The beginning of 2021 proved to be a new landmark moment for the cryptocurrency market. After rapid growth in the last months of last year, bitcoin and its relatives in the digital money world faced a new correction, which once again reminded us of such an inherent quality of cryptocurrencies as high volatility. But unlike at the beginning of 2018, when bitcoin was also plummeting rapidly in value, almost no one talks about cryptocurrencies being just another financial bubble that could burst at any moment. On the contrary, most analysts now tend to believe that bitcoin will continue to grow, aiming for at least the $40,000 level tested just recently. There is too much money circulating in the cryptocurrency market and too serious investors have gone there, experts say.
Correction in anticipation of a jump
$4,1616 – that’s what the bitcoin rate peaked at on Jan. 8, according to the popular investment portal Invecting.com. But having climbed to this level, more than four times the value of the beginning of 2020, the digital currency collapsed sharply – already on January 12 for a bitcoin was given a little more than $ 31 thousand. But the fall was interrupted quickly. The impeachment of outgoing President Donald Trump by the U.S. House of Representatives seems to have had an immediate effect on the bitcoin exchange rate, which reached $38,000 on January 14.
“At the beginning of 2020, we predicted a fall rise in bitcoin to $18-25 thousand, as well as the first echelon of altcoins [other cryptocurrencies], but no one could have foreseen such a powerful jump. Such rapid growth will have a negative impact on the crypto industry, which has long needed to reduce volatility. Further, we should expect, probably, prolonged correction with the resistance line at $20, 16, and 12 thousand in case of the negative scenario. On these positions it is necessary to re-buy the asset and to expect restoration of a course on positions of $25-33 thousand by the end of autumn 2021”, – Sergey Baryshnikov, the head of GodChain Group points out.
According to him, the recent jump in bitcoin was caused by the arrival of institutional investors who intend to play “long term”. As for non-professional investors, they took positions mainly after bitcoin’s rate reached the level of $25 thousand, as evidenced by the increase in the number of purses on the corresponding dates and trading volumes on exchanges and exchanges. The fall to $20 thousand (and possibly lower, if there is a panic sale) will be due to the closing of positions of institutional players, who suddenly reached their long-term goals (for example, 50% or 100% margin), according to Sergei Baryshnikov. But closing positions doesn’t mean quitting the game: institutional investors will be fixed and also will wait for entering at levels below $20K in order to double the volume of available crypto-assets.
Denis Burlakov, CEO of fintech company RBK.money, also notes the role of this group of market participants: the Christmas rally of bitcoin was due to the fact that investment funds sought to invest in a growing asset, and the recent statements of institutional investors indicate that they do not plan to exit from bitcoin after the recent fall. The total capitalization of the cryptocurrency market has exceeded $ 1 trillion, of which bitcoin accounts for more than 70%, an indicator that cannot be ignored emphasizes Burlakov. According to him, cryptocurrencies became one of the popular tools for investing funds even in the conditions of skeptical attitude to them on the part of world regulators, and now there is nothing to prevent the usual scenario when bitcoin after a sharp decline went up again. This has happened before, with notable declines in bitcoin followed by a rebound from the “bottom” in 2014, 2018, and 2020.
Investor confidence has undoubtedly become a decisive moment for the fate of bitcoin and its digital brethren. Today, the claim that cryptocurrencies represent some marginal segment of the financial market is hardly justified, unlike the situation in 2017, when many predicted their imminent collapse.
“Its actual use every year only strengthens users’ belief in a financial system independent of any government policy. As long as bitcoin remains a convenient and independent means of payment it will be in demand, and this demand will grow, albeit with a high degree of volatility. This is primarily due to the fact that there are large purchases and sales of bitcoin from serious players. The powerful development of tools with which to work with cryptocurrencies will only encourage ordinary citizens to take advantage of their opportunities. The pandemic stimulated online payments and people became more aware of cryptocurrencies. This allowed them to invest some of their personal savings into electronic money and start using them,” comments Nikita Odintsov, a member of the Expert Council under the Russian Government.
Nevertheless, the question of what role “physicists” played in the current bitcoin rally remains debatable. On the one hand, Odintsov notes, the arrival of a large number of investors also influenced the sharp growth of bitcoin – not so long ago more than 80% of users on all platforms were searching for information about it, which indicates a huge demand. The growth of bitcoin was caused by a large inflow of “young” investors after statements in the open sources of large investors about the prospects of growth in its value up to $ 200 thousand, Alexander Chalyan, director of MBA department of the “Synergy” business school, believes. Of course, according to him, such growth could not last long: as soon as big holders fixed their profit, there was a rollback caused by correction.
On the other hand, according to Tatyana Maksimenko, an official representative of the cryptocurrency exchange Garantex, the current situation is different from 2017 when bitcoin reached the level of $20,000 in a few months and then promptly collapsed: the growth was supported mainly by retail investors and the current bitcoin rally was caused by an influx of money managed by professional investors. Another important aspect is that the players are losing confidence in national currencies, including the dollar, adds Sergei Baryshnikov. In addition, the governments of many countries are concerned about the creation of national cryptocurrencies, trying to adjust to the trend, and maybe try to lead it.
Therefore, many experts have no doubt that after the inevitable correction, the prospects for further growth of bitcoin and other cryptocurrencies are quite optimistic.
“I think bitcoin will stabilize around $28,000 to $30,000, maybe $25,000 before the end of February or mid-March,” continues Maksimenko. – Then there will be small waves of growth and subsequent correction during which bitcoin may in principle fall below $ 20 thousand, but it is unlikely to fall below $ 12 thousand. This will continue until the fall of 2021, when a new round of growth will begin, which will once again bring bitcoin to $40 thousand. The maximum rate I see for bitcoin in 2021 under the most positive scenario is approaching $50 thousand, but most likely, the return to $35-40 thousand can be considered a success. It is the fact that institutional players have entered the crypto market that gives hope that bitcoin will not be able to fall very low.
Certainly, we can expect the next stage of growth in the near future, caused by limited supply and the interest in bitcoin of large funds, which are now starting to invest in the cryptocurrency, Alexander Chalyan predicts. The psychological mark of $40 thousand has already been overcome, so, in his opinion, we can expect the next stage – $50 thousand.
The liquidity of the first cryptocurrency is not yet enough to restrain the sellers’ pressure without a significant impact on the price, said Vitaly Kirpichev, an analyst at TradingView, Inc. platform. Nevertheless, he said, the excitement around bitcoin still exists and the lower its price will be, the more buyers who did not participate in the previous growth wave will be. If this scenario materializes, a retest of historical tops is possible in the near term.
In Search of New Gold
It is noteworthy that the recent bitcoin rally occurred in parallel with the strong growth of the stock market. At the very end of last year, after Donald Trump signed a law to support the U.S. economy, three key U.S. stock indices – the Dow Jones Industrial Average, the S&P 500, and the Nasdaq Composite – set new highs. The recent events in the U.S. – the seizure of the Capitol on January 6 and the ensuing “showdown” – did not affect them: in two days the stock indices as if nothing had happened, renewed their records. The stock market rally in the U.S. is also affecting other trading floors. For example, the Moscow Exchange index on the first day of trading in 2021 (January 4) also reached its all-time high of 3325 points.
The present optimism of investors can be excessive, analysts warn. According to Sergey Baryshnikov, this is due to the fact that the coronavirus is by no means a catastrophic factor, as it seemed at its rapid spread. The world economy, to a greater or lesser extent, has reconstructed itself and prepared itself for the epidemiological situation; many threats turned out to be not as dangerous as they had been imagined before. However, the expert believes that there is reason to expect that the stock rally will change to a more moderate pace.
“People are inspired by the appeared vaccines and hope for the pandemic to finish soon and for a return to the former life at least in some way, and it cannot help influencing the sentiment on the stock markets,” says Tatyana Maksimenko. – Everyone is expecting that industrial production and tourism will start to recover and consumer demand and expenses will rise. They also expect the U.S. to restart the printing press with new dollars to stimulate the economy. Naturally, some of these dollars will flow to the stock market, which will cause its growth. The serious frontier should be the fall of 2021 when it will be clear whether severe restrictive measures are still needed because of the pandemic or whether it is already on the decline. But falling GDP does not necessarily go hand in hand with falling stock markets. As 2020 has shown, economies have slowed or fallen, and the stock market, especially the U.S. stock market, has risen tremendously in some sectors.”
The recent rally has nothing to do with anything other than support measures by central banks: an injection of trillions of dollars into financial systems allowed stock indexes not only to return to pre-crisis values but to exceed them, explains Igor Kuchma, an analyst at TradingView, Inc. In addition, in his opinion, this is due to the fact that the yield on fixed-income securities is at its lowest value.
“Thus, investors are simply being forced to take additional risk in order to make money,” the expert notes. – It seems that even news of new coronavirus strains can’t break the bullish trend. What to say about the unrest in the U.S. and Donald Trump’s unwillingness to step down as president. The main tool to cool the markets may be an interest rate hike, but it is unlikely to happen in the near future. With the arrival of Biden, it is worth paying attention to “green companies”, because they were emphasized by the new U.S. president during the election campaign. Firms specializing in artificial intelligence and semiconductors may also be of interest.
According to Chalyan, two main factors may seriously undermine the optimism of investors. Firstly, the consequences of the elections in the USA: it will be possible to feel their result at the beginning of the second quarter, when, in particular, it will be clear what position in relation to Russia Joe Biden will choose concerning sanctions. Secondly, the emergence of new strains of the virus – until it is not clear whether the existing vaccines can cope with them or not. “One thing is certain: at the moment, with the world economy falling, stock markets are rising and currencies are weakening, but sooner or later either the economy will grow or the stock market will adjust,” sums up the expert.
Undoubtedly, of great interest for investors is the question of how trends on the cryptocurrency market interact with each other and how the behavior of other more traditional assets – securities, gold, raw materials, etc.
According to Nikita Odintsov, there is no correlation as such, because stock markets are very different from volatile cryptocurrency markets, and commodity markets directly depend on the current world situation, on the current political state of the country of origin of resources, or the country of their consumption. In contrast, cryptocurrencies depend on the amount of money the end-users have at the moment. The stock markets are the most stable for an investor when working with the right analytics and the right companies, the expert believes.
Nevertheless, cryptocurrencies are still sensitive to stock market movements, notes Tatiana Maksimenko, recalling that in March 2020, the crypto market fell after the stock market. In addition, she says, bitcoin also correlates with gold, which is traditionally used by investors as a safe haven in times of turbulence or decline. Therefore, the expert advises, the investment portfolio should include stocks (or shares of ETF funds, if there is no desire to deal with each issuing company), bonds, precious metals, and some cryptocurrencies. As for ordinary currencies, adds Maximenko, if the U.S. Federal Reserve turns the machine back on to print dollars and stimulate the U.S. economy with them, we should expect dollar inflation against other world currencies such as the Swiss franc, the euro, or the pound sterling. Again, the situation also depends on whether the ECB turns on the printing press. If it does, the dollar/euro exchange rate may not change much.
Bitcoin in the minds of conservative players is gaining more and more status as a reserve asset, like gold, said Sergei Baryshnikov. In most cases, there is an inverse correlation of crypto-assets to the stock market and a direct correlation with gold, and even regulators eventually also characterized bitcoin as a commodity, effectively equating it to gold. The expert believes that there is every reason to correlate bitcoin and gold movements.