First Mover: While Bitcoin surpasses $ 18K, there is solace in the crowded trade

Bitcoin’s rise continues, with prices climbing to the $ 18,000 mark during Asian trading hours. In a sign of persistent decline in demand, the sudden drop to $ 17,200 seen after breaking through the new 34-month highs was quickly reversed.

“Bitcoin is now targeting an all-time high of $ 20,000,” Simon Peters, a cryptocurrency analyst at multi-asset investment platform eToro, said in an email. “The last time bitcoin hit the $ 20,000 mark was in 2017 and retail investors piled up while experimenting with FOMO crypto.”

In traditional markets, European equities and US stock futures gained ground and safe havens like gold and the dollar weakened as investors continued to discount prospects of a rapid global recovery on potential coronavirus vaccines.

Has betting on bitcoin become a crowded affair?

This was the assessment of about 4% of global fund managers in a monthly survey released Tuesday by Bank of America, when asked to name the “busiest trade.” The “long bitcoin” answer ranked behind “long US tech” (65%), “short US banks” (11%), “long corporate bond” (9%) and “long gold” (5%):

A few things come to mind.

1) It is difficult to argue that “long bitcoin” is particularly crowded right now, given how many large investors have yet to claim that the trade has any merit. On Tuesday, Ray Dalio, CEO of Bridgewater Associates, the world’s largest hedge fund, tweeted several “problems with bitcoin as an effective currency”, including its limited usability as a form of payment. “What am I missing?” Dalio wrote. (#CryptoTwitter has had a lot of answers for this.)

According to Mati Greenspan, founder of foreign exchange and cryptocurrency research firm Quantum Economics, the price chart patterns suggest that bitcoin was “due to a long ago withdrawal.”

“But fundamentals are firmly in control right now, as bigger and bigger players are entering this small market,” Greenspan wrote on Tuesday.

In other words, people are just starting to arrive.

2) If the trade is crowded, many investors must be overjoyed with how well it is doing this year. Bitcoin topped $ 17,000 on Tuesday, and then $ 18,000 early Wednesday, climbing to levels never seen in three years and with prices rising more than 150% year to date. This compares to 12% of the Standard & Poor’s 500 index of large US stocks. This could be a sign that the rally is over the top. But as First Mover discussed earlier, many investment decisions are made based on retrospective track records. Few large banks have made a serious push to cryptocurrencies, but Germany’s Deutsche Bank described bitcoin as the best-performing asset in the world in 2021.

“If you knew 10,000 people who owned bitcoins, you could call them all and congratulate them on their success,” Matt Blom, head of sales and trading for cryptocurrency firm Diginex wrote on Tuesday. “The fact is, you don’t know 10,000 people who own bitcoins, you probably only know a handful. And they’ll all say the same thing: ‘I don’t own enough.'”

3) Market signals suggest that interest among large investors is growing, not plateauing, indicating that there is no shortage of traders looking to invest more money in trading. Open interest in bitcoin futures rose to over $ 6 billion from $ 4 billion recently in October, according to data firm Skew. Even those amounts are still tiny fractions of bitcoin’s total market capitalization, currently around $ 325 billion.

4) The number of active bitcoin addresses has recently risen to around 1.2 million, but is still a touch below the levels seen during the 2017 bitcoin bull run, when prices rose to an all-time high near $ 20,000 . According to the Norwegian cryptocurrency analytics firm Arcane Research, “the number of active addresses grew more organically in 2020, without a dramatic and dramatic peak as witnessed in late 2017”.

“The rise in active addresses indicates that bitcoin is seeing an increase in usage and adoption,” Arcane wrote in a report Tuesday. “This is a bullish and healthy sign and underlines the strength of the current bull run.”

5) The reality is that nobody really knows how to value bitcoins. It’s an 11-year cryptocurrency, too short to really gauge how much it might be worth in the future, especially when neither the Federal Reserve nor private economists can agree on the likelihood of runaway inflation from this year’s trillion-dollar stimulus. coronavirus or the impact of momentous changes such as the shift to remote work. Bitcoin has no earnings, so it cannot be valued as a stock and it has no yield, so it cannot be valued as a bond. The price is actually just a function of how many people want to buy it, compared to the amount created each day by cryptocurrency miners. (By the way, that’s about 900 bitcoins a day, worth about $ 15.3 million at current prices.) Dalio says governments will “outlaw him and make him too dangerous to use” if bitcoin becomes too popular. But according to the same Bank of America fund manager survey, roughly 3% -4% of global fund managers think bitcoin is the asset class most likely to outperform in 2021 (emerging markets ranked at first place, followed by the S&P 500, oil and gold.)

Hence, roughly the same percentage of respondents see bitcoin prices rise higher than those who see the trade as overcrowded. These are just guesses about what the future holds, of course. A Citigroup analyst recently predicted that the price could exceed $ 300,000 by the end of next year.

If so, there is a small reason to disperse the crowd.

Bitcoin’s recent rally from $ 10,000 to $ 18,000 looks similar to the sharp rise to record highs near $ 20,000 in the last quarter of 2017. However, that doesn’t necessarily mean the market is nearing the top.

While the 2017 rally peaked in December, the current rally appears to have legs, according to the Mayer Multiple, which is the ratio of the price to the 200-day moving average. At press time, the ratio stands at a 16-month high of 1.67. However, the metric is still well below the 2.4 threshold which historically marked the final stage of bull markets.

The ratio rose above 2.4 on December 1, 2017, after which bitcoin’s value doubled to $ 20,000 in just two weeks before returning to $ 12,000 on December 22. .

Read more: The Bitcoin Indicator suggests that the bull market is still in its infancy

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