Victor Argonov, senior analyst at EXANTE compares Bitcoin‘s rally in 2019 to 2020-2021
When the crypto winter ended in April 2019 and the rally began, many were confident that Bitcoin (BTC) would break its record from 2017. But after the rapid growth in April-May, the rally slowed down. In the summer, BTC reached a multi-month record of $13,000 (it had risen by 4 times since the beginning of the year), after which it began to fall in price, having rolled back to $7,000 (2 times) by the end of the year.
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The current rally started in October with levels around $10,000. In less than six months, bitcoin has risen in price by 6 times, but the main growth fell in November-February, and since March the positive trend has weakened. In February, BTC exceeded $58,000, and slightly exceeding this in March when it reached $61,300. However, in April it has failed to set new records yet. Will the 2019 scenario repeat itself in 2021, when, despite the general optimism, growth ended earlier than expected and was replaced by a double drawdown (in our case, say, up to $30,000).
However, despite the similarity in the dynamics of quotations, there are fundamental differences between the rally 2019 and the rally 2020-2021, which are unlikely to allow the current rally to end so abruptly.
The First Factor: Participation Of Institutional Investors
Institutions have shown interest in BTC since 2018, when specialised exchanges for deliverable bitcoin futures Bakkt and ErisX began to be built for them. But obtaining licenses and the start of trading was delayed: Bakkt started working in September 2019, ErisX - even later. The spring rally 2019 went on without the legal participation of institutions and, in fact, contradicted their interests, preventing them from buying at the lows. When they entered the market, bitcoin had a negative trend, but was still worth $9,000. Institutional activity on Bakkt was initially modest, and it was only when BTC fell to $7,000 that deliverable bitcoin futures gained some popularity. If in September the daily trading volumes of Bakkt were below $1m, then by the end of the year they amounted to tens of million.
Unlike 2019, many large players from pension funds and investment companies like Fidelity have participated in this rally from the very beginning. The main growth comes from institutional money. At the same time, not all interested institutions have already entered the market: many are still put off by the high volatility of cryptocurrencies, which complicates risk management. However, as JP Morgan research shows, this volatility is gradually decreasing. In April it has reached 3 and 6-month lows. It is possible that soon those institutions will invest in BTC that were waiting for the decline in volatility.
Second Factor: Political Climate
During the 2019 rally, the attitude of states towards cryptocurrencies was largely unclear. On the one hand, the ErisX and Bakkt exchanges were expected to open, designed to legitimise BTC in the United States as an exchange commodity. On the other hand, the Libra scandal erupted in the summer. Donald Trump allowed himself to criticise cryptocurrencies as such, and a collective G7 statement was made against corporate stablecoins such as Libra.
Now BTC has already become a full-fledged exchange commodity in the United States, it has legal delivery and settlement futures and options. Similar instruments have appeared for Ether (ETH). No reversal is expected on this issue. Governments have focused their criticism on currencies from corporations since 2019. In addition to Libra, the TON project was closed, Ripple and others are being persecuted. As for BTC, it shows an increasing resemblance to gold, mainly competing with it, rather than national currencies. In this niche, BTC does not threaten central banks as much as a stable global Libra would.
The Third Factor: Defensive Asset Status
In 2019, BTC was viewed primarily as a risky speculative asset - a very unpredictable, albeit with a positive long-term trend. There was no consensus among investors regarding the final point of the rally. The majority tried to buy in the first two months of the rally, and in June investors had a shortage of free funds. Not only politics, but this commonplace factor seriously slowed down the rally.
In 2020, BTC has proven its ability to be a defensive asset - both against the devaluation of world currencies (and not just regional ones, as in Argentina and Venezuela), and against a stock collapse. After the March sale, by the beginning of May 2020, the BTC rate retraced the overwhelming part of the fall, while the S&P only half of it. People massively believed in him as a defensive asset. Now, many consider cryptocurrency as an almost uncontested type of investment, since the stock market is overheating and they predict a drawdown, and fiat loses its purchasing power due to the increase in the world money supply. The March polls showed that out of the received Biden incentives, people are ready to invest 6.1% in cryptocurrencies, and only 3.9% in stocks.
The Fourth Factor: Signals From Major Players
This factor is closely related to others. In the current rally, major players have repeatedly demonstrated that they are waiting for the crypto market to grow. This is the acceptance of cryptocurrencies in the PayPal account, and Citibank's statements about the likely BTC reaching the $300K level, and Elon Musk's tweets, and Tesla's direct investment in BTC. In 2019, there was no such unanimity among market participants. Institutions not in time for the rally (who had no opportunity to buy BTC before the launch of Bakkt and ErisX) were interested in the rate drawdown.
Should The Bitcoin Rally Continue?
Based on the combination of the above factors, it can be assumed that the current rally has a greater "power reserve" than the 2019 rally. BTC is the hero of the crisis, in 2020 it has risen in price by 4 times, and in the first quarter of 2021 - twice more. At the same time, not everyone has already invested in BTC. Many expect a decrease in its volatility, which is actually happening.
Players who have already invested in BTC represent an impressive force that is interested in growth. In the first quarter of 2021 alone, the same amount of money was invested in it as in the entire previous period. Since the fall of 2020, there has been a flow of capital from gold ETFs (they lost $20b) to cryptocurrency and cryptocurrency funds such as Fidelity (received $ 7b). Recently, the cryptocurrency market capitalization exceeded $ 2 trillion. The most optimistic boundaries like $ 300K do not seem so likely now, and JP Morgan even adjusted its forecast of $146K to $130K. However, BTC's rise to at least $100K is almost beyond doubt.