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Betting On Bitcoin Bottoming Out? Bet Again

  • Traders may have been caught by surprise when trying to call a Bitcoin bottom this week as Bitcoin bounced back up and recouped most of its losses 
  • Investors should focus on the volatility of Bitcoin in percentages and avoid being drawn into the drama of the absolute values that Bitcoin trades at 

When Bitcoin crashed to as low as US$33,000 earlier this week, after having scaled to a new all-time-high past US$41,000 as recently as last week, Bitcoin naysayers were smug that the Bitcoin bubble had finally burst. But before you could say, “Hold my Bitcoin,” the bellwether cryptocurrency recovered most of the eye popping losses proving naysayers were yet again too quick to forecast the end of the most recent rally in what is arguably the world’s most controversial nascent asset class.

Spiking to as high as US$40,000 yesterday, Bitcoin’s relentless ascent has since temped down to around US$38,900. But for those seasoned in the dark arts of Bitcoin trading, the level of volatility isn’t just unsurprising, it’s par for the course. None of the volatility is surprising, the only reason it seems surprising is because the absolute numbers are a lot larger and the media gives it a lot more attention.

A combination of institutional interest and retailers pouring back into Bitcoin is pushing absolute prices higher, but in terms of volatility, nothing much has changed – the greater the number of participants in the Bitcoin trade, the more volatile investors can expect things to get. For now, the narrative seems to indicate a process of price discovery that favors a strong rally – calling the bottom is a trickier affair. Having already risen by more than 300% since last year, fiscal stimulus, loose monetary policy and outside fears over inflation and the debasement of fiat currencies, are just some of the macro factors fueling Bitcoin’s ascent. And greater institutional investment, coupled with high profile investors such as billionaire hedge fund investors Paul Tudor Jones and Stanley Druckenmiller endorsing Bitcoin, have added to the positives fueling Bitcoin’s rally.

Add to the mix, PayPal (-1.16%) rolling out spending avenues for cryptocurrency holders this year and it’s not difficult to see why the heady cocktail of factors are fueling the rapid rise of Bitcoin. Cryptocurrency products have seen an unprecedented surge in popularity in recent weeks as investors rushed to get a piece of the action.

And Grayscale, whose Grayscale Bitcoin Trust (“GBTC”) is popular among institutional investors has reported total inflows of more than US$3 billion across its products in the fourth quarter of last year, with GBTC seeing average weekly investments of around US$217 million during that period.

Given that stocks can rally some 20% in a single day, a 26% rally in Bitcoin would bring it to US$50,000 and that’s why it’s important to remember that the absolute numbers may be large, but the volatility in terms of percentages is just ever so slightly higher than for other risk assets. 

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© Copyright of Novum Global Consultancy Pte Ltd {2020, 2021}. All rights reserved.

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