The Bitcoin Rally Is (Provisionally) Back, Baby!

The Bitcoin Rally Is (Provisionally) Back, Baby!
Jonathan Hobbs

almost 2 years ago4 mins

  • Bitcoin’s done well over the last couple of months, which could be down to increasing acceptance from governments, as well as, paradoxically, more regulatory attention.

  • On-chain data suggests long-term bitcoin holders are reluctant to sell right now, while bitcoin’s price chart is also showing positive price momentum.

  • But a word of caution: the leverage on bitcoin futures contracts is approaching extreme levels.

Bitcoin’s done well over the last couple of months, which could be down to increasing acceptance from governments, as well as, paradoxically, more regulatory attention.

On-chain data suggests long-term bitcoin holders are reluctant to sell right now, while bitcoin’s price chart is also showing positive price momentum.

But a word of caution: the leverage on bitcoin futures contracts is approaching extreme levels.

Bitcoin’s been on a tear these past two months, rising 18% against the dollar after a pretty shocking start to the year. So as we head into the second quarter, here’s why I think this rally could go from strength to strength – and the one thing that could bring it to a screeching halt.

1. There’s more clarity around regulation.

On the one hand, some governments seem to be getting more comfortable with the idea of crypto. Take the US, whose president has just ordered an examination of the risks and benefits of cryptocurrencies with a deep-dive into six key areas: consumer protection, financial stability, illicit activity, US competitiveness, financial inclusion and responsible innovation. That’s a sharp about-turn on the fingers-in-ears position it’s taken up to now.

On the other, even the governments that aren’t comfortable with crypto are acknowledging that it’s not going anywhere. The European Parliament, for example, just passed a vote that’d force self-hosted wallet providers to collect know-your-customer information from users. The European Commission and European Council now have to pass the bill for it to become law, but that does seem the likely outcome.

That regulation isn’t even necessarily a bad thing: it makes institutional investors more comfortable with the idea of investing in the cryptocurrency. That means they’re increasingly likely to pile money into the asset class, and in doing so should support its rally going forward.

2. There’s a new bitcoin whale in town.

Do Kwon, the CEO of Terraform Labs, has been buying over $100 million in bitcoin a day to use as collateral to back stablecoins on the Terra blockchain. At the current bitcoin price, that’s more than double the total supply mined every day.

And Kwon seems to have no plans to stop any time soon, saying on Twitter recently that he wants Terra to become the largest bitcoin holder in the world (besides Satoshi Nakamoto). That isn’t impossible, but it is going to take some time: Terra’s 31,000 bitcoin puts it a long way behind Michael Saylor’s Microstrategy (MSTR) – the number two holder of bitcoin with 125,000 coins. So there’s at least one very big fish who’s going to be buying up bitcoin and pushing up its price for the foreseeable future.

3. HODLers are holding.

Here’s something interesting: 63% of all bitcoin in existence hasn’t switched hands for a year or more.

% of bitcoin supply that has not been moved in over a year. Source: Glassnode
% of bitcoin supply that has not been moved in over a year. Source: Glassnode

That hasn’t happened since October 2020, when it went from around $10,000 to $60,000 in just six months. Of course, there are no guarantees that the same price surge will happen this time around, but the chart does suggest that you might find it harder to come by a willing seller.

That’s not all: we can see the amount of bitcoin held on crypto exchanges (orange line) is dropping too.

Bitcoin supply held on crypto exchanges. Source: Glassnode
Bitcoin supply held on crypto exchanges. Source: Glassnode

That’s important because when coins go off exchange, they’re typically locked away in “cold storage” wallets. In other words, their owners are putting them away into secure hibernation, and have no intention of selling them anytime soon.

4. Bitcoin’s technicals are looking good.

In the past, the 21-week exponential moving average (EMA) has been a strong indicator of bullish momentum for bitcoin’s price.

Unlike simple moving averages, the EMA gives more weight to more recent price moves and is in turn more responsive to changes in momentum. The chart below shows that bitcoin has closed two consecutive weeks above the 21-week EMA (yellow line), which is sloping upward for the first time since November.

Bitcoin price in US dollars (weekly chart). Chart drawn with TradingView.
Bitcoin price in US dollars (weekly chart). Chart drawn with TradingView.

If bitcoin can continue to hold above the 21-week EMA, that would be a strong sign for the rally to continue from here on out.

So what could halt the rally?

There’s a lot for bitcoin bulls to celebrate right now, but there’s also a counterpoint: the open interest on bitcoin futures is approaching extreme levels.

Let me explain. Plenty of bitcoin traders don’t buy the cryptocurrency itself, but rather futures – leveraged contracts that track the underlying bitcoin price. That means they borrow money to boost the size of their position and magnify their potential gains. Trouble is, it magnifies their potential losses too. So to keep their position open, they need to add more “margin” whenever their position starts moving against them and their unrealized losses start to deepen. If they’re unable or unwilling to pay to keep that position open, they’re forced by the exchange to settle up. So when leverage gets too high, a wave of traders might suddenly be forced to exit their positions, which has a pretty significant effect on the price of the underlying asset.

There’s a risk that the same thing will happen here, given that bitcoin futures “open interest” – that is, the total number of unsettled contracts – now stands at around $14 billion. That’s right where it was a year ago in April 2021, before the bitcoin price slid from $64,000 down to $29,000.

That said, bitcoin futures open interest has been higher in the past – namely in November last year, when the OG cryptocurrency’s price hit an all-time high of $69,400. So yes, leverage is high, but it could still go a bit higher before bitcoin sees a major fall. Keep this caveat in mind, for sure. But for now, at least, I think there’s a lot more in favor of the rally than there is against it.

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