In-depth analysis of Bitcoin breaking through $40,000, what’s the next step?

Author: Carbon 7

Source: Carbon Chain Value (ID: ccvalue)

If people believe in the value of Bitcoin, then even if there are several crashes and bumps on this value path, it is normal. In fact, Bitcoin should maintain an upward trend in the long run, even if many people think there is a bubble, but as James Angel, a professor of finance at Georgetown University, said, the history of financial markets is the history of bubbles - so, while being cautious about risks, don't be afraid.

On November 28, 2017, Bitcoin broke through $10,000.

On December 16, 2020, Bitcoin broke through $20,000.

On January 2, 2021, Bitcoin broke through $30,000.

On January 8, 2021, Bitcoin broke through $40,000.

It took only 17 days for Bitcoin to rise from $20,000 to $30,000, and then only 7 days for it to rise from $30,000 to $40,000, setting a new record. Whether you are a veteran in the industry or a newbie in the field, you must have questions at this time: Why is the price of Bitcoin rising so rapidly? Will Bitcoin collapse?

In fact, Bitcoin was invented only 12 years ago. It is a new electronic payment system built on an Internet-based computing network that is not controlled by any person, company, or institutional entity. The reality is that Bitcoin transaction history is very short and asset valuation methods have not been tested, so no one can really determine the value of Bitcoin now or in the future.

But this time, digital asset investors and even Wall Street giants have made price predictions of $50,000, $400,000, or even higher, such as:

• MicroStrategy CEO Michael Saylor predicts that with the influx of $100-300 trillion, the price of Bitcoin may be pushed up to $14 million. He even believes that Bitcoin will subvert gold and become the world's largest store of value in the future.

• BitPay Chief Commercial Officer Sonny Singh predicts that Bitcoin can reach $45,000 in 30 days, but he is cautious about the role that institutional investors will play in the future of Bitcoin because some large companies may sell their cryptocurrency holdings for profit earlier than expected.

• Anthony Scaramucci, founder of hedge fund Skybridge Capital, said that the scarcity of Bitcoin provides people with anti-inflation qualities because when something is scarce, people want it. Now there is a historic opportunity to get in before institutions enter the market. It is expected that the price of each Bitcoin may reach $100,000 by the end of 2021.

• Johnny Lyu, CEO of KuCoin International, mentioned that the current round of Bitcoin's rise was straightforward and direct. In particular, in the first week of 2021, Bitcoin rose by more than $10,000. This is not only due to the huge buying power brought by the entry of institutions, but also due to the market's combined efforts to repeatedly push Bitcoin to set records. Under such market sentiment, Bitcoin is expected to rise further.

• Dan Held, director of business development at Kraken, believes that Bitcoin’s current bull market may be part of a super cycle. The COVID-19 pandemic has provided a perfect macro environment for Bitcoin to demonstrate its value. Financial institutions have finally understood the value of Bitcoin and are entering the Bitcoin market, laying the foundation for a super cycle. Prices may be pushed up to $1 million.

So, what are the key reasons behind this bull market?

Key reason 1: Demand from institutional buyers is growing, and many people are beginning to view Bitcoin as a tool to hedge against inflation. According to the white paper and source code design rules, the total supply of Bitcoin is only 21 million, which is obviously in stark contrast to central banks such as the Federal Reserve that continue to print money. Many institutions have already begun to enter the market, such as:

• Major asset managers including Tudor Investment and Guggenheim Partners have announced they will “bet” on CME’s Bitcoin futures contracts;

• Analysts at JPMorgan Chase, the largest bank in the United States, recently predicted that Bitcoin could soar to $146,000;

• Bloomberg analyzed in its latest cryptocurrency outlook report that $20,000 is already the "new base point" for Bitcoin, and the next resistance level will be $50,000. If historical data is any guide, the $50,000 resistance level will be easily broken within a year after the supply reduction;

• Morgan Stanley purchased 792,627 shares of business intelligence software company MicroStrategy in December 2020, accounting for 10.9% of the company's total shares.

Key reason 2: The decline of the US dollar in the foreign exchange market. The US dollar index is an indicator of the exchange rate of the US dollar against major world currencies such as the euro and the yen, but in 2020, the US dollar fell by 6.8%, and this decline will continue in 2021. The US dollar is very important for Bitcoin because Bitcoin prices are mainly denominated in US dollars. The biggest reason for the decline of the US dollar is that the Federal Reserve has issued more than $3 trillion in currency in the past year, equivalent to three-quarters of the total amount of US dollars issued in the past 108 years. On January 6, the US Capitol was violently attacked by demonstrators, which is likely to be the first time that the United States' leadership on the global stage has been weakened. Many economists predict that the US government under the control of the Democratic Party will launch a large spending plan and a new stimulus bill, which will continue to expand the government budget deficit in the next few years, and most of the additional costs will be achieved through the printing of new US dollars.

Key reason three: It is easier for retail investors to buy Bitcoin. You will find that it is becoming easier and easier to buy Bitcoin. Retail investors can buy directly from payment service providers such as PayPal and Square. For example, Paypal's daily cryptocurrency trading volume has exceeded 125 million US dollars, and as cryptocurrency trading services continue to expand, trading volume will further increase. It is worth mentioning that according to the analysis of digital asset company ByteTree, the current single Bitcoin transaction amount is mainly concentrated in the 600 US dollar range, which is similar to the amount of relief provided by the US stimulus bill.

In the bull market, the most active are still exchanges

Just after the price broke through $40,000, the actual trading volume of Bitcoin on various cryptocurrency exchanges also soared to twice the previous highest level. According to Messari analysis data, in the first week of 2021, the Bitcoin trading volume of several major cryptocurrency exchanges in the world exceeded $67 billion. The previous peak of trading volume occurred in mid-2019, when the price of Bitcoin fell below $4,000 and then briefly rebounded to the $10,000 range, resulting in a single-week trading volume of more than $32 billion. (Carbon Chain Value Note: Messari's Bitcoin actual trading volume indicator summarizes and adjusts the data of several leading cryptocurrency exchanges, such as Bitfinex, Coinbase Pro, Kraken and Poloniex.)

However, although the market is positive, many people still have doubts, namely: How is the record high transaction volume of cryptocurrency exchanges different from the last bull market? Will the bull market be followed by a longer bear market like the last time? It is worth mentioning that before the bull market officially started in 2020, some industry insiders had indeed "foreseen" that the market would rise significantly, but what many people did not expect was that the new coronavirus epidemic dealt a heavy blow to the global financial market, including cryptocurrencies, causing Bitcoin to fall to the $3,000 range on "Black Thursday" on March 12, when many retail investors did choose to sell.

But now the situation is different. As Bitcoin doubled from $20,000 to $40,000 in a very short period of time, the trading intensity of the exchange has obviously increased significantly this time. As shown in the figure below, the median Bitcoin trading intensity on January 8 reached 6.77, which is higher than the 180-day average:

Judging from the current market environment, it means that more market participants want to "buy" rather than "sell" - the numbers don't lie:

• According to Chainalysis data, on January 9, the inflow of Bitcoin into cryptocurrency exchanges reached 127,720, which was higher than the 180-day average.

• According to Glassnode data, on January 9, the amount of Bitcoin inflows to cryptocurrency exchanges (1-day moving average) hit a record high of $132,812,085.62;

• According to Chain.info data, on January 10, the balance on the cryptocurrency exchange chain exceeded 2 million BTC, and there were 125 large deposits and withdrawals in 24 hours (Carbon Chain Value Note: "large amount" refers to transactions with an amount greater than or equal to 50 BTC);

• According to data from cryptocurrency data service provider CoinMarketCap, on January 10, Bitcoin's daily trading volume also exceeded US$85 billion.

It should be noted that due to different data sources, the data provided by different cryptocurrency data service providers are also different. For example, Coingecko's daily trading volume data is US$77 billion. The following table shows the trading data of several major cryptocurrency exchanges taken from Coingecko at the time of writing this article (January 10, 2021):

Why are cryptocurrency exchanges still the most active in the bull market? In fact, despite some inherent risks, the vast majority of both institutional and retail investors are willing to trust/store their wealth in cryptocurrency exchanges. According to a recent survey at the end of 2020, 92% of cryptocurrency market participants are willing to "hand over" their Bitcoin, stablecoins, etc. to trusted exchanges rather than choosing to control them themselves - at least at this stage, exchanges are still the most popular choice for crypto asset custody, not hardware wallets as some professionals think. In addition to cryptocurrency exchanges, the second most popular cryptocurrency custody option is cold wallets, and the last one is third-party custody service providers.

In addition to the record high trading volume, the network traffic of cryptocurrency exchanges has also reached a peak. According to the cryptocurrency exchange network traffic data released by The Block (as shown in the figure below, the data time is January 6, 2021), it can be seen that the current number of visitors to cryptocurrency exchanges has approached 200 million, setting a record high.

The figure below shows the traffic distribution of several major cryptocurrency exchanges on the market. The top ones include: Coinbase, BitMEX, Upbit, Huobi, KuCoin, Bittrex, etc.

Since exchanges are the most active in the bull market, perhaps we can compare the performance of cryptocurrency exchanges through platform coins (as shown in the following table, data source: Coingecko, data time: January 10, 2021):

As can be seen from the above table, if we compare the weighted growth of platform coins over 7 days, 14 days and 30 days, KuCoin’s KCS performs the best, followed by Huobi’s HT and Matcha’s MX.

Most cryptocurrency exchanges have launched their own platform coins after they have a certain strength. Generally speaking, the better the trading platform develops, the greater the room for the platform coin to rise. Thanks to the recent continuous improvement in the traffic and trading volume of exchanges, the corresponding income from withdrawals, transaction fees, etc. will also rise. As long as the exchange income increases, the rise of platform coins is natural. With the traffic and trading volume hitting new highs, the platform coins of cryptocurrency exchanges are performing better and better, because the platform coins are directly generated by the cryptocurrency trading platform, and the value is also directly reflected on the platform.

Overall, as the price of Bitcoin continues to hit new highs, exchanges, as an important part of the crypto ecosystem, seem to be taking advantage of this favorable trend and making great strides. So, can this trend continue?

Where will Bitcoin go after $40,000?

As we all know, the price of Bitcoin fluctuates greatly. From a historical perspective, a collapse after a surge is likely to be imminent. Although Wall Street and many investment giants are very optimistic about Bitcoin, some industry insiders have expressed cautious opinions.

Joe DiPasquale, CEO of cryptocurrency hedge fund BitBull Capital, noted that Bitcoin "has always been very volatile," such as on January 4, when Bitcoin prices suddenly plunged by nearly $7,000 just after climbing to a high. Joe DiPasquale believes that the main reason for this may be that some people use too much leverage, so it is easy to get wiped out.

Gavin Smith, CEO of digital asset company Panxora, said that since 2013, almost every year has seen Bitcoin prices fall by more than 25% from their highs of the year, so don't be surprised if you see Bitcoin rise to $70,000 or $80,000 and then plummet 40%.

Johnny, CEO of KuCoin International, also mentioned, “With the recovery of the crypto market, many exchanges including KuCoin have seen a surge in trading volume recently. KuCoin’s cumulative trading volume has recently exceeded 100 billion US dollars, which shows that the market’s investment enthusiasm has been ignited, and it is highly likely that Bitcoin will continue to break through the high point. However, this process will not happen overnight. There will inevitably be several large pullbacks in the middle. It is common in the crypto market for the pullback to exceed 20%, so investors should pay more attention to risks while paying attention to the price of the currency.

Mike Venuto, co-portfolio manager of the Amplify Transformational Data Sharing exchange-traded fund, which invests in blockchain-related stocks, said that the price of Bitcoin could rise two to three times from its current level and then fall back to its current level, which could be equivalent to a two-thirds retracement - of course, for Bitcoin, a short-term plunge of more than 50% is not impossible, as it has happened several times before. For example, in just three months from mid-December 2017 to early February 2018, Bitcoin plummeted from about $20,000 to $6,550, and then did not return to the $20,000 level for as long as three years.

In fact, no one knows where Bitcoin will go. After all, most people cannot predict the future. It may be $40,000 today, $100,000 tomorrow, but $5,000 the day after tomorrow. However, the biggest difference between this time and the last "bull market + bear market" is that the new coronavirus outbreak in 2020 has forced the U.S. government to issue trillions of dollars to cope with the impact of the economic depression. However, people with a little economic common sense know that issuing more dollars will trigger long-term inflation and even financial crises. In the case of the failure of the traditional financial system, Bitcoin, which has the attribute of scarcity, will undoubtedly attract more attention, and some savvy investors have begun to try to diversify their investments to spread risks.

On the other hand, Bitcoin is no longer in the early adoption stage. As more and more large institutions view Bitcoin as a product to hedge against traditional market risks and consumers begin to try to trade digital currencies in their daily lives, Bitcoin is becoming a core part of the investment portfolio of many institutions and will also become a universal payment method.

If people believe in the value of Bitcoin, then even if there are several crashes and bumps on this value path, it is normal. In fact, Bitcoin should maintain an upward trend in the long run, even if many people think there is a bubble, but as James Angel, a professor of finance at Georgetown University, said, the history of financial markets is the history of bubbles - so, while being cautious about risks, don't be afraid.