There is some evidence to suggest a less volatile future for Bitcoin
By Rakesh Sharma
Volatility in Bitcoin prices and cryptocurrency markets is hardly news. But when the volatility occurs after a prolonged slump, then people notice.
Bitcoin’s price has moved downwards and sideways for the better part of this past year, then shot up 17 percent in just 30 minutes on April 2. The original cryptocurrency also breached the $5,000 mark, a figure it touched last in November, during a downward trajectory. As of this writing, it’s bouncing around $5,000.
Other coins followed Bitcoin’s lead. The second- and third-most valuable cryptocurrencies by market cap, ETH and XRP, are up by 13.1% and 12.5% respectively in the last 24 hours. The overall effect of Bitcoin’s surge has been a skyrocketing valuation in cryptocurrency markets — up by 120% to $176.2 billion.
Naturally, the mood on Crypto Twitter is celebratory.
Bitcoin the king.
Only thing that really matters for alts is the BTC price.
Anyone using the USD price for alts is either clueless, or desperate to see something positive in their bad trades.
Don’t @ me. pic.twitter.com/UwBSOnlf27
— WhalePanda (@WhalePanda) April 2, 2019
So why this sudden surge? As in the past, traders and analysts are scrambling to find an explanation. A variety of theories are making the rounds online.
No Shortage of Theories
One theory attributes the increase to trader excitement over a false April Fool’s report about the approval of a Bitcoin ETF by Finance Magnates. The approval is a hotly anticipated event within the cryptocurrency community because it could open the gates to institutional investor money.
Another theory says there was “strong momentum” building up toward this price move by traders. According to this idea, smart money wants to get in on the Bitcoin action and profit from an upside later.
In a note to clients, crypto merchant bank Galaxy Capital’s Michael Novogratz wrote that recent trade position by dealers had left the room open for yesterday’s spike. “Over the last few weeks, some degree of complacency and dealer positioning (short volume carry positions) had left the market vulnerable to an explosive upside move,” wrote Novogratz, a billionaire who has invested a third of his fortune in cryptocurrencies.
Finally, and perhaps most credibly, various reports are crediting the price increase to a single buyer who placed large orders for Bitcoin across three exchanges. Bloomberg added algorithmic crypto traders to the mix.
Whatever the cause, does Bitcoin’s boom herald the onset of a bull market?
Coindesk seems to think so. Analyst Omkar Godbole stated that the price jump “confirms” the transition from bear to bull markets because Bitcoin breached the 200-day moving average with its jump. The move was also accompanied by substantial trading volumes, he pointed out.
Enthused by the price spike, famous cryptobull Parabolic Trav has returned to the markets. Online publication The Block stated that Parabolic Trav’s return means that the “worst of the crypto winter” may be over.
For longtime observers of Bitcoin’s price, the story playing out with Bitcoin’s recent price action may be a familiar script. Stratospheric highs and abysmal lows are common in the cryptocurrency’s price history.
In November 2013, Bitcoin’s price tumbled by 50 percent in a single day to $378. In 2017, its price surged. Media chatter coupled with positive developments, such as the introduction of Bitcoin futures at Cboe, led to sky-high expectations and its price traversed the distance between $3,700 to $20,000 in three months.
That peak was followed by a swoon which lasted all of 2018 and culminated in a fall of more than 90 percent in Bitcoin’s price and approximately 85 percent drop in cryptocurrency markets.
A Stable Future?
That being said, there is evidence that the market is stabilizing, and that Bitcoin’s narrative is finally being rehabilitated. Events worth noting:
- Investment and asset management firms have recently ratcheted up the pressure on the SEC by filing for ETFs.
- The world’s biggest stock exchange company announced plans to add its own trading platform for cryptocurrencies as has Fidelity, the world’s biggest asset manager.
- The contours of an evolving security token ecosystem for physical assets, a long-term goal for cryptocurrencies, are also beginning to take shape.
To be sure, scams and problems still pervade the cryptocurrency ecosystem. Just recently, asset management firm Bitwise released a widely criticized report that 95% of trading volume at cryptocurrency exchanges was fake. The SEC expressed reservations about a slew of issues at cryptocurrency exchanges in a letter released last year and refused to approve a Bitcoin ETF.
What Does this Mean for Investors?
The defining characteristic of cryptocurrency markets is their uncertainty. In conventional stock market valuations, a matrix of factors is evaluated and analyzed to predict prices. Such a matrix is mostly absent for crypto.
That said, there is a fundamental difference in the factors responsible for Bitcoin’s price increase this time. During its last bull run, the whipsaw in Bitcoin’s prices was driven by speculators and fly-by-night traders interested in quick profits. They did not care nor bother to understand the technology or its utility as an asset within the financial services ecosystem.
The collapse in 2018 all but ensured the exit of such traders.
Meanwhile, the infrastructure to establish Bitcoin (and other cryptocurrencies) as a viable investing asset has firmed up. Regulators, perhaps the most important part of the cryptocurrency puzzle, now have a better understanding of its inner workings. So too do investors who have become more familiar with this asset class.
Finally, Bitcoin’s next halving in 2020 will create greater scarcity. Earlier halvings saw Bitcoin’s price inch upwards in advance, and increased momentum as the date drew closer.
For all the enthusiasm on Crypto Twitter — and the return attention of the media — veterans are keenly aware that Bitcoin promises nothing. One can hope that crypto will finally take its place among other mainstream asset classes, but there’s no guarantee.
Dumb money will always rush in alongside educated investors who understand they’re speculating in a wildly unpredictable market. The key to smart trading is knowing the difference — and, of course, HODLing.