The current Bitcoin price surged past the $70,000 mark on May 21, marking a significant milestone driven by a surge in Bitcoin trading volume and a broader market rally. Bitcoin’s price climbed to $70,325, a 6% increase over 24 hours before settling around $68,700, reflecting investors’ anticipation amid rising U.S. monetary expansion and inflationary pressures.
The renewed interest in Bitcoin is evident from the nearly $1 billion flowing into spot Bitcoin exchange-traded funds (ETFs) and the substantial liquidations over $235 million, including $63 million in Bitcoin short positions. Additionally, Bitcoin whales have accumulated substantial holdings, contributing to the bullish momentum as the drop in exchange reserves indicates rising scarcity amidst the recent Bitcoin halving event.
Bitcoin Price Analysis
Technical analysis of Bitcoin’s price chart
Analyzing Bitcoin’s price chart can provide valuable insights into its potential future movements. Patterns that emerge over a longer period are generally more reliable, with larger moves resulting once the price breaks out of the pattern. The system also clearly indicates the expected price path going forward, based on machine learning algorithms that crunched thousands of past situations.
Chart patterns often have false breakouts, so traders can increase their success by confirming breakouts with other indicators like the Relative Strength Index (RSI) or Moving Average Convergence Divergence (MACD). Ideally, a price breakout (above resistance or below support) is accompanied by an increase in volume, as the subsequent move is likely to be substantial. An increase in volume can confirm the validity of the price breakout.
Key resistance and support levels
Pivot points are used to identify intraday support, resistance, and target levels. The pivot point and its support and resistance pairs are defined based on the current day’s high, low, and close prices. Standard deviation, a measure of past volatility, provides a mathematical possibility of trading range based on the mean values over one year.
- 1 Standard Deviation: Provides a possible trading range around 68% of the time, anticipating that roughly 2 out of 3 times, the market will stay within this support and resistance range for the next trading session.
- 2 Standard Deviations: Provides a possible trading range around 95% of the time, anticipating that roughly once a month, the market will move outside of this range.
- 3 Standard Deviations: Provides a possible trading range around 99.7% of the time, anticipating that less than once a year, the market will move outside of this range.
Indicators and chart patterns suggesting trend continuation
Some simple patterns like support and resistance breakouts and approaches are among the most successful, with win rates above 75%. When the price finally breaks out of a pattern, it can represent a significant change in sentiment.
Emerging patterns are particularly useful for swing traders, who look for situations where the price becomes range-bound and continues to bounce between support and resistance. They go long on the upward bounce from support and short on the downward rejection from resistance, as long as it stays within the range.
For triangles, a breakout typically occurs in the direction of the existing trend. Most traders will take a position once the price action breaks through the top or bottom trendline with increased volume, anticipating a move equivalent to the widest section of the triangle.
With bullish flag patterns, traders prefer a breakout with an increase in volume, but it isn’t a must. With bearish flag patterns, the breakout volume may not differ significantly from the preceding volume.
Market Dynamics
Influence of spot Bitcoin ETF investments
The introduction of spot Bitcoin exchange-traded funds (ETFs) could potentially enhance the liquidity of the Bitcoin market by providing more buyers and sellers. Increased liquidity can lead to more stable prices and less volatility, making Bitcoin more attractive to ordinary investors. A spot Bitcoin ETF does not directly affect the price of bitcoins, but it can indirectly influence their price in several ways:
- Increased adoption: A spot Bitcoin ETF will likely attract significant investment inflows from mainstream investors who want exposure to bitcoins within their brokerage accounts. As demand rises, this influx of new investors and capital could boost Bitcoin prices.
- Market validation: The approval and launch of a spot Bitcoin ETF would further validate Bitcoin’s legitimacy in the mainstream financial system. This perceived legitimacy could bolster confidence in bitcoins and drive prices higher.
However, some argue that a spot Bitcoin ETF would reduce the premium that institutional investors pay to acquire bitcoins through trusts and private funds, which could depress Bitcoin prices at the margin.
Impact of reduced Bitcoin exchange reserves
Bitcoin exchange reserves have hit an all-time low, indicating a trend of ‘hodling’ (holding onto Bitcoin) and reducing the Bitcoin available for buying and selling on exchanges. This trend is generally a positive indicator of Bitcoin’s future price.
Bitcoin exchange reserves refer to the amount of Bitcoin held on cryptocurrency exchanges, which traders and investors use to buy and sell Bitcoin. When reserves are high, there is a lot of Bitcoin available for trading. In contrast, when reserves are low, there is less Bitcoin available, which can create a supply shock and increase its price.
Since Bitcoin exchange reserves are at their lowest levels, more Bitcoin is being taken off exchanges and stored in private wallets, reducing the supply available for trading. Total exchange outflows come at $8.03 billion over the same period, suggesting that the net outflow trend of declining exchange reserves could continue.
Role of institutional interest and liquidity
Bitcoin’s price has been significantly influenced by its institutionalization, as institutional investors are typically long-term investors who prioritize portfolio diversification and risk management. This means they are less likely to sell their Bitcoin holdings during market volatility, which can help to limit price swings.
Furthermore, institutional investors frequently invest large sums of money in Bitcoin, which can help to keep the price stable. Bitcoin’s increased stability has also made it a more appealing investment for traditional investors like pension funds and endowments, which typically have strict investment policies that require them to invest in low-volatility assets.
Despite the crypto winter of 2022, financial institutions have been increasing their investments into crypto. However, the industry’s Financial Performance Index (FPI) score witnessed a recovery in Q3 2022 due to improved liquidity, reduced market volatility, and improved return against the market.
The low exchange reserves, combined with high demand from institutional buyers and retail investors, could set the stage for a potential price increase. Additionally, large transactions worth $79.62 billion in the past seven days, often indicative of institutional activity, suggest continued interest from big players, which can be a bullish signal for Bitcoin.
Macroeconomic Factors
Relationship between Bitcoin’s price and monetary expansion
The past decade appears to show a strong correlation between crypto markets’ performance and the growth in a broad measure of money supply (M2), stemming from a reduction in interest rates, quantitative easing, and fiscal stimulus. M2 has surged since the Great Recession as central banks lowered interest rates and implemented QE, exhibiting exponential growth, particularly due to expansionary monetary policies during recessionary periods. The correlation between money supply and the crypto index is 0.75 over the historical period starting in 2017. However, in July 2022, M2 declined as the US reversed loose monetary policies, potentially restricting crypto asset appreciation or contributing to depreciation.
Implications of inflation and Federal Reserve policies
Inflation is generally associated with an overheated economy after expansionary monetary and fiscal policies have increased aggregate demand. Fiscal policies that increase disposable incomes above sustainable levels raise consumption, leading to demand-driven inflation and boosting investment, including in assets that generate higher returns, such as crypto. However, the data to date does not conclusively support crypto assets’ hedging capabilities against inflation, unlike gold, which has tracked the 10-year Breakeven Inflation Expectation index quite well since 2013.
The anticipation of approval of spot Bitcoin ETFs appears to be a main driver of Bitcoin’s recent price surge. In early 2023, the SEC approved 11 asset managers to offer Bitcoin ETFs, and the expectation of approval helped Bitcoin finish 2023 strong, with inflows to the new ETFs powering it to a new all-time high in March. However, the recent decline in prices has led to substantial outflows from US spot Bitcoin ETFs.
The Federal Reserve’s actions have significantly impacted Bitcoin prices. The instability in the banking sector led traders to bid up cryptocurrency in the belief that the future path of rate increases would be less severe. As rates seemed to peak in October 2023 and then fell, riskier assets like Bitcoin rose. However, the Fed’s announcement of tapering quantitative tightening (QT) in June came as a dovish surprise, not only in its timing but also in the magnitude of the reduction. The Fed now appears to be in a difficult position, unable to raise rates without stifling growth prospects or cut rates due to inflation concerns.
Scarcity and halving event’s impact on Bitcoin supply
The “stock-to-flow” ratio, a measure of current supply against the rate of new supply, is a crucial indicator of Bitcoin’s long-term valuation and scarcity. Each halving event markedly increases this ratio, underscoring Bitcoin’s growing scarcity and reinforcing its role as a store of value for the digital era.
The upcoming 2024 halving event, which will reduce Bitcoin’s supply, could amplify demand, although this hinges on multiple variables like selling pressure, regulatory shifts, and the broader macroeconomic landscape. The anticipated first rate cut by the Federal Reserve in mid-2024 is expected to further positively influence Bitcoin’s price.
Without a change in demand, the halving should only trigger a 0.9% price increase over the first year after the halving, relative to what would be the case without the halving. However, the halving could tilt the balance between marginal buyers and sellers, setting off a bull market with a feedback loop where more people want to buy as the price rises. The halving also draws attention to Bitcoin’s absolute scarcity at a time when it is more accessible for investors than ever before, thanks to the ETF-approvals in the U.S.
Conclusion
The recent Bitcoin price surge to over $70,000 underscores the growing maturity and mainstream acceptance of the cryptocurrency market. Driven by a confluence of factors, including the approval of spot Bitcoin ETFs, reduced exchange reserves, and increased institutional interest, this milestone reinforces Bitcoin’s position as a legitimate asset class. However, the road ahead remains uncertain, with macroeconomic forces like monetary policy and inflation playing a pivotal role in shaping the market’s trajectory.
While Bitcoin’s long-term prospects appear promising, with its inherent scarcity and the upcoming halving event potentially fueling further demand, investors must remain vigilant and navigate the market’s complexities with caution. As the cryptocurrency landscape continues to evolve, a thorough understanding of the underlying dynamics and market forces will be crucial for informed decision-making and successful investment strategies.
