What precipitated the recent Crypto market surge?

It was almost certain that with the recent sharp uptick in the market price of Cryptos there would be a lot of eyeballs rolling as to the cause of this surge. Fair enough, but a lot of people fail to realize is that every market has a mind of its own & sometimes you don’t need any reason or rationale behind such moves. Considering the fact that Cryptos have been under relentless selling pressure for more than a year, there was bound to some meaningful correction at some point. Apart from the volatility and financial market mentality of these digital assets, we are also dealing with a fundamental technological shift via the DLT/Crypto revolution. Certainly not the only one as there are other technological drivers like IoT, AI, Fintech & 5G, but I believe they all compliment each other in converging towards a common goal of digitization of the global ecosystems.

Coming back to the recent price move in Cryptocurrencies, there are a few theories roaming, some more believable than others. So let’s take a look at them.

❶ Bloomberg reported that the surge in Crypto prices could be attributed to the number of inactive Bitcoin wallets dropping from an average of 40–50% for the past 1–6 months to just 10% since March 15 citing market intelligence firm Flipside Crypto (chart above). It’s analogous to a dormant volcano coming alive. Mostly bigger players like institutional investors & hedge fund managers etc. (so-called “Whales”) are behind mammoth price moves like this, but Boston-based Flipside reports this time the price move looks much more broad-based as many of the small BTC wallets have come alive too. Summarizing the analysis, CEO Dave Balter said,

“We see this move much more valid than a few whale moves in October, This probably signifies a change in perception or confidence in this asset class. There are more people warming up to the idea of buying Bitcoin.”

❷ The second theory also reported by Bloomberg is of Algorithmic trading that has become more widespread with the automation of the financial markets. This type of trading utilizes automated software with built-in complex mathematical models & formulae to detect trends and ideal opportunities in mostly high frequency trading. The critics of Algorithmic trading suggest that this type of trading amplifies the moves in either direction for the markets and is a manipulative tool while the proponents of automation cite it as making markets more efficient. There might be some merit to this criticism as we have seen various runaway moves like this in all forms of financial markets in the past few years, causing a lot of pain to investors.

Figure 1

Coming back to the Crypto markets, algorithmic Crypto traders have been on the rise with 17 algo or quantitative funds kicking off since September 2018 alone. These account for more than 40% of the Crypto hedge funds, according to Crypto Funds Research. The 20%+ surge in BTC price within an hour on Tuesday was likely an event triggered by an automated algorithmic trading software which was set to execute an order of $100 million across three major crypto exchanges Coinbase, Kraken and Bitstamp. Or at least that’s what CEO of London-based crypto firm BCB Group believes. While Crypto hedge funds lost more than 72% of their value in last year’s Crypto meltdown, some algo funds said they booked profits of 3–10% per month throughout 2018. A lot of traditional hedge funds have also moved to Algo based trading in addition to 26 algo funds launched in 2017–18. If in fact, the latest price move in Cryptos is algo driven, than I hope it is based on actual interest in the digital asset class and not a result of algo spoofing — flooding of markets with fake orders!

❸ There was also a reference to the Brexit factor, a report suggesting the impending break away of UK from EU having a huge impact on Cryptos with the massive fall in the value of British Pound, people are shifting to digital currencies. While it’s true, Sterling has lost significant value against the Greenback & other major fiat currencies since the Brexit vote in 2016, it has still managed to recover from the yearly lows and in fact has been well supported in recent times despite the continuing uncertainty. A complete breakdown of Sterling might provide some kind of rationale to this theory, but with fiat currency holding its nerve and the volume traded in Cryptos being minimal as compared to Dollar, Yen or Euro — there isn’t much merit to this theory.

❹ On the lighter side of things, there was an April Fool’s Day story making the rounds, claiming that U.S SEC approved the Bitcoin ETF applications from Bitwise and VanEck in an emergency meeting held over the weekend (March. 31st) after a public outcry on yet another delay from the regulatory body. As the Crypto kingpin moved to take over the psychological barrier of $5K on April 2nd, the story was quoted by some news outlets as a joke to being the catalyst towards this jump. Obviously it wasn’t the case…

Figure 2

For me, it’s the good old-fashioned trading by looking at the charts and seeing what the technical indicators are dictating. Taking a quick look at the BTC hourly chart (Figure. 1), the gains from the sharp rise on April 2 seem to have sustained pretty well with the bullish trend line holding for now as the Crypto kingpin has already taken a jab at the recent high of around $5300. There might be some consolidation with the immediate support around the $4800 region. The next big level to watch is around the $5850 mark which is a significant resistance level in the daily chart, the penetration of which would signal a bullish flip in the Medium-term bias. Looking at the daily chart, the 20-day EMA (Exponential moving average) had a bullish crossover of the 50-day EMA (in late February) signalling a possible bottoming in the Crypto kingpin. RSI (Relative Strength Index) has also seen an upward trajectory with the bullish MACD signal line crossover and increasing divergence pointing to further gains. Note however, that RSI has moved over into over-bought territory (over 70 value) and there could be some correction at these levels. Summarizing it looks like BTC is finally preparing to turn the corner. Crypto bulls must be smiling right now…

This post was originally published on Medium by Data Driven Investor authored by Faisal Khan in April 2019

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