The premier digital currency has propelled higher above $50k on strong macro demand and liquidity constraints
Bitcoin has finally broken through the shackles to whiz past the high reached back in early September. As has been the case on many occasions before, the premier digital currency has single-handedly carried the crypto market upwards. Although trading around $54.5k at the time of publishing, BTC has already charted a multi-month high of over $56k earlier. Not to say that other cryptocurrencies have benefited from the strong BTC upswing — just not that much.
BTC saw a price jump of $10k within one week — something which is not out of bounds for the crypto kingpin considering the bouts of extreme volatility that we have seen it exhibit over the years. However, there are some fundamentals that seem to be playing out behind this Bitcoin rally. According to Chainalysis Market Intel, institutional investors, those holding at least 1k of bitcoin, have increased their holdings by 172k bitcoin and institutional traders have acquired an additional 68k.
And similar dynamic might be behind the recent price rise. Institutional investors and traders seemed to have stocked up as the price of BTC fell to $40k on Sep. 21. This is on top of the investors who entered the market in Q4 of 2020 and Q1 of 2021 & have continued to hold throughout price swings, keeping their liquidity off of the market — another factor contributing to the diminished supply. As evident from the chart below (Figure 1), a mid-Sep decline in institutional investors saw a sharp reversal going into early-Oct.
Figure 1
What follows is simple Economics— a shortage of Bitcoin with an increased demand for the digital asset puts a strong upward price pressure, as we have seen in the most recent episode. One can also argue about the tough regulatory stance taken by China towards digital currencies should have had a negative impact on the BTC price. However, previous data suggests that over half a million bitcoin flowing from Eastern Asia to North America since March 2020, mostly between then and March 2021.
Other boosters to BTC demand include the recent worries about prolonged higher inflation in the global economy. Bitcoin which is also referred to as digital gold might be benefitting from this, as a hedge against inflation. Also, investors appear to have cooled off their frenzy of buying into smart contract platforms like Ethereum & Solano. Perhaps this may be a hype-peak, magnified by recent challenges at Compound — one of the most high-profile DeFi platforms.
Figure 2
Whatever the reasons behind this rally, it was a pretty sudden flip in the crypto market — more specifically in Bitcoin. This is evident from the chart above (Figure 2), fiat suddenly buying almost 50% of bitcoin and Ethereum added to exchanges via the blockchain in early October, compared to a 28-day average of 30% (with the other 70% bought with stablecoins). A large increase in fiat buying is usually indicative of strong demand from investors/traders, rather than just the crypto natives trading among themselves.
Continued macro trends and the recent price action suggest that Bitcoin may continue to push ahead but consolidation at the current levels might be seen as the investors who have stocked up in recent months might book their profits. Liquidity may be low but it looks like it is increasing at a price of above $50k. We have already seen this happen in Q4 2020 when demand outpaced supply. Are we looking at a repeat of that? We will find out soon enough.
Originally Published on Medium
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