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Bitcoin recent price rally walks a familiar road, will this time be different?

July 3, 2019

For the first time since January 2018, Bitcoin’s market cap broke past the $200 billion mark, following its recent price rally. Bitcoin’s value against the US dollar rose from a low of $5,151 on April 27 to a sudden high of $13,844 on June 27, a leap just shy of 270%.

Then, not entirely unexpectedly, the Bitcoin price dropped sharply just before hitting the $14,000 mark retreating back to levels in the lower $10,000 range. The overall sentiment is still bullish with some expecting the $10K mark to hold and potentially act as a FOMO trigger spiking the price of Bitcoin once again.

BTC to USD price chart. Source: Coinmarketcap.com
BTC to USD price chart. Source: Coinmarketcap.com

We can’t predict what the price trend will be with absolute certainty. So instead, let’s take a look at what factors are playing a role in Bitcoin’s recent price rally and assess whether this time “things will be different”.

Facebook enters the cryptocurrency market with Libra

Facebook’s crypto bid with Libra and Bitcoin’s price rally may seem like two unrelated topics at first, but it’s more than likely that these developments are related. Both the social media giant dipping its toes in crypto and the price surge of the number one cryptocurrency, reflect elements of a worldwide financial transformation that is taking shape.

The development of Facebook’s Libra more than likely applies upward price pressures on Bitcoin as it reignites the conversation about cryptocurrencies in the mainstream. Because Facebook is a household brand, we can expect it will draw more people into the most established and understood cryptocurrencies, with Bitcoin leading the way.

Regardless of where you stand, or if Libra succeeds or not, a crypto bid from the world’s biggest social media giant certainly underscores the financial transformation we are in right now and makes the fact that we are moving into an age of digital assets an undeniable truth.

The money of the future will be based on blockchain-enabled technologies that make the current gatekeepers less powerful and challenge the dominance banks have enjoyed in the past centuries. In a way, Bitcoin’s price chart serves as an indication of how strongly people believe in that future scenario taking place soon.

Global market tensions

Just like during previous periods of global market tensions, the ongoing trade war between the US and China has investors spooked. The uncertainties have resulted in an uptick of demand for traditional safe-haven assets, indicated by the flood of demand that is going into longer-term bonds, for example.

Adding to global market tensions, economists expect monetary easing by central banks reminiscent of what followed the global financial crisis and European debt crisis around 2008. That, together with the near-certain event of the US Federal Reserve to cut interest rates in July has led investors to start buying inflation hedges.

The biggest difference today, compared to the crisis in 2008, is that all of these events are happening at a time when cryptocurrencies and blockchain present a viable alternative way for people to manage risks. Next to the usual suspects such as gold, Bitcoin is becoming a safe-haven asset too.

Halving of Bitcoin and Litecoin

Every 210K blocks, or 4 years on average, the reward allocated to Bitcoin miners for adding a block to the Bitcoin blockchain is cut in half. Bitcoin halving was designed by Satoshi Nakamoto to keep Bitcoin’s inflation in check over time, simulating a similar process with gold. There is only a finite amount of gold in the world and with every new gram mined, the remaining gold becomes harder to uncover. The limited supply and increasing difficulty over time have enabled gold to hold its value as a medium of exchange and store of value.

There can never be more than 21 million Bitcoins. By cutting the mining rewards in half every 210k blocks, increasing market limitations are put in place for the next set of 210k of blocks mimicking the increasing difficulty that occurs with mining gold. In fact, Bitcoin’s scarcity is even more certain than gold. Unlike with gold, there are no asteroids or planets that may be mined in the future: Bitcoin’s scarcity has been programmed, and it's final.

The next halving event is expected to occur around May 2020. Since the halving basically cuts the supply of new Bitcoins in half, many believe this event will have a dramatic effect on Bitcoin’s price.

For the same reasons, Litecoin (LTC) has a built-in halving event, which is expected to trigger on August 5, 2019. LTC more than doubled in the last few months booking gains from $60 on 1 April to $130 on 1 July. While this doesn’t mean there is a direct line from LTC to BTC prices, Litecoin’s rally will likely have added more momentum to Bitcoin’s ongoing price rally.



LTC to USD price chart. Source: Coinmarketcap.com
LTC to USD price chart. Source: Coinmarketcap.com

 

Hedge funds and institutional investors buy into Bitcoin

Lastly, another factor that will have played a role in the Bitcoin price rally is the influx of crypto-focused institutional investors. With more crypto-inclusive hedge funds, crypto exchanges and fintech companies building for the institutional market, new waves of capital are being driven into the Bitcoin market.

That would be a plausible explanation for what Financial Times Correspondent Jemima Kelly found. Looking at Google’s keyword trends, she found a major disparity between this year’s bitcoin price surge compared to the frenzy of 2017.

Search queries for the keyword “Bitcoin” jumped only a few points in the last few weeks, while 2017’s keyword trend analysis reflected the same sharp increase as the price of Bitcoin had in the same time period.

 

Keyword trends for Bitcoin. Source: Google Trends
Keyword trends for Bitcoin. Source: Google Trends


So, what’s next for the price of Bitcoin?

The recent price correction after so much upward movement is only healthy and doesn’t invalidate the bullish trend we’ve seen over the past few months. 

If Bitcoin falls below $10,000 with enough force, panic sells could drag the price down even further. Similarly, the same price level could also be a major FOMO trigger and stimulate a new wave of people looking to buy bitcoin. We’ve seen this before but the context has fundamentally changed.

When the crisis hit in 2008, not many people knew about Bitcoin and Satoshi’s readership would have been negligible when the Bitcoin whitepaper was published on 31 October that same year. Now, things like Bitcoin, stablecoins, cryptocurrency, and blockchain are all top of mind amongst the financial services industry as well as retail investors – with Libra being the latest boost to making crypto more of a mainstream subject.

A familiar road indeed, but perhaps this time will be different.


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