Following yesterday’s epic rally, the Bitcoin price continued to escalate today until eventually hitting a high around $7,500 before leveling off. The rise resulted in a massive 30 percent in gains over the space of a few days – the most volatile movement Bitcoin has seen in over a year.
So why the sudden rally?
Currently, the weekend volatility in the cryptocurrency market appears to have subsided but it’s possible more big movements are coming. Considering Bitcoin was worth a mere $5,000 less than a month ago means it is almost certainly in overbought territory and in a fragile position. Most of this new money has been added in just the past few days, so where did all the volume come from?
Bitcoin ‘moonboys’ and maximalists see this as evidence that Bitcoin is finally getting the respect it deserves but surely there is more to the story. It’s highly abnormal for any asset to suddenly explode in this fashion and last time this happened, an even more sudden and severe crash followed.
Manipulation in the cryptocurrency market is considered commonplace these days and recent events like the Bitfinex/Tether scandal might remind some of us of 2017. Back then, Tether was accused by some of being responsible for a rally that saw Bitcoin surge to almost $20,000 before heavily correcting by over 300%.
Is something similar happening now?
The volume entering the market yesterday was so abnormally high that the resulting price increase was actually lower than it should have been. This could only mean that a lot of that capital was flowing into short positions, which makes one ask – what do these ‘shorters’ know that we don’t?
A popular theory floating around is that either Bitcoin ‘whales’ or institutional investors want to create a seller’s market so they can buy large amounts of Bitcoin cheap. However, to achieve this they need to increase liquidity, which was low up until now. This is difficult to do but possible by instigating a ‘short squeeze’ – using massive amounts of capital to push the price up, attracting small buyers and then subsequently liquidating investors short positions as it rises. When the market eventually crashes under its own weight, investors panic sell at low prices and the institutional investors buy it all up.
When the price of an asset rises that quickly, it doesn’t create any decent support levels so instead of dropping in a stepped, rational fashion it crashes all the way back down. If this scenario pans out, we could see the bitcoin price reach $4,000 or less again in the next few weeks.
However, that is just one theory.
An overdue bull run?
Another possibility that Bitcoin ‘perma-bulls’ prefer to believe is that this bull run is not the result of manipulation but rather an overdue rally that Bitcoin deserves. That theory certainly holds a lot of legitimacy, especially considering the extended bear market that cryptocurrency has just suffered through over the past year and more.
The fact that Bitcoin’s 200-day moving average (MA) recently crossed over its 50-day MA in what’s known as a ‘golden cross‘ strongly supports an incoming bull run. It is common in traditional stock market trading that an asset will begin to grow in price drastically following this event. There are also several other strong indicators suggesting that the price is now in a strong upward trend that should continue for some time.
The upcoming ‘Bitcoin halving‘, set to occur sometime in May next year, has also been noted a possible reason for investors rushing to accumulate now. Personally, it seems to me to be a bit pre-emptive but some analysts have made relevant comparisons to previous halving events and the type of accumulation leading up to them.
Despite strong evidence to suggest the current market is being manipulated, it is also equally possible that an emerging market like that of cryptocurrency is simply prone to high volatility. The fact that anybody and their aunt can now easily invest in Bitcoin means it often attracts emotional buyers who don’t really know what they’re doing. This is the perfect situation to fuel irrational price hikes and exuberant, illogical market movements.
It’s quite possible if this form of panic buying continues, the Bitcoin price could break through the significant psychological level of $10,000 in the very near future. My only fear, though, is that if it does so too quickly then it will crash back down just as fast.