that will occur next May, and that is the “halving of awards for miners” in the Bitcoin system. Based on its original design, the total of Bitcoin tokens in the marketplace is capped at 21 million. One year from today, miners will only be paid 6.25 tokens for each block mined, a cut of 50% from today’s 12.5 reward. One survey claims that 60% of traders believe prices will rise due to this change. Less supply plus more demand equals higher prices, if you buy into this logical reasoning.
Also, thanks to Mr. Trump, the “Tariff Man”, global investors, who want nothing to do with equities when a trade war erupts, are beginning to view Bitcoin as a “safe haven” of sorts. It already has that reputation within the crypto world. When safety and security matter in the minds of crypto investors, they have shifted in masse to Bitcoin in the past. During the current market upswing, however, altcoins have been swept along with BTC, but more forcefully so when Bitcoin consolidates about a particular benchmark.
Lastly, to round out a full composite of ten fundamental drivers, anticipation is mounting that the SEC will finally approve an application for a Bitcoin Exchange-Trade Fund (ETF). It has balked a good dozen times or more in the past, citing security, price manipulation, the lack of custodial arrangements, and low trading volume, to name just a few.
According to Lou Kerner, partner at CryptoOracle: “A Bitcoin ETF would certainly be positive both short-term and long-term. The amount of flows into ETFs can be very significant since a lot of investors prefer ETFs, and it obviously connotes additional market approval, government approval of Bitcoin. It really would be a bullish thing. But there are lots of reasons to take news of a pending ETF with a grain of salt. There are still a lot of unanswered questions about how it would be handled.”
What are the “unanswered questions” that persist in Crypto-Land?
Price manipulation can happen in the forex market from time to time, when a large investor seeks to enter the market. One route is to break the order down into smaller bits, but the other tactic involves putting out a material sales order to drive the market down, then scoop up as much as you can, as quickly as you can, including stop-loss orders, too. We have all witnessed this scenario before.
The same thing happened a few days back. Per Gilad Raz, CEO of Blockium explains: “This was clearly a direct result of a huge sell order of exactly 3,645 Bitcoin, or $26 million, on Bitstamp on May 17. This is also not the first time that large sell-orders cause panic amongst traders and greatly affect the prices of the market.”
Deliberate price manipulation is another thing. Currently, the Nasdaq is sharing its surveillance monitoring software with a number of U.S.-based crypto exchanges to allow for effective detection of potential manipulation threats, which would please the SEC. The advent of custodial services with Fidelity, Bakkt, and ErisX may also cause competitive responses in-kind from competitors, or they will miss the new tide of institutional capital that is expected shortly.
As for security breach issues and the prevalence of fraud in Initial Coin Offerings (ICOs), the lesson of Binance is that even the largest and never-before-breached exchange is susceptible to today’s modern cyber-criminal. Resources will be invested, and the course of ICOs seems to be changing to formats more acceptable to traditional investors.
As for volume concerns, recent research that removes the 90% of suspected “fake” volume has revealed that BTC volume is actually concentrated in the top ten exchanges and centered in the U.S., approximately $400 million per day, of which the majority tends to be from the futures market at the CBoE. The fear that foreign unregulated volume might cause issues may be unfounded.
Bitcoin is on fire, of late, resilient in the face of scandal, hacking compromises, and supposed price manipulation. Analysts and hedge fund managers are already suggesting that $9,000 and even $10,000 may be breached before yearend. Could they be right? Maybe yes, maybe no… Momentum has been building for quite some time, bolstered by a host of favorable fundamental drivers this time around. If you wish to invest in these shark-infested waters, be sure to understand that volatility is the hallmark of this asset class. At the end of the day, your personal judgment will be tested.