New players are hopping on the Bitcoin bandwagon, but the price of the digital asset has been skyrocketing. Now, there’s evidence that the momentum that helped him shoot above $ 40,000 earlier this month is losing steam.
Bitcoin has fallen about 9% over the last 24 hours to a recent $ 31,700. The price appears to be showing “vulnerability” after a great month, and could start slipping toward $ 20,000 if it can’t hold the $ 30,000 level, Oanda analyst Craig Erlam predicted.
The decline has continued even as important financial players warm up to cryptocurrencies.
(ticker: BLK), the world’s largest asset manager, for example, allows two of its funds to invest in Bitcoin’s future, according to prospectuses filed Wednesday with the Securities and Exchange Commission.
And Sequoia, a software and engineering company in Virginia, gives employees the option to get paid in Bitcoin. (This could create a tax headache for employees who actually want to spend their paychecks, given that any changes in the value of Bitcoin would have to pay more taxes after already paying income taxes.)
None of these positive announcements appear to have boosted Bitcoin’s price. As always, it is difficult to pinpoint exactly why the digital asset is moving. Janet Yellen, the nominee for Treasury Secretary in the Biden administration, talked about the risks of crime and fraud posed by Bitcoin at a hearing, but the sales pressure did not really match her comments.
The stock market can also move in tricky ways, falling on seemingly good news and vice versa. But this kind of unexplained wild swing is far more common in Bitcoin, which still trades largely on lightly regulated exchanges or on fast-moving foreign futures markets.
In recent weeks, Bitcoin has been generally weaker when it is daytime in Asia, and stronger when it is daytime in the United States. That reflects a split in enthusiasm in both those parts of the world – both crucial to Bitcoin prices.
Bitcoin may be an international asset, but it trades differently and faces different regulations depending on the jurisdiction, so changes in local sentiment can affect prices even if the broader market is optimistic.
“There have been large net inflows into North America from East Asia,” said Philip Gradwell, chief economist at Chainalysis, a company that has mapped the worldwide Bitcoin ecosystem and can track the movements of cryptocurrencies in real time.
To understand Bitcoin, it is necessary to understand the differences in local sentiment, which can make American Bitcoin holders wake up 10% poorer than they were when they went to sleep.
“The North American ecosystem around cryptocurrencies has matured tremendously compared to 2017, and cryptocurrencies also became a little harder to use in East Asia,” said Gradwell. “There is still a lot of cryptocurrency held by Chinese nationals, but there is a little more pressure on the exchanges that tend to serve them. Technically, they are still not allowed to operate on the mainland. They do, but there have been many more conflicts. Also, you’ve gotten less interest from Japan and South Korea than you did back in 2017. Then people who bought Bitcoin have been ready to sell it. ”
So even if Asian investors are bullish on Bitcoin, they have incentives to sell if they are nervous about their ability to exchange currencies in the face of stricter government rules.
Gradwell says Bitcoin’s 600% rise in 2020 has a lot to do with supply and demand. Large investors bought a huge amount of Bitcoin between March and June, with record sales of at least $ 1 million – 84% more than bought during the bull run in 2017. Some say those investors that they bought Bitcoin because they ‘wanted to grow more nervous about inflation in the US, given that the government has been spending so much on stimulus efforts.
The supply of Bitcoin is limited, with only 6.25 new Bitcoin – or worth about $ 200,000 at current prices – created about every 10 minutes. So when big investors enter the market they need to find willing sellers, and they may have to pay for the privilege of buying it.
Theoretically, ever-increasing demand would continue to push the price higher given supply constraints. But Bitcoin is a momentum trade that can turn around in a hurry. When the price starts to fall, there is often a rush for the exits, because sellers fear – as in 2017 – that they will not be able to sell for these prices for a while.
“What’s interesting is that when demand slows down, there’s always a rush to sell,” said Gradwell. “Because people are going, ‘OK, I don’t know when the price will return to this level.’”
He says there is some evidence that recent Bitcoin holders are becoming more willing to sell in the past few weeks. “Literally last week or so, the volume of Bitcoin moving that has been held for less than a month but made dollar gains of 25% or more has reached quite high levels. So there are a lot of people who recently acquired Bitcoin, they have made very good of the price increase, and they are starting to move it. And when they move it, that tends to sell. That is starting to put some pressure on him. ”
Traders may be starting to stress just how much Bitcoin is driven by hype and FOMO – the “fear of missing out.”
Bank of America
released a global survey this week showing that clients believe Bitcoin is now the most overpriced trade in the market – even more so than tech stocks.
These technical and sentiment issues can make it difficult to trade Bitcoin based on the day-to-day news in the sector. Momentum, market dynamics, and regional changes often explain things better.
“It’s one of the markets where the technical analysis traders are actually doing quite well, which economists like me are getting a bit excited about,” said Gradwell. “So I try not to explain those big price swings. I really think there’s a legitimate demand and supply mechanism and it’s kind of that simple. “
Write to Avi Salzman at [email protected]