Bitcoin prices have exploded higher lately, gaining over 50% this month, echoing the exponential moves back in its ‘heydays’.
The latest buying frenzy seems owed to a combination of Chinese capital flight, growing retail adoption, and increasing institutional interest. In the big picture, sentiment around cryptos seems to be changing for the better.
Digital currencies are back in vogue, with Bitcoin seeing an explosive rise once again, albeit without a clear catalyst. A combination of factors seems to have been at play.
With a little help from China
First and foremost, China started to tighten its capital controls recently amid an escalating trade war, reducing further the amount of foreign currency people can withdraw from banks. The result is that wealthier Chinese citizens may be trying to evade such controls and move money out of the country by buying cryptocurrencies.
Cryptos go mainstream
A smaller though still significant factor may have been the rapid growth in mainstream acceptance for Bitcoin. Several major US retailers including Whole Foods and Bed Bath & Beyond just started accepting Bitcoin as payment, through the use of specialized apps like Flexa. Gone are the days when the king of cryptos could only be used for a handful of purposes online.
Make no mistake, this is huge. It could mark the beginning of a new era where consumers can spend cryptos at mainstream shops, helping to legitimize digital currencies and thereby grow the overall market.
Institutional players seek diversification
Likewise, Fidelity investments – one of the largest asset managers globally – recently announced it will offer Bitcoin trading for its institutional clients within a few weeks. This implies that institutional players with ‘deep pockets’ may be about to enter the crypto space, improving liquidity and therefore reducing the wild price swings that have scared away many investors.
This is a big deal too. Funds and money-managers have so far stayed away from digital currencies due to their security issues and lack of liquidity. If those are resolved, previously hesitant investors could start adding cryptocurrencies to their portfolios as a means of diversification. Digital tokens have a relatively low correlation with traditional assets like stocks and bonds – a valuable characteristic in times of market turmoil.
So what’s next?
In the near term, the wind seems to be blowing in favor of the bulls. Chinese capital flight, mainstream retail acceptance and growing institutional interest all paint a brighter picture for Bitcoin over the coming months.
That being said, any additional gains may be fairly modest from here, as a lot of the ‘good news’ seem to have been priced in already. Unless of course something major changes, like Chinese capital controls tightening further or a Bitcoin ETF being approved in the US, either of which could spark another buying frenzy.
As for downside risks, the main one may be regulation. Financial watchdogs around the world have slowly but surely clamped down on digital currencies, and if that process accelerates, it could have severe consequences for prices.
Technical picture improving too
The technical outlook has also turned positive, with Bitcoin prices recently posting a ‘golden cross’, where the 50-day moving average moves above the 200-day one; a bullish sign.
Further advances in the digital coin could encounter immediate resistance near 8,330, the May 14 high, with an upside break opening the door for the psychological zone of 10,000.
On the flipside, a pullback in Bitcoin may stall first around 6,000, which was a reliable support barrier back in 2018.
by Marios Hadjikyriacos, XM Investment Research Desk
Marios graduated from the University of Reading in 2015 with a BSc in Economics and Econometrics.
Prior to joining XM as an Investment Analyst in December 2017, he was providing financial analysis, reporting and consulting services to one of the largest financial services firms in Cyprus. He specializes in identifying and forecasting trends in the foreign exchange, commodity, and equity markets, predominantly through the utilization of fundamental analysis.
Besides being an active commentator in financial markets, Marios is a keen follower of economic literature as it relates to moral issues, while he is also intrigued by developments in the field of behavioral finance.