Bitcoin. The Reasons That Explain The Rally... And The Setback That Is Coming

The bitcoin price shot up in December by about 40% and is moving slightly above $27,000. In the middle of the month, it already exceeded 23,000 dollars and now it has reached 28,000 dollars, a new historical maximum.

In this way, the bitcoin signs its bad bullish month since June 2019, which also occurs at the margin of other cryptocurrencies. Thus, the Litecoin barely got to 18% in the week and 1.75% for Ethereum.

We are in a new environment where bitcoin is the maim goal.

As is often the case after such vertical advances, now we have to wait for the setback to come. Its amount will test the strength of the market.

In addition, Bitcoin faces scrutiny from regulators and the reception it will receive from the Biden Administration.

There are several reasons for the revival of Bitcoin: the arrival of institutional money, the interest of companies like Paypal or Square, protection against inflation or even the compliments of some Wall Street heavyweights, such as Elon Musk.

In reality, they could all be defined with the same adjective, euphoria.

1.- FOMO. The triumph of euphoria

If there is one word that perfectly illustrates the feeling of the market, it is euphoria.

When in the beginning of March the bitcoin hit bottom at 4,900 dollars, few could imagine that it would close the exercise at historic highs.

This rally implies returns of 450%, enough to unleash enthusiasm among investors, and in turn provoke another well-known psychological reaction, the 'FOMO' or fear of missing out. Pure speculation, in short.

The problem is that the last ones to arrive at the party attracted by the FOMO are usually the ones who finally do worse. It happened on the last big climb, and history could repeat itself.

2.- The role of institutional money

Since the bitcoin collapsed at the end of 2017, analysts have already warned that the next rally would have to be driven by the big institutional investors, money in capitals. And this is what has happened.

According to data from Bitcoin Treasuries, the big institutional investors have already accumulated 1.15 million bitcoins, which multiplied by its current price, means an investment of 31,343 million dollars. Together, they control almost 6% of the currencies in circulation.

These are large funds, such as Grayscale Bitcoin Trust, MT Gox, Block One or Microstrategy, among others.

Large companies such as PayPal or Square have joined the group of convinced, as well as prestigious investors such as Ray Dali, who is already doubtful about his attacks on bitcoin.

This role of institutional money, is the biggest driver of the rise!

3.- Bitcoin as an active refuge and reserve of value

Evidently, the big institutions arrive for one reason, the supposed loss of value that will occur in trust money (dollars, euros...) because of the monetary injections of the central banks to fight the coronavirus.

The greater the increase in the money supply, the less value the money in circulation will have. With bitcoin this does not happen.

The money supply is fixed and unchangeable. 21 million coins in circulation by the year 2140. From then on, no more bitcoins will be issued.

With this monetary policy, the principle of scarcity operates at full strength. That's why, when there is a peak in demand like today, miners cannot respond by mining more bitcoins. It's impossible, and the only form of adjustment possible is to increase prices.

In fact, for the price of bitcoin to rise, investors must want to own the currency as a store of value, and not just to spend it.

4.- The setback that is coming

With a bullish streak of such caliber, now the correction is most likely just around the corner.

We should definitely see a reversal, but the magnitude is probably less. We may only see drops of 10% to 15%.

In this sense, no operation is recommended and warns about the risks involved in the euphoria unleashed by the bitcoin.

We are facing a unique asset, whose demand has skyrocketed in recent months, where investors who were behind previous movements do not now dominate prices. In his opinion, the first support could be around 24,000 dollars, with an extension towards 22,500 dollars.