Several factors fueled bitcoin's New Year's rally, said analysts. (Photo Illustration by … [+]
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Bitcoin has experienced some compelling gains this year, climbing more than 20% in the last few weeks.
The digital currency reached $8,897.64 this morning, up 23.8% from its price of $7,188.30 at the beginning of 2020, CoinDesk figures show.
Some market observers have cited hopes the cryptocurrency will enjoy greater adoption in 2020 when explaining these gains.
Others have pointed to anticipation surrounding the upcoming halving, scheduled to take place in May, as helping bitcoin push higher.
[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.]
While these are certainly plausible explanations, there are other factors that may have been overlooked.
Bitcoin Was Oversold
The digital currency was undervalued when the New Year began, claimed certain analysts.
“The price just got too low at the end of last year,” said Jeff Dorman, chief investment officer of asset manager Arca.
This development “resulted in a lack of selling coupled with ‘value’ buyers.”
“From cost of production, to stock-to-flow, to MVRV and NVT, all fundamental metrics pointed towards value,” he stated.
“Those numbers do tell a story of value,” said Marouane Garcon, managing director of crypto-to-crypto derivatives platform Amulet.
Tim Enneking, managing director of Digital Capital Management, also weighed in.
“The minimum value at which miners can operate also plays a role because ‘value buyers’ will only come in when they think they can buy at the bottom,” he stated.
“Therefore, the more important piece of the equation is that $6k appeared to be a bottom because miners would simply stop adding to supply below that level,” said Enneking.
Bitcoin’s Safe-Haven Appeal
Another factor that analysts spoke to was bitcoin’s draw as a safe haven or hedge against macroeconomic turmoil.
Several market observers cited the conflict in Iran as a factor causing investors to flock to the world’s most prominent digital currency.
“The Iran/US conflict jolted Bitcoin, as it behaved exactly as you'd expect for a ‘safe-haven’ asset to perform… rallying on both air strikes, while selling off on Trump's de-escalation of further events,” said Dorman.
“This gave investors confidence that Bitcoin can be a global macro hedge.”
Evan Kuo, CEO and cofounder of digital currency firm Ampleforth, also weighed in.
“My sense is in the past year, the narrative that Bitcoin benefits from global instability has started to take hold,” he stated.
“With 2020 being an election year (among other things) people are anticipating a lot of uncertainty,” claimed Kuo.
A Perfect Storm
As soon as bitcoin prices started pushing higher, a multitude of factors helped amplify its gains, said analysts.
“The start of a new year always lends some optimism and then the ‘crisis’ between the US and Iran provided a trigger,” said Enneking.
“CME futures added momentum to that move and the prospect of the halving creates a bit of FOMO,” he noted.
Dorman offered a similar perspective, stating that:
“Once the market started to gain momentum, the usual suspects began levering up again, pushing the market even higher. In the past few days, we've seen a large increase in call buying, and futures buying.”
Market Outlook
“There are literally a hundred reasons to be bullish on crypto at the moment,” said Mati Greenspan, founder of Quantum Economics.
“One aspect that I've been watching particularly is the affect of central bank action on the markets,” he clarified.
“In the second half of 2019 all of the largest central banks very suddenly changed their policy to ultra accommodative,” said Greenspan.
“The affects on the stock market are glaring and many tech companies are seeing their valuations soar. It did take a few months but it seems the funds are starting to trickle through the system into the crypto market as well.”
Kuo spoke to other positive developments, stating that “there's no doubt the proliferation of PlanB's stock-to-flow analysis and Bitcoin's 2020 halving have people excited.”
“Miners, who have to speculate ahead of retail investors have increased hash rates, further adding to this signal,” he noted.
Enneking also weighed in, providing his outlook for the market.
He emphasized that the January rally was “much more measured” than the sharp gain that bitcoin experienced in October, when it surged roughly 40% in a single day.
“We’ve seen a succession of higher lows (which we haven’t seen since BTC hit almost $14k in the middle of last year), sharp moves up have been tempered and accompanied by a bit of consolidation (witness the last couple of days) and the trendline is much more sustainable over the long term,” he stated.
“Knowing BTC, we will, of course, see major moves up (and down), but the foundation is being put in as we speak for upward moves to continue after some consolidation – as opposed to the 110% retracement we saw after the gravity-defying, late October 2019 spike.”
Disclosure: I own some bitcoin, bitcoin cash, litecoin, ether and EOS.
