First Mover: Bitcoin’s Failure to Break $20K Shows Big Investors Only Just Arriving

Bitcoin was lower, retreating after rallying over the past 24 hours to a new all-time-high price of $19,920, based on CryptoX’s Bitcoin Price Index. 

Cryptocurrency analysts predicted bullish traders might next target the $20,000 threshold, though the market could struggle to break through if large potential holders choose to take profits at that level. 

The “resistance into $20,000 could be more psychological than anything else,” said Denis Vinokourov, head of research at the digital-asset prime broker Bequant. “It would make sense that once we are finally able to get past this threshold, that the rally has legs.”

In traditional markets, European shares rose, led by banks and energy firms, and U.S. stock futures pointed to a higher open on the first day of the final month of a tumultuous 2020. Gold strengthened 1.2% to $1,798 an ounce. 

All sorts of reasons were cited Monday as bitcoin pushed to a new all-time-high, ranging from PayPal’s (PYPL) recent entry into the space to the collective market shrug in response to the massive outflows from the OKEx cryptocurrency exchange following after a five-month withdrawal suspension was lifted. 

What’s clear is that most analysts, traders and industry executives are talking about the sudden influx of big investors and Wall Street firms nosing into bitcoin and digital-asset markets for the first time. As noted Monday in First Mover, “institutional adoption” has become among the buzziest of buzzwords from bitcoin bulls and marketeers. 

The key driver of their interest appears to be the desire for a hedge against inflation, during a year when the deep economic toll from the coronavirus has prompted the U.S. Federal Reserve and other central banks to pump trillions of dollars of emergency liquidity and monetary stimulus global financial markets.  

“With so much excess liquidity in the system, the original investment case for bitcoin is being vindicated.” Rich Rosenblum, who heads trading at the crypto firm GSR, told CryptoX’s Daniel Cawrey.
On Monday, just before bitcoin prices began their single-day price climb of 8.3% to end the month, the market was filled with chatter about a new endorsement from an analyst at the $631 billion investment firm AllianceBernstein. (“I have changed my mind about bitcoin.”) Later in the day, CNBC reported that strategists for another Wall Street firm, BTIG, said cryptocurrency had come of age, and that bitcoin should reach $50,000 by the end of next year. 

“The stream of institutions commenting and allocating to BTC became a flood of good news that reinforced the narrative,” Matt Blom, head of sales and trading at the cryptocurrency-focused financial firm Diginex, told subscribers in an email. 

CryptoX’s Muyao Shen reported that support from institutional investors might help to sustain the latest rally, contrasted with the bull run of 2017 when prices briefly touched these levels before quickly tumbling and then hibernating in a bear market for most of 2018.  

“Broadly speaking, institutional positions and high-net-worth individuals are leading the way this time,” Jason Deane, an analyst at Quantum Economics, told Decrypt.

Another difference from 2017 is that digital-asset markets appear to have evolved dramatically in the past few years and appeared to have handled the recent uptick in intensity and transaction volumes without too many glitches. (The well-trod fiat-to-cryptocurrency on-ramp Coinbase did report delays in processing some bitcoin withdrawals due to network congestion.) 

“The trading, settlement and custody services are all far more sophisticated and mature, which instills confidence,” GSR’s Rosenblum said. 

Major spot exchanges, where retail customers casually buy the world’s oldest cryptocurrency, have seen an uptick. Combined daily volume for Coinbase, Bitstamp, Kraken, Gemini and ItBit was at $1.5 billion as of press time Monday, much higher the $488 million average of the past six months, CryptoX’s Dan Cawrey reported.

Jeff Dorman, chief investment officer at Arca Funds, wrote in his weekly blog that some big investors, due to regulatory concerns, might be using futures on U.S. commodities exchanges or publicly traded investment vehicles in traditional stock markets to gain exposure to bitcoin – instead of just jumping into digital-asset markets. He provided a chart showing how key closures on public U.S. markets over the past week coincided with big swings in 24-hours-a-day, 7-days-a-week cryptocurrency markets.

“The institutions are coming all right, but they are taking the local bus while the rest of us are on the express,” Dorman wrote. 

The upshot is that bitcoin is reaching new all-time-highs when institutional adoption hasn’t even really got going, in the truest sense. 

Bitcoin’s one-month implied volatility has risen to 6.5-month highs, reflecting increased expectations of price turbulence over the next four weeks.

According to data source Skew, the metric influenced by demand for call and put options has increased to 89%, the highest level since May 18, having bottomed out near 44% in September. The doubling of implied volatility has happened alongside bitcoin’s rally from $10,000 to $19,920 and looks to have been caused by relatively higher demand for call options (bullish bets).

That’s evident from the record low one-, three- and six-month put-call skews, which measure the cost of puts (bearish bets) relative to calls. The options market looks positioned for a continued rally.

Some analysts say a healthy pullback could be in the offing as bitcoin’s inflow to exchanges has exceeded outflows since the Thanksgiving sell-off, according to data source CryptoQuant. “That on-chain metric could indicate a short-term bearish trend, sending bitcoin back to a level of around $16,000,” said Ki Yong Ju, chief executive officer of CryptoQuant.

At press time, bitcoin is trading near $18,800, representing a 4% drop on the day.

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