First move: Bitcoin’s drop to $ 31,000 shows how the bull market had become

Bitcoin (BTC) suffered its biggest decline in four months, falling 9% after a seven-day winning streak that led prices to a new high of $ 34,347 on Sunday.

“Bitcoin is undergoing a much-needed reboot,” Matthew Dibb, co-founder and COO of Stack Funds, told CoinDesk.

Some analysts have seen signs that cryptocurrency traders may be switching from bitcoin to digital market alternatives, like ether (ETH) and litecoin (LTC). Ether, the second largest cryptocurrency, shot up 27% on Sunday and hit a 35-month high above $ 1,150 on Monday morning. Litecoin, the fourth largest cryptocurrency, was changing hands at its highest level since April 2018.

In traditional markets, European indices rose on the first trading day of the year, driven by encouraging signs of an industry recovery, and US stock futures pointed to an upward opening. Gold appreciated 1.9% to $ 1,935 an ounce.

Market movements

The cryptocurrency markets so far in 2021 have been similar to that of 2020: prices are on the rise.

After quadrupling last year, bitcoin gained about 7% in the first days of January. This is almost half of the gains that the Standard & Poor’s 500 Index achieved throughout the year 2020.

Ether, the second largest cryptocurrency by market capitalization, soared 26% on Sunday alone, surpassing the $ 1,000 mark for the first time since February 2018. The price of the digital asset has increased almost five times in the past year.

And even with last month’s 67% drop in prices for what had been the third largest digital asset, XRP (XRP), the crypto industry’s total market capitalization has more than doubled in the past two months to about $ 883 billion.

“In the current trajectory, we can estimate that we will easily break the $ 1 trillion mark in the coming months,” wrote Mati Greenspan, founder of Quantum Economics currency and cryptocurrency analysis, last week.

To put it in context, remember that it was big news in traditional markets when the pending amount of US “leveraged loans” – those made for companies with risk-grade credit ratings – grew to around $ 500 billion at the end 2010, and then doubled to $ 1 trillion in early 2018.

Bitcoin’s total market capitalization has more than doubled in just a few months, to almost $ 900 billion.

This rapid (and frankly surprising) growth in the digital asset markets should, in theory, make any responsible financial journalist struggle to bring together experts who can talk about the growing risks.

But in addition to the usual warnings that cryptocurrencies are volatile and subject to unexpected and punitive price corrections, analysts and traders say the institutional adoption of bitcoin, ether and a host of other digital tokens is likely to be just beginning.

And prices are much more likely to continue to rise at this point than they will suddenly reverse, in the absence of big surprises similar to last year’s pandemic, which caused stocks to swing violently, from American Airlines to Zoom.

Jim Bianco, a widely followed Wall Street veteran who now runs Bianco Research, tweeted on January 2 that bitcoin “makes Tesla look like it’s stopped, ”Referring to the electric automaker’s share price.

First Mover previously argued that as bitcoin enters unknown territory, investors who read the price chart’s patterns – a practice widely followed among crypto operators known as “technical analysis” – have less signs of shutdown.

Just a month ago, when the cryptocurrency was changing hands for around $ 19,000, Kraken Intelligence, a research unit of the Kraken digital assets exchange, published the results of a survey noting that customers expect an average price of US $ 36,602 in 2021. These predictions were proven on target, the biggest bitcoin gains for the year would already be in the books.

But respected professionals in the digital asset markets and on Wall Street recently considered price predictions of $ 50,000 to $ 400,000.

The truth is that no one knows where prices are going, any more than anyone can say with certainty that the 2021 economy will be brighter than the bleak 2020 that has just ended. Or how much additional money the Federal Reserve and central banks around the world may have to create to finance stimulus measures and sustain financial markets.

What seems clear is that, for now, “there are few signs that the boom is over,” as Matt Blom, head of sales and trading at cryptocurrency firm Diginex, put on Sunday in his daily newsletter.

“Bitcoin started the year exactly as the last offer ended,” wrote Blom.

Bitcoin Watch

Financing rates have risen on perpetual bitcoin swaps, a sign of high demand for leverage on long bets.

Bitcoin retreated sharply early on Monday, in a typical bull market correction move.

Prices dropped from $ 33,000 to $ 28,000 before returning to $ 30,000. The abrupt correction erased the $ 29,000 high to more than $ 34,000 in the previous three days.

A correction seemed imminent, with the perpetual swap financing rate – a proxy for the cost of maintaining a long position in the derivatives market – reaching an 11-month high of 0.137% earlier today. A high financing rate may signal excessive leverage and often produces retractions similar to those seen at the end of November. Even with Monday’s price drop, the financing rate fell only slightly to 0.122%.

According to trader and analyst Michaël van de Poppe, bitcoin came under pressure as the spread between EUR / USDT (euro-denominated exchange) and the EUR / USD spot rate normalized. EUR / USDT jumped to 1.33 on Saturday – a 9% premium to the EUR / USD spot rate of 1.23 seen on Friday, according to data provider TradingView.

“This possibly pushed the bitcoin-denominated price up,” said Poppe, adding that the premium began to normalize on Monday. Tether (USDT) is the largest dollar-linked stablecoin at pending value.

Investors expect the cryptocurrency to trade with volatility in the next four weeks. This is evident from the increase in implied volatility from one month to close to 100%, the highest level since March 2020, according to data provider Skew.

Analysts, however, expect the falls of bitcoin to be short-lived. “Our thesis remains extremely optimistic, with a target of $ 40,000 in February,” Matthew Dibb, co-founder and COO at Stack Funds, told CoinDesk.