Market Overview

Bitcoin, a leading digital currency, lost almost 12.5% on Thursday morning after it almost hit all-time highs of December 2017 at $19,891. In 2020 the digital currency has repeated it’s hype fromthree years ago when it rocketed up by 484% from its lows of $4000 in March to this year’s high of $19,349 which was reached on Tuesday. Bitcoin has performed notably in November this year as it gained 37%.

The rally in the leading cryptocurrency may be partially explained as it is positioned as a risky asset or “digital gold” opposed to the U.S. Dollar. So, Bitcoin rose along with the optimism of investors. It is worth noting that stocks, oil and emerging economies currencies are also in the group of risky assets. They have also performed gains recently despite harsh negative sentiment related to the severe second wave of the pandemic. However, markets are pricing in future developments, and the future is forecast to be positive at the moment as several vaccines are ready to be available for the public soon. The victory of Joe Biden as the next president of the United States is also of paramount importance for the markets as he has declared that he will swiftly terminate the trade wars with China, launched by the Donald Trump Administration. That will most probably be an advantage to global trade and production.

The other reason for a recent rally in digital currencies is a weakening of the Greenback against major currencies, including currencies of emerging economies. Markets are expecting Joe Biden, as a new president-elect, to strongly advocate the long-awaited relief bill – that is expected to be worth at least $2 trillion - that is expected to bail out the American economy and provide additional liquidity to the markets, and this package might be approved within a few months. It should be noted that the fiscal stimulus measures and loose monetary policy of the Federal Reserve have boosted prices of risky assets and bitcoin among them.

A sharp increase in monetary supply in the United States has led to a decline of the Greenback against most of the assets. Additional liquidity flows subside not only in the real economy but also in financial markets nudging the demand for instruments that are an alternative to the U.S. Dollar.

However the future might not be bright for bitcoin or other existing private digital currencies since no government will most probably not allow them to replace national currencies. Government officials are reluctant when it comes to digital currencies and mostly do not welcome them as alternative currency or even a savings instrument.  German Finance Minister Olaf Scholz said that privately-issued cryptocurrencies are unlikely to be bound to the banking system. “I do not support private sector digital currencies,” he told delegates to the European Banking Congress last week. Billionaire hedge fund manager Ray Dalio believes that such currencies will be banned by the governments. Dalio, the founder of Bridgewater Associates, the world’s largest hedge fund, has long been a sceptic of bitcoin and other digital currencies. He points out the week sides of such “currencies”. “Bitcoin is not very good as a medium of exchange because you can buy much with it (I presume that’s because it’s too volatile for most merchants to use,” he wrote in his Twitter. Dalio believes that such currencies is not suitable for saving too. “It’s not very good as a store-hold of wealth because it’s volatility is great and has little correlation with the prices of what I need to buy so owning it doesn’t protect my buying power,” he wrote in addition. Dalio has challenged the audience with another tweet: “I can’t imagine central banks, big Institutional investors, businesses or multinational companies using it. If I’m wrong about these things I would love to be corrected.”

Many governments, including those from the largest economies like China, the United States, the United Kingdom, Japan or even Europe, are working to introduce the state-issued digital currencies or Central Bank Digital Currencies (CDBC). China is leading the process among developed nations with an intention to launch its full scale CDBC in 2021. China’s CDBC has reportedly crossed the $300 million payment milestone from about 4 million transactions as of October 31. Chinese President Xi Jinping recently called on the G20 nations to adopt a more receptive attitude towards sovereign digital currencies. Countries like Cambodia and The Bahamas have already released their own central bank digital currencies.

Bitcoin is completely different to stocks, currencies and crude, as it has no physical background behind it. Its virtual nature and high volatility allow to whirl up its price as well as shatter it much steeper than fiat currencies. Now could be considered as a time for such a whirl up for Bitcoin price. Nevertheless, now things are completely different to what they were in late 2017. Many institutional investors at the moment are attending the rally as the infrastructure of digital currencies has significantly enhanced and became more “civilised” in the last three years. So, many portfolio managers are considering Bitcoin as a savings instrument for their portfolios. Trading volumes for the leading digital currency on crypto exchanges hit 5 months highs, futures trading volumes reached all-time highs. Grayscale Investments fund has allocated around $1 billion to be invested in digital currencies within 11 days, and will allow for 500,000 bitcoins to be accumulated under its management.

Citibank called Bitcoin a new “digital gold” while Black Rock and Deutsche Bank highlighted the notion that Bitcoin is replacing gold contracts in investment portfolios. The Wall Street Journal wrote that billionaires like Paul Tudor Jones and Stanley Druckenmiller have their own bitcoin, calling it an asset class that has a lot of attraction as a store of value and could be better than gold. Wall Street Journal itself wrote a front-page article on bitcoin rally recently.

So, maybe it should not be excluded that Bitcoin may hit the $20,000 landmark soon and continue its rally amid continuous investors’ optimism around the approval of a new relief bill in the United States, and mass vaccination. However, the unpredictability of the “digital gold” should also be considered. From a technical point of view Bitcoin may extend its correction to the support level at $16,000.

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Analysis and opinions provided herein are intended solely for informational and educational purposes and don't represent a recommendation or investment advice by TeleTrade.