Cryptocurrency Swings – Why and What’s Next?

5 January 2021

The cryptocurrency market is trading in all directions. Bitcoin saw a record breaking surge to $34,792 on 3 January 2021 and a volatile 2020.

While he maintains a longer-term bullish view, our expert shares why things can still go either way.

 

Cryptocurrency prices could soar in the long term because:

1. Increasing and enduring institutional interest as they see the appeal of BTC as:

  • An inflation hedge against huge “money printing” around the world
  • A (resultingly) weak US dollar
  • An alternative to gold
  • Increasingly limited bitcoin supply
  • Increasing ease of acquiring and transferring bitcoin

2. Medium-to-long term Federal Reserve asset purchases
There is a long-term positive correlation between the Federal Reserve’s balance sheet and bitcoin bull/bear cycles.

3. The weak US dollar environment right now tends to drive bitcoin’s price up.

4. Low interest rates will increase incentive for investors to move out of low-yield investments

5. High retail interest due to high savings rates around the world. 

Despite some recovery, consumers are spending less due to reduced economic activity (from lockdowns, pandemic concerns, restricted gathering and activities, reduced tourism etc.) – US hit record high savings rates in the middle of 2020 due to enhanced unemployment benefits, and a $1,200 handout from the government.

6. Tech stocks impact

If tech stocks begin to give lower returns this year, many investors who jumped on the tech bandwagon last year will begin to rotate out of tech – and possibly into the cryptocurrencies given the relatively low-yield environment.

7. What the tech indicators say

Long-term technical indicators for Bitcoin such as the Puell Multiple and MVRV Z-Score still show further upside on bitcoin, although the assessment window for those indicators could take months to be realised.

 

On the contrary, some factors could keep cryptocurrency prices low.

1. Earlier-than-expected tightening of liquidity 

Higher interest rates and reduced asset purchasing would likely see a similar unwinding of bitcoin, like end-2017. This tightening may be brought forth by concerns of inflation, which traditionally would be when the US hits full employment (probably around 4%, although they used to benchmark it around 5%). Inflation concerns may however be premature at the moment.

2. Increasing scrutiny of bitcoin/cryptocurrency’s use for criminal activity could see governments attempt to impose identification requirements on crypto wallet holders. 

This could put off some investors – as the authorities would gain access to every transaction ever made by individual wallets, and it might also add an extra layer of transactions e.g. ‘Exchange > KYC Wallet > Individual Wallet’ instead of just ‘Exchange > Wallet’.

3. Regulatory disapproval

Similarly, (likely) incoming Treasury Secretary Janet Yellen has publicly expressed disapproval of bitcoin for its utility in illegal activity, although she has endorsed blockchain for its applications in finance. This could provide a clue to the likelihood of bitcoin regulation during the Biden administration.

4. Mining by higher-risk jurisdictions

Increasing evidence of countries such as Iran, Russia, and North Korea using bitcoin and engaging in bitcoin mining may see the Biden administration explore options to gain leverage over this flow of income to those states. This would also serve as a way to curb cyberattacks and tighten US sanctions.

Cryptocurrency CFD is available for trading on Phillip MetaTrader 5 (MT5).

Features of trading CFD:

  • Trade in both the bull and the bear markets
    The ability to enter a long and/or short position allow traders to take advantage of both rising and falling markets.
  • Smaller barrier to entry
    CFDs typically have flexible and smaller contract sizes. This means that traders will be able to enter into a CFD contract with a modest amount of capital.
  • No expiration date or risk of delivery
    Unlike futures which commonly have a fixed expiration date, CFDs allow traders to perpetually hold the position(s). CFDs are cash settled, no need to worry about the delivery of the underlying asset.

Benefits of using Phillip MT5:

Trade at zero commission on a dynamic platform that offers low spreads. Integrated with Autochartist and Trading Central Indicators, and available on mobile, web and desktop app, you will never miss a trading opportunity with Phillip MT5.

Request for a 30-day FREE Phillip MetaTrader 5 Demo