Bitcoin: Is there any value in this rally?

The 8-week rally in Bitcoin breached $10,000 today for the first time since February and is retesting the 10,000-10,500 Resistance area for the third time since September. Other cryptocurrencies saw a similar price action. This has been concomitant with a rally in global equity markets which are pricing-in a reopening of major economies from virus-containing lockdowns, overlooking dismal data (such as a 6% plunge in Japanese household spending, in data released today, and an expected 16% plunge in US April unemployment, in data to be released later) as being backward looking. Yesterday’s unexpected 8.2% y/y rise in Chinese exports in April, contrary to the median forecast for a 14.1% contraction, was a tonic for investors, while news that the US and China have agreed to strengthen cooperation in trade talks has gone down well, too.

However, the main factor that has boosted bitcoin and in general the cryptocurrency market is the anticipation of a major technical event for the digital coin, i.e. Halving. The price of bitcoin is expected to continue to rally in the run-up to the “halving” on May 12.

The reward halving, during which the number of new bitcoins being issued are cut by 50%, takes place every four years in BTC’s case. This halving activity is the breakdown of block mining rewards in half and it makes the cost of mining activity more expensive than ever before. This activity tends to lead to a decline in supply and is directly proportional to an increase in demand, which would theoretically lead to higher prices.

Hence as the cryptocurrency market historically tends to decline after every halving, it seems that investors have increased their interest ahead of the event by boosting the entire market capitalization of the cryptocurrency market by more than $13 billion from a day before. Currently, the value of the entire market stands at $268.07 billion

Other contributory factors probably include the central banks’ monetary policy, as the unprecedented economic destruction is being countered by massive fiscal and monetary policy measures globally. Also Bitcoin has once again rekindled the belief that cryptocurrencies are affected by the global equities performance but also react on major political and geopolitical events. This comes from the fact that cryptocurrency markets plunged following the plummet in oil prices and further sell-off in stocks back in February and March 2020, while they have spiked higher again since March 24 for the same reason, i.e. stocks recovery. Bitcoin more precisely posted more than 150% rebound from $3,762 seen in March, which was slightly above the 2018 bottom.

Bitcoin, from a mathematical perspective, looks to be ready to form another parabolic circle with a potential lower peak after the ones that we have seen in 2017 and 2019. There is a repetitive pattern in Bitcoin with lower wave peaks every time. Hence in the upcoming weeks it will be interesting to see if the asset will manage to sustain the positive sentiment and more precisely remain above the $10,000 level. This level is a key area to be closely watched as it reflects 6-month Resistance, a round number but also the break of the 61.8% Fibonacci retracement since 2019 plunge.

However, as following every halving the market tends to enter a bear market there is also the risk of a reversal if the top is reached. Hence Bitcoin could turn lower again if we see a potential pullback below the 50% Fib. level or even the 20-week SMA, at the 7,900-8,700 area. Hence please bear in mind that Bitcoin has always been and probably remains a very volatile asset subject to huge price swings. Hence the risk of a substantial drop remains.

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Andria Pichidi

Market Analyst

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