Bitcoin’s 2020 Rally More Sustainable Than 2019 Surge

[Ed note: Investing in cryptocoins or tokens is highly speculative and the market is largely unregulated. Anyone considering it should be prepared to lose their entire investment.]

During the first half of 2019, bitcoin (BTC) tallied significant price gains, only to face stark decline during the latter portion of the year. As part of a strong 2020, crypto’s largest asset posted similar price gains of more than 50% between January and February, leaving the public to wonder if bitcoin will repeat its 2019 performance and lose its upward momentum. This year’s price run looks different, however, according to crypto analyst, YouTube host and Twitter personality Tone Vays.

“I do see a little bit more retail interest helping to drive this current run up,” Vays told me in a February 17 interview regarding bitcoin’s 2020 price rally so far. “This run up is moving a little bit slower — it’s a little bit more orderly than the last one,” Vays added.

Between April and July 2019, bitcoin flew from $4,025 up to $13,910, as recorded on TradingView.com. Crypto’s pioneer asset fell on hard times in the latter half of the year, however, riding declining prices until December, during which it sank to $6,400. “This entire run-up didn’t seem right to me,” Vays said in a September 2019 YouTube video regarding bitcoin’s surge past $13,000. “Price is king, and the price did not make sense,” Vays added.

Instead of natural market price positivity, Vays told me he attributed last year’s price rise to two factors. The first of which was the PlusToken Ponzi scheme, an infamous scam that swindled approximately $2 billion in crypto assets from victims, including 180,000 BTC, according to Chainalysis data. “That helped the run up, and that also contributed to the big drop from $14,000 down to $6,500,” Vays said of the PlusToken ordeal.

Additionally, crypto traders and investors sold many of their altcoins for bitcoin, which also fueled the pioneer asset’s 2019 run, Vays explained. Between April and July 2019, bitcoin dominance — the amount of capital held in BTC versus all the other cryptocurrencies — rose from approximately 50% to almost 70%.

“This rotation out of altcoins was basically the money that was already in the crypto space,” Vays said, explaining that bitcoin’s rally likely was not the result of fresh capital being injected into the industry but rather a different mixture of the same funds. “If 10% or 15% of ethereum is exiting into bitcoin, that will significantly raise the price of bitcoin,” Vays said noting the low amount of liquidity present in the crypto space.

The Halving Is Coming

This year’s bitcoin rally also differs from 2019 in terms of excitement. “This time around, we are much closer to the halving, so there is hype in the crypto space because the bitcoin production is about to become half in about two and a half months or so,” Vays said.

According to its code, bitcoin is expected to undergo a halving event around May 2020, which will decrease the reward participants receive when they mine the coin. Bitcoin miners compete for a mining prize, called a block reward, paid out approximately every ten minutes as compensation for helping the asset’s network run. At present, each block reward is 12.5 BTC, meaning 12.5 new bitcoin enter the market every ten minutes, 24 hours per day, seven days per week.

In May, as part of a halving event that occurs every four years, this reward will cut down to 6.25. Bitcoin has historically risen in price after halving events, filling the crypto space with positivity for the upcoming event.

Derivatives Trading Plays A Part

Blockchain analyst and crypto trader Willy Woo said crypto derivatives trading played a part in bitcoin’s exuberant 2019 price increase from $4,000 to $13,000. “The 2019 run up was very extreme and driven by derivatives trading on futures exchanges, since the majority of retail traders were in short positions, it was lucrative to squeeze them out of the trade,” Woo said in a message Vays forwarded to me. “[T]his sent the price soaring but was unsustainable,” Woo added.

Since crypto’s mega bull run of 2017, derivatives trading has gained prevalence. Even mainstream exchanges such as the Chicago Mercantile Exchange (CME) and the Intercontinental Exchnage’s (ICE) Bakkt platform now offer bitcoin futures and options trading.

Derivatives trading allows participants to buy and sell contracts based on an underlying asset’s price. In the case of bitcoin, entering a short position is essentially a bet that the coin’s price will go down in the future.

If an overabundance of participants sit in short positions, and bitcoin’s price starts to move up, the upward pressure can “squeeze” those short positions, eventually fueling an explosive move upward as those positions close and the market reacts.

Contrary to 2019, Woo said bitcoin’s price action this year has been different, rising in price due to an increase in buyers. “In 2020 the mid-$6,000 floor coincided with organic investor flow coming in,” Woo said. “[T]hat's to say the 2020 run up has been dictated with fundamental long-term investor activity, being organic demand, this run is much more sustainable,” he added.

During the first few days of January, bitcoin posted a higher low on its chart, just below $7,000, setting the stage for a price bottom, which has held so far, with bitcoin holding a press time price of $9,567.

In an early February video, looking back at January’s upward bitcoin price activity, Woo said actual bitcoin purchasing activity picked up, which then led into an uptick in derivatives trading. “The spot markets were leading the futures markets, which is a really good sign,” Woo said in the video. “That means that real investors are putting money in.”

Although Woo and Vays said bitcoin’s price rise looks more sustainable this year, skepticism in the asset will likely continue at least in some capacity for crypto’s main asset — which was proclaimed “dead” 41 times in 2019, according to 99bitcoins.

Disclaimer: I actively trade cryptocurrencies, as well as hold a small amount of BTC, ETH, LTC, XMR, NEO, ZEC, BEAM, BCH, DASH, LINK, XTZ and various insignificant other altcoin positions.