Key Talking Points:
After breaking an important milestone, Bitcoin holds above 50,000 USD and seems well supported in the short-run. The cryptocurrency has been enjoying an increase in open interest in the last few weeks as the corporate world is starting to embrace its use, all whilst investors look for assets with higher returns to counteract the quick rise in bond yields.
Gold seems to be out of the picture for now given it is a non-yielding assets, plus the commodity tends to underperform when economic expectations are high, meaning Bitcoin is likely enjoying some flows that are coming out of gold. Stocks are still a good option but they seem to be getting more and more expensive by the day, with many investors worried about a short-term correction to bring an overheating equity market in line with valuations, meaning cryptocurrencies are the way to go at the moment.
But as JPMorgan Chase & Co analysts mentioned earlier this week, unless its volatility ebbs, Bitcoin’s rally is likely to be unsustainable. The moves since the beginning of the year seem mostly attributable to speculation, and although institutional inflow has increased significantly, the limited supply of the cryptocurrency and increased retail demand are likely the main factors behind it. In order for Bitcoin’s price to normalize there needs to be a driving force behind price other than speculation, likely coming from a wider adoption as an alternative investment or a store of value.
But volatility is expected to remain in the foreseeable future and this increases the risk of a significant pullback as the cryptocurrency heads higher. As we saw when it crossed the 50,000 USD mark, there is bound to be strong profit-taking as investors cash out of their profits ignoring longer-term forecasts of price appreciating further, especially as investors start to believe that Bitcoin may be overbought, possibly causing a downward spiral effect.
Whilst there is little doubt amongst analysts that BTC/USD is destined for higher levels, investors should always have a good risk management strategy in place when trading, especially such volatile assets like cryptocurrencies.
If we look at the Daily BTC/USD chart, recent price action seems to have set a support area around 45,965, which could become of increased importance if price falls below 50,000. If so, and given this area of support doesn’t hold, sellers may be aiming at the 42,000 mark, where the previous all-time high was set in back at the beginning of January before we saw a short-term correction.
Alternatively, if price continues to head higher, it is a bit of a guessing game where it can go, but I expect Bitcoin to reach 55,000 with little resistance in the immediate future, looking for the next significant milestone to cash in profits, possibly around the 60,000 mark, where some pullback wouldn’t be a surprise.
BTC/USD Daily chart
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--- Written by Daniela Sabin Hathorn, Market Analyst
Follow Daniela on Twitter @HathornSabin
