Bitcoin may have reached an important bottom and has the potential for another big rally
Bitcoin (BTC-USD) has rallied strongly on the week to buck the year-long downtrend and the negative sentiment which has seen critics doubt its survival, giving a boost to the price of Riot Blockchain (RIOT). In this article I will discuss why I am bullish on Bitcoin and why I see this providing support to Riot Blockchain in what may be a short-term speculative play.
After beginning the week around $6,350 the price of Bitcoin came within a whisker of resistance at $7700 on Friday, before fading in late trading. Despite the pullback to $7,283, Bitcoin is still higher by 14% on the week and during the last month, quieter weekend trading has seen bullish moves occurring. This may propel Bitcoin to a strong close on the week. A strong close would see another boost to Riot’s price, which was up 27% from Monday’s open.
After failing to sustain two rallies in February and April of this year, Bitcoin’s future was being cast into doubt by its critics. Bitcoin has retreated from a high near $20,000 at the end of 2017 to reach lows around $6,000. What many fail to accept is that Bitcoin’s late-2017 rally was a speculative rally which overextended the uptrend as Bitcoin was receiving front-page media attention. This move was typical of a blow off top and trapped many new investors at the highs. Many of these weak hands will have left the arena and Bitcoin’s recent negative price action has been created by a lack of volume and bullish catalyst as current investors are holding at these levels and there has still been a lack of meaningful investment from traditional asset management firms, who have stayed away due to the volatility and uncertainty over regulation.
The lack of new investors is one of the key reasons I am bullish on Bitcoin’s future.
Despite the attention that Bitcoin has received in recent months, there were still only 24 million blockchain wallets being used as of the first quarter of 2018. This is a tiny number and cryptocurrency developers are currently working on fixes to longstanding criticisms in an attempt to create mass adoption. If we see a move towards more mainstream adoption, the number of blockchain wallets could increase tenfold or more. Unlike gold, Bitcoin has a limited supply and 80% of Bitcoin’s have already been mined. This limited supply alongside improvements in scaling and a lowering of transaction fees should bring further attention from investors.
Bitcoin supporters have been hopeful in recent months that Bitcoin will see favourable moves to regulate the sector and this is driven by a desire to create incentive for institutional money to flood into cryptocurrencies en masse. At present, the entire cryptocurrency market has a market capitalization of $277 billion, with Bitcoin having a 45% dominant share of that figure. Again, these numbers are tiny compared to the trillions that are being invested around the globe in traditional markets such as stocks and bonds.
Efforts to regulate the crypto space are ongoing with a Senate hearing this week leading to mixed views amongst Senators, with one even calling for the ban of mining in the U.S. This is similar to Chinese efforts to clamp down on Initial Coin Offerings (ICOs) and mining efforts. Despite efforts to curb mining, we are already near the peak of Bitcoins created so their value would hold up even more with a mining ban. China is currently the home of Bitcoin, with around 70% of Bitcoin’s hash rate and is also the dominant player in the manufacture of mining equipment. Cheap electricity in the country make it more suitable to the energy-intensive nature of crypto mining. It was recently reported that three Chinese mining companies had achieved unicorn status.
Investors are also hopeful that the S.E.C. will approve a Bitcoin Exchange Traded Fund (ETF), with the regulator receiving a flood of supportive letters in favour of the move. A Bitcoin ETF would be another step in the move to mass adoption, and like the arrival of futures in December 2017, it would continue to support accurate price discovery and lower volatility. The SPDR Gold ETF (GLD) for example has net assets of $35 billion, which is close to the market cap of Bitcoin’s nearest rival, Ethereum (ETH-USD). The CME noted recently that average daily volume in Bitcoin futures had doubled over the previous quarter.
In recent weeks, a host of bullish projections have been shared about Bitcoin’s price. Billionaire Marc Lasry, a founder of distressed investment fund, Avenue Capital saw investors making “five to ten times their money in three to five years.” Another bull is Thomas Lee, head of research at Fundstrat Global Advisors, who has set a price target of $25,000 by the end of 2018.
If Bitcoin starts to climb once again, we may see a second wave of speculative activity coming into the cryptocurrency market. If Bitcoin does see an ETF come to market or achieve…