Hype of the Week: Bitcoin Rally
The market is buzzing, coverage is increasing, and Bitcoin seems to be breaking resistance after resistance. At present, crypto’s flagship currency is priced at $18,600, a three-year high. However, the question begs what is fueling this price rally?
Hedge Against Inflation
Perhaps the genesis factor that may be contributing to the price rally is the fear of wide-spread inflation and depreciation of the dollar.
At present, the US Federal Reserve has turned its money printing taps on to free flow, with an estimated $3 trillion dollars spent in order to combat COVID-19. On a weekly basis, the Federal Reserve has bought $25 – $30 billion worth of treasuries and mortgage-backed securities.
Additionally, according to a report by Citibank, once the vaccines hit the market, “there is the potential for the dollar’s losses to be front-loaded, with the USD potentially falling by as much as 20% in 2021.”
Thus, it makes perfect sense that institutions as well as HNWI’s are seeking to minimize their inflation-risk by purchasing Bitcoin. Usually, gold would be the first-choice asset as a hedge-against inflation, however, Bitcoin has outperformed gold by a landslide. Bitcoin is being regarded as a modern alternative to gold, with a finite supply of 21 million, who could blame investors for seeing crypto’s flagship currency as a good hedge.
As a result of the current geopolitical climate, fears of inflation and depreciation, Bitcoin’s current price push may further stem from institutional engagemen.
In August, MicroStrategy, surprised the market with a colossal purchase of over 16,000 Bitcoin in a $425 million dollar investment. MicroStrategy CEO Michael Saylor cited increased monetary supply, decreasing interest and rising inflation as the reason for the companies bold move.
Two-months later, Square, run by Twitter CEO Jack Dorsey, 4709 Bitcoins worth $50million, claiming that Bitcoin is both the currency of the future and a source of world-wide financial empowerment.
Then come the end of October, PayPal announced that it would open the games to cryptocurrency trading, with users having access to Bitcoin via their PayPal accounts. With over 286 million active users, PayPal may have the means to launch a rally on its own, a view shared by data from the crypto exchange itBit.
High-Net-Worth Individuals (HNWI)
Following the institutional engagement and in reaction to current affairs, HNWI’s are becoming a major source behind the recent price rally, as opposed to the hordes of retail clients that fueled the FOMO-induced rally in 2017.
In a statement made by JP Morgan analyst Nikolaos Panigirtzoglu, there are clear signs that family wealth management offices, are seeing a rise in interest and a rise in allocation of funds towards cryptocurrencies.
This notion is backed by data provided by the startup Glassnode, whose mean transfer volume metric, indicated that the size of current transaction values is ever growing. Furthermore, defining HNWI’s as entities holding over 1000BTC, additional data from Glassnode shows that the number of HNWI’s is increasing, signaling a return to previous highs.
Additionally, data from the Whalemap, depicts clear clusters of transactions forming around the $17,700 price level. The emergence of such whale clusters indicates price action wallet addresses that hold in excess of 10,000 Bitcoin. The size of the cluster indicates the volume of whale activity and ind icates intent to hold – accumulation is apparent.
Another strong contributing factor in the rally is subject to the laws of supply and demand. According to data published by Glassnode, the net flow of Bitcoin held on exchanges, has seen a sharp decrease in the past two months. Bitcoin is being moved from exchanges to be placed in storage, indicating a growing sentiment to hold or HODL.
A report published on the 19th of November by Chainanalysis outlines a very similar story. The report highlights that ~77% of all mined Bitcoin are in illiquid wallets, wallets that have a greater propensity to hold their contents as opposed to spending them as prices rise. Thus, that leaves the number of Bitcoin available to purchase at 3.4million, according to Chainanalysis.
The propensity to hold naturally increases when investors believe there is considerable positive price movement at hand. With demand growing as a result of such price rises, supply will decrease as less investors are willing to place their Bitcoin on the market.
Thus, it can be concluded that some of the key reasons for the current price rally can be attributed to institutional engagement, high-net-worth individual spending a supply crunch and Bitcoin being used as a hedge against inflation. It seems that the current geopolitical climate and federal spending are perhaps the underlying source behind all other sources noted. Due to the en-masse spending by central banks, institutions and HNWI’s are placing their bets on Bitcoin as a hedge-against inflation. Naturally, as a result of this uptake in large purchases of Bitcoin, with these purchases being HODL’d, a supply crunch will ensue by demand driven by Bitcoin’s price ascent.
This rally is different, no longer is retail FOMO the main source of price increases, but institutions and HNWI’s are beginning to see the value in holding Bitcoin. If this behavior and geopolitical risk continues who knows where the price of Bitcoin will be in a years’ time.