Price analysis: Bitcoin moves above $8,000

January 14, 2020

Fundamental analysis

It seems that the institutional demand for Bitcoin and crypto-related products has been increasing lately. According to Nikolaos Panigirtzoglou, who serves as Managing Director at banking giant J.P. Morgan, the market is eagerly anticipating the launch of the Chicago Mercantile Exchange (CME) Group Inc. options.

Panigirtzoglou believes that the CME entrance can significantly alter the picture due to CME’s dominance in trading Bitcoin futures on regulated exchanges. Accordingly, the number of large open-interest holders has grown.

“There has been a step increase in the activity of the underlying CME futures contract over the past few days. This unusually strong activity likely reflects the high anticipation among market participants of the option contract,” Panigirtzoglou wrote in a note to clients last week. 

However, the registered higher interest doesn’t necessarily mean higher Bitcoin prices. When Bakkt started offering its Bitcoin-based options, Bitcoin price fell more than 10% in the days after the launch. 

“The market price has declined by nearly 40% from its peak while the intrinsic value has risen by around 10%,” Panigirtzoglou wrote. But “the gap has not yet fully closed, suggesting some downside risk remains.”

Panigirtzoglou refers to Bitcoin’s intrinsic value, which is calculated by looking at the marginal cost of Bitcoin production, including computational power employed, and the cost of electricity. According to JP Morgan, Bitcoin’s current intrinsic value is around $5000.

CME, which was one of the first institutional institutions to offer futures trading on Bitcoin in December of 2017, is expected to launch the Bitcoin options this week. 

“CME options on Bitcoin futures give the buyer of a call/put the right to buy/sell one Bitcoin futures contract at a specified strike price at some future date. Upon termination of trading, in-the-money options, expire into one Bitcoin futures contract which immediately cash settles to the CME CF Bitcoin Reference Rate (BRR),” the company noted. 

The Bitcoin options market is getting increasingly crowded. It was announced this week that crypto exchange FTX has launched Bitcoin options, which according to FTX CEO, reached a $1 million volume in the first two hours of trading. According to CoinGecko, FTX is currently the eighth-largest crypto exchange by traded volume.

Elsewhere, Japan continues to further regulate the Bitcoin and cryptocurrency market. Japan’s Financial Services Agency (FSA) is looking to limit the use of leverage in cryptocurrency trading to twice the size of the deposits of a trader.

The provision will be implemented to reduce the risks of losses that increase multiple times due to price volatility. Local media reports that the provision will be included in the amended version of the Financial Instruments and Exchange Act, to be promulgated in spring this year. 

The FSA decided to cap the leverage after it analysed crypto-related regulation in the United States and Europe, as well as the historic price action. Once the new rules have entered into force, the Agency is expected to follow up with registered cryptocurrency exchanges to have these changes incorporated into their operations. 

Technical analysis 

In the meantime, Bitcoin price has moved above $8,000, which translates into a 15% rise since the beginning of the year. More importantly, the price action now trades above the 100-DMA, which should start offering support to bulls in the future. 

On January 08, Bitcoin made a similar move but failed to clear the channel resistance at $8,400 (see price chart below). The Bitcoin price action rotated lower to find more buyers at $7,200 - the horizontal support - before it returned back again to test the channel resistance for the second time in just a few days. 

Bitcoin daily chart
Bitcoin daily price chart

This signals that this Bitcoin move may have legs for a more substantial push higher. A break of this level should pave the way for a test of the key short-term resistance area above the $9,000 mark, where the triple confluence of resistance - 38.2% Fibonacci retracement, the 200-DMA, and the horizontal line - are located. 

On the downside, the 100-DMA offers immediate support at $7,950 while $7,200 represents the next layer of support near the $7,200 mark. The strongest support is located just above the $7,000 handle where the major ascending trend line (the red line) sits.


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