Bitcoin Gearing Up

The crypto market went through a “shake out” event yesterday, dropping 7% from its new record high. Despite this rapid fall, institutions seem confident about the cryptocurrency’s long-term prospects.

Bitcoin fell after failing to break through the significant psychological barrier of $50,000 US. The cryptocurrency has spent the last week on the cusp of breaking the barrier but has failed to do so… so far at least.

Funding stress and technical factors are two other major contributing factors to the price topping off just under $50,000 US

The cost of holding long positions in bitcoin’s perpetual futures market, also known as the funding rate, rose to a 12-month high of 0.109% on Sunday, indicating excess bullish leverage, or overheating, in the market.

The perpetual funding rate has normalized to 0.05%. Bitcoin has regained some composure in the past few hours and appears to be gearing up to break through $50,000 again.

Despite the pullbacks, the options market shows no sign that institutions are preparing for significant losses. There is still an absence of any institutional long-term hedging. Funds continue to take advantage of selling June-December expiry put options at strikes below $40,000 US.

That means that large investors are still hesitant to place long-term puts below $40,000 US, signifying their confidence in the market.

And still, with no apparent topping price action (i.e., a blow-off top), its anyone's guess what price BTC will be at the end of this incredible bull run.

Bitcoin is increasingly going mainstream and the vote of confidence by major companies such as Tesla could have positive effects on the cryptocurrency that will last well beyond the knee-jerk reactions seen previously in the market.

Tesla has put almost 8% of its reserves into the cryptocurrency. If Apple, Microsoft, Facebook, Twitter and Google were to do the same, this would translate into almost another US$7 billion investment. This is less than 1% of the total current worth of the bitcoin market, but the signal that it would send to other companies and retail investors would likely trigger a bull run that would make the current market look comparably stable. Some crypto analysts are already predicting that the price will rise to US$100,000 or even US$200,000 before 2021 is out.

Another bullish sign is that the number of active address for BTC has only just passed the top from early 2018. A significant portion of the new addresses created in the last year is likely to be institutional addresses. The two charts below should tell you that retail FOMO has not kicked in.

Consider the barrier to entry for the crypto market in 2017/18. Unless people had some technical knowledge, it was an intimidating market to enter. This time around, retail FOMO will be apparent, and we should see the chart for new addresses spike like never before.

bitcoin - number of active addresses

bitcoin - number of new addresses

Whether you are a BTC $1 million by Christmas prophet or a doubter expecting an imminent correction, this is a chart to watch because the price of bitcoin and Ethereum is FOMO-driven and when that impulse passes, that will be the top for this cycle. FOMO, and now that we are now seeing corporate FOMO, is a powerful force.

Bitcoin’s latest price slide is typical of pullbacks observed during the previous bull markets, and the path of least resistance remains to the higher side.

“We’re probably entering (I think) a brief and minor correction now, but we’re still in the midst of a violent bull run that will soon be more violent,” Ari Paul, CIO of BlockTower Capital, tweeted.

According to analysts, more institutions may soon emulate Tesla’s move to diversify cash holdings into bitcoin, leading to a convincing move above $50,000.