Something interesting has been happening the last couple of weeks.
I’m pretty well connected to a lot of veterans in crypto, and independently, we’ve all been fielding inquiries from smart money investors, the non-technical types who are now ready for a hedge instrument against global uncertainty.
Our basic conclusion is that what we’re seeing right now is a whole lot of new money coming into the cryptocurrency markets.
Some have been perplexed with this unprecedented rise, and it’s easy to see why. The total market cap of the space is now $46.5bn, a figure that’s up roughly 50% over the last few weeks.
Domino effect
That might seem simplistic, but it’s also coinciding with a lot of uncertainty in Europe.
On Sunday, 7th May, we will see the outcome of elections in France. Of the two candidates, Emmanuel Macron and Marine Le Pen, Len Pen is for France leaving the European Union. Should this happen, it could signal the start of an EU breakup.
Now, Le Pen is considered a long shot, similar to President Donald Trump in the US elections last year, but we know what happened there. Savvy investors have been looking for hedges, and now new money is moving into cryptocurrency. But, new money is also flowing from bitcoin into alternative cryptocurrencies.
So-called “altcoins” are getting the benefits of bitcoin’s two-year stalemate on scaling, so the amount of money falling out significant. Now, it’s important to understand that altcoins markets, with the exception of ethereum’s ether token, are thinly traded. This means that for every $1 going into altcoins, their markets rise disproportionally compared to bitcoin’s deeply traded market.
This adds an amplifier to the altcoin market cap rise.
Really, the big clue to this situation is bitcoin and ethereum are both rising at the same time when we typically see a see-saw action. Beyond a shadow of a doubt, this is evidence that new money is coming into the system.
Price Action
Another less-discussed development is that bitcoin broke out of its long-time trading channel yesterday.
This is significant, as the channel has held for a multi-year timeframe.
It’s now carving out new all-time highs without a channel resistance to hold it down. In this situation, all bets are off.
Since there are no historical resistance points, we default to Fibonacci levels, derived off the golden ratio numbers that traders use to find support and resistance levels. Our next Fibonacci level is $1,717, which will act as resistance. While it is entirely possible that we could see a run up to this price if the buying frenzy continues, we are seeing a dip as the market overheats.
I suspect some of the current dip may have been from election speculators taking profits before the final outcome.
So, we are faced with a situation similar to our March ETF decision.
If Le Pen wins, bitcoin and cryptocurrency markets will have a very strong run ahead of it. On a Le Pen defeat, I suspect we may get a moderate retrace and consolidation before resuming its upward momentum. (I can’t see the new influx of new money slowing down, a Le Pen defeat does not solve the EU’s financial uncertainty.)
Further, looking back at Google search trends, we are not in a hype cycle as yet.
This further supports the notion that it’s a moderate population of high net-worth investors entering with sufficient money to push these markets up significantly.
I would say wave two of bitcoin has begun. In wave one, investors were technically proficient. In wave two, investors will be non-technical, but savvy in traditional markets. Wave three will be the general public.
I’ve estimated this will begin in two years when bitcoin’s peak 60-day volatility dips below 5%. At this level, it will begin to compete with national currencies in price stability.
And who wouldn’t consider bitcoin as an alternative cash account that generates a relatively smooth return of 100% per annum? This is the long-term historical price trend driven by a doubling of users per year.
So, despite the confusion, the fundamental drivers of this bitcoin rally are solid. Unlike in 2013, we may not see a pullback this time around.
