Bitcoin ‘vulnerable to correction’

Written by Ciaran Ryan. Posted in Journalism

Though Citibank sees it at $318 000 in 2021. From Moneyweb.

A drop in active addresses interacting with the network is a sign that holders are trading rather than holding, though it doesn’t necessarily mean they are preparing to sell. Image: Andrey Rudakov, Bloomberg
A drop in active addresses interacting with the network is a sign that holders are trading rather than holding, though it doesn’t necessarily mean they are preparing to sell. Image: Andrey Rudakov, Bloomberg

As bitcoin burst through $16 500 this week and with $17 000 now in sight, the euphoria of 2017 – when it briefly hit $20 000 – has returned with a vengeance.

A weaker US dollar index and expectations of further monetary stimulus to prop up ailing economies around the world are behind the latest price surge in the benchmark cryptocurrency.

In a recent report entitled Bitcoin: 21st Century Gold, Citibank MD Tom Fitzpatrick notes some unmistakable similarities between the 1970 gold market and bitcoin. When former US President Richard Nixon abolished the gold standard in 1971, the dollar devalued and gold surged.

“Bitcoin’s move happened in the aftermath of the Great Financial crisis (of 2008) which saw a new change in the monetary regime as we went to zero percent interest rates,” says Fitzpatrick.

Governments today have responded to the Covid crisis with massive monetary stimuli, creating an environment similar to gold in the 1970s. Fitzpatrick, who worked at Nedbank in Johannesburg in the 1980s before rising through the ranks at Citibank, sees bitcoin at $318 000 by the end of 2021, and gold between $4 000 and $8 000 an ounce.

But a lot can happen before then – and two developments may spoil the party.

First, news that US biotech firm Moderna has achieved 94.5% efficiency in its Covid vaccine trials and the likelihood of an imminent return to something approaching the ‘old normal’.

Second, a drop in the number of active addresses interacting with the network. This is a signal that holders are trading rather than holding their bitcoin, though it does not necessarily mean they are preparing to sell.

The news of another possible Covid vaccine from Moderna comes barely a week after Pfizer announced its vaccine had achieved success rates of 90% in trials. The Pfizer announcement was accompanied by a sharp, though short-lived, drop in the bitcoin price on the presumption that such a development meant that fears over the pandemic may start to fade and this would benefit the world economy and the US dollar. The Moderna announcement had no such effect, with bitcoin surging towards $17 000.

According to analytics firm Santiment, the number of active addresses hit a 33-month high two weeks ago, the largest since January 2018 before bitcoin crashed by 85% after its massive spike to $20 000 in December 2017.

Read: Bitcoin is the bubble that keeps on giving

Comparisons have been made between bitcoin and the dotcom bubble that came crashing down in the early 2000s. Out of that crash came Facebook, Amazon and other tech giants.

But bitcoin has just emerged from a major crash that began in early 2018 and ended in 2019. It is prone to volatile swings, and is due for a correction after its amazing run in 2020.

But not everyone is convinced the current bull market is anywhere near running out of steam, Citibank among them.

Bitcoin tore through resistance levels at $15 700 in recent weeks and could see support building at this level as it makes a push for its previous high at $20 000.

Read: Bitcoin on the brink of fresh year high following PayPal embrace

The election fiasco in the US has added to the general sense of uncertainty, with sentiment remaining firmly with safe haven assets such as gold and bitcoin.

This might prompt disbelief among more conventional analysts, but Citibank’s Fitzpatrick notes that bitcoin has been in an ascending parallel channel since 2013.

He writes: “You look at price action being much more symmetrical or so over the past seven years forming what looks like a very well defined channel giving us an up move of similar timeframe to the last rally [in 2017].”

Ciaran Ryan

The Writer's Room is a curated by Ciaran Ryan, who has written on South African affairs for Sunday Times, Mail & Guardian, Financial Mail, Finweek, Noseweek, The Daily Telegraph, Forbes, USA Today, Acts Online and, among others. In between he manages a gold mining operation in Ghana, and previously worked in Congo. Most of his time is spent in the lovely city of Joburg.