Bitcoin: The Bull Rages On
For the third time this week, bitcoin is back above $8,000 Wednesday and trading near its ten-month peak. Mainstream media outlets have been struggling to identify the reasons for the sudden rally, but as Hacked pointed out a few days ago, there are several underlying factors fueling the bull market.
Key Resistance Breached
Bitcoin has been surging since April, but the seeds of recovery were planted many months before that. After struggling for January and much of February, BTC finally overcame a major resistance at $4,200, a level that had thwarted the new-year rally. From there, the largest cryptocurrency quickly catapulted to $5,000 through the early part of April. Since then, the gains have been parabolic.
The $4,200 level is significant for a few other reasons. It not only marked the high from December (i.e., the false breakout), it was also the region at which institutional traders were shorting the virtual currency.
That’s because some market participants were relying on covered calls to get out of the dreaded crypto winter. Covered calls limit the seller’s ability to benefit from price increases once it reaches a certain point, leaving most of the upside potential for the buyer.
Bloomberg reported back in February that institutional investors were buying three-month call options with a strike price of $4,200. Clearly, many different market forces were converging on that level. Once it was breached, the floodgates opened and they did so much more intensely than anyone had expected.
Read more – Bitcoin and Derivatives: Why $4,200 is So Critical.
Trends and Cycles
Bitcoin is now in the fifth month of a new four-year cycle, which should offer long-term investors some relief in knowing that the worst of the bear market has passed. There’s simply too much separation in terms of time and price for bitcoin to relive the December lows.
The beginning of the new four-year cycle has seen bitcoin virtually negate its previous bear market trend. When we presented the bearish case for bitcoin back in February, we highlighted the fact that prices still had a long way to go before the bear trend is reversed. At the time, bitcoin’s bear market was seen lasting so long as prices traded below $6,800.
Others are more conservative in declaring the end of the bear market. Tomas Salles of FXStreet believes BTC must surpass $8,350 to get rid of the bearish bias. This level should offer significant resistance in the near term.
Regardless, bitcoin has spent the better part of six weeks trading above the 200-day moving average, which is one of the most vital signs that the market has turned. The cryptocurrency must maintain the 200-day MA for the foreseeable future to ensure that the trend doesn’t reverse back into bearish territory.
Fundamentals Overwhelmingly Bullish
Aside from the fact that Microsoft is building on the bitcoin blockchain, Starbucks is accepting BTC payments and Intercontinental Exchange is finally testing its Bakkt futures platform (read more here), there are several underlying reasons why the bull market may continue.
Bitcoin remains in heavy accumulation, which means more people are buying and holding the virtual currency instead of selling it. This is further confirmed by the accumulation/distribution (A/D) line in the chart above.
Data from Blockchain.com also show that unspent transaction outputs are at a record high. Once again, this means fewer people are selling bitcoin.
There’s also evidence to suggest that bitcoin is benefiting as a store-of-value asset amid the latest bout of geopolitical tumult. The U.S. stock market recovered on Tuesday but remains highly vulnerable to an ongoing trade spat between the Trump administration and China. Overvaluation risks, declining corporate earnings and a shaky global economy mean investors are looking to alternative assets to store their wealth. Not all of them are choosing bitcoin, but some of them are.
Case in point: the popular Grayscale Bitcoin Trust (GBTC) now controls $1.7 billion in assets under management. The vast majority of its capital comes from institutional investors and most of the contributors are hedge funds.
Read more: Five Reasons Why Bitcoin is Surging.
Institutional demand will continue to rise now that Fidelity and Intercontinental Exchange have entered the market. It’s widely expected that Nasdaq will soon follow. In any event, Nasdaq is already backing a new cryptocurrency platform by the name of ErisX, which seeks to bring digital asset trading to institutions and retail traders.
Disclaimer: The author owns Bitcoin, Ethereum and other cryptocurrencies. He holds investment positions in the coins, but does not engage in short-term or day-trading.
Featured image courtesy of Shutterstock. Chart via TradingView.