More than 2 years ago, we first speculated that there was no tangible interest in bitcoin (BTC) as a currency, especially in a market with much superior alternative currencies.
Since then, our forecast has remained somewhat correct, even despite the short-lived bullish rally in 2019, which was quickly followed by a return to the mean. Price action has been mostly sideways on higher time frames with relatively stable and low volume. Every rally was followed by long periods of no real momentum in either direction until eventually a cascade of stop losses would trigger a push in either direction. Most people who were interested in BTC were simply HODL-ing their assets. Anyone who wasn’t interested, well… wasn’t interested. If you’ve been day trading during the past 2 years, you might agree that most of the price volatility (or lack thereof) was generated from day traders winning and losing to each other and bots, without any significant money flowing into the market.
Then things changed a bit.
In July, BTC broke above USD 10,000. In doing so, it also broke through an exceptionally long-term trend line that was making us very hesitant in opening long positions when we were in the USD 8,000-9,000 area. Since then we’ve been enjoying a very bullish momentum on the lower time frames, and an extremely positive rally in altcoin markets. A lot of traders we interact with believe we’re on our way to a new rally like 2017. People are excited and fear of missing out (FOMO) is in the air… again.
But wait, is there any reason for crypto to go boom in 2020? Has anything changed in 2020 to cause a rally in cryptocurrencies?
If you're reading this post, it would be safe to assume you’re interested in technical trading. But even if you’re a hardcore no-news-nonsense technical trader, it would be unwise to blindly jump into the FOMO with total disregard of the environment of 2020.
Altcoins are still mostly useless. Most cryptocurrency enthusiasts are still only holding BTC with the intention of selling it for cash. We're in the middle of a global pandemic with so much confusion and noise in traditional markets, let alone an unregulated digital market. BTC is still slow and there’s virtually no demand for it as a currency. All over the world people are losing their businesses and incomes. Some people are being evicted while millions and millions of dollars are being spent on trying to recover from a pandemic that’s not even over yet. If anything, people should be dumping their coins for cash in such troubling times.There are a couple of major explanations for the price action we’re witnessing.
Correlation with the global market
Since the start of the pandemic in early 2020, there has been a strong correlation between the traditional markets and BTC. For instance, this is BTC daily chart with S&P 500 index futures (blue line) on top:
We can’t explain why there's such a strong correlation between the markets recently. However, it’s clear this correlation exists. It would be unwise to ignore the traditional markets when investigating cryptocurrencies right now. If the stocks bleed due to world events, BTC will most likely do as well.
Before you buy into the FOMO, maybe ask yourself: Are you bullish on the traditional markets?
If the primary reason for the recent rally in BTC is this correlation, this implies there’s no change in demand for cryptocurrencies relative to traditional markets, and thus BTC is overvalued.
Demand for digital assets
Like it or not, Covid-19 has permanently affected our world dynamics. It's easy to imagine that our near-future versions of ourselves are going to be a lot more aware of social hygiene and disease prevention. The pandemic has created a new use case for BTC and cryptocurrencies in general. Social distancing and travel restrictions make it that much harder to move wealth and cash has proven to help the spread of infections. Demand for a more digital economy is on the rise, and the opportunity has presented itself to the blockchain industry to impact our lives in more significant, constructive ways. However, this industry isn’t the only player to meet this rising demand. While this has the potential to push cryptocurrency into the mainstream, we must consider that other industries and sectors (e.g. banks and governments) may beat blockchain in this race and provide faster, more convenient forms of money transfer. It is up to the blockchain industry to take advantage of this opportunity. Cryptocurrency traders need to pay close attention to not just cryptocurrencies, but their competitors too.
What about altcoins?
During this past couple of months, aside from BTC’s bullish momentum, we've also seen massive pumps across the lesser known altcoins. We don’t think anything has really changed for altcoins in 2020, compared to prior years. Most of the lesser known coins still have no real-world applications and are prominently valued based on marketing potential alone. We avoid the pumps on low cap coins because they're a gamble. We avoid the large cap coins because BTC is simply more liquid.
Right now, the safe move is to focus solely on BTC for day trading opportunities. Our opinion will change if the correlation between BTC and the stock market breaks apart and the bullish momentum maintains. This would imply that the second reason (i.e. increasing demand for digital assets) is the primary reason for the rally, which would make me a lot more confident in cryptocurrency overall.
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