Cryptocurrency Swings – Why and What’s Next?
The cryptocurrency market is trading in all directions. Bitcoin saw a record breaking surge to $34,792 on 3 January 2021, after a volatile 2020.
While Simon Teo, senior strategist at Phillip Futures, maintains a longer-term bullish view, he shares why things can still go either way.
Reasons cryptocurrency prices could soar in the long term
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. Weak US dollar
The weak dollar environment right now tends to drive bitcoin’s price up.
4. Low interest rate environment
Low interest rates increases the 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 technical 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 in criminal activity
This could see governments attempt to impose identification requirements on crypto wallet holders and could put off some investors. Authorities would likely try to gain access to every transaction ever made by individual wallets. 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.
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