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

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

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

Some analysts have seen signs that cryptocurrency traders may switch from bitcoin to digital market alternatives such as Ether (ETH) and Litecoin (LTC). Ether, the second largest cryptocurrency, climbed 27% on Sunday and hit a 35-month high above $ 1,150 early on Monday. 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, supported by encouraging signs of a manufacturing recovery, and US equity futures showed a higher opening. Gold strengthened 1.9% to $ 1,935 an ounce.

Until now, the cryptocurrency markets in 2021 have looked a lot like those in 2020: prices are on the rise.

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

Ether, the second largest cryptocurrency in terms of market value, climbed 26% on Sunday alone, surpassing the $ 1,000 mark for the first time since February 2018. The price of the digital asset has almost quintupled the last year.

And even with the 67% drop in prices last month for what was the third largest digital asset, XRP (XRP), the total market cap of the crypto industry has more than doubled in the past two months. to reach approximately $ 883 billion.

“On the current trajectory, we can estimate that we will easily cross the $ 1 trillion mark in the next few months,” wrote Mati Greenspan, founder of currency and crypto analysis Quantum Economics, last week. .

For context, remember that it was big news in traditional markets when the outstanding US “leveraged loans” – those granted to companies with poor credit ratings – rose to around 500. billion dollars in late 2010, then doubled to $ 1 trillion in early 2018.

Such rapid (and frankly astonishing) growth in digital asset markets should theoretically prompt any responsible financial journalist to scramble to bring together experts who can speak out about growing risks.

But aside from the usual warnings that cryptocurrencies are volatile and prone to unexpected and punitive price corrections, analysts and traders say it’s likely that institutional adoption of Bitcoin, Ether and of a range of other digital tokens is just beginning.

And that prices are much more likely at this point to continue to rise than to reverse suddenly, absent major surprises similar to last year’s pandemic, which rocked stocks wildly, d ‘American Airlines at Zoom.

Jim Bianco, a widely followed Wall Street veteran who now heads Bianco Research, tweeted on January 2 that bitcoin “gives the impression that Tesla is standing still», Referring to the stock price of the electric car maker.

First Mover has previously discussed that as bitcoin enters uncharted territory, investors reading price chart patterns – a practice widely followed among crypto traders known as “technical analysis” – have less of signs to ignore.

Just a month ago, as the cryptocurrency changed hands around $ 19,000, Kraken Intelligence, a research unit of the Kraken digital asset exchange, released the results of a survey noting that Customers expect an average price of $ 36,602 in 2021. Did those predictions prove true? on target, Bitcoin’s biggest gains for the year would already be on the books.

But well-respected professionals in the digital asset markets and on Wall Street recently referred to price forecasts ranging from $ 50,000 to $ 400,000.

The truth is, no one knows where prices are going, just as no one can say for sure that the 2021 economy will be brighter than the dismal 2020 that just ended. Or how much more money the Federal Reserve and central banks around the world may need to create to fund stimulus and support financial markets.

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

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

Bitcoin fell sharply early Monday in a move typical of the market’s bullish correction.

Prices fell from $ 33,000 to $ 28,000 before rebounding to $ 30,000. The steep correction erased the rally from $ 29,000 to over $ 34,000 over the previous three days.

A correction appeared to be on the horizon, with the perpetual swap funding rate – an indicator of the cost of maintaining a long position in the derivatives market – hitting an 11-month high of 0.137% early today. A high funding rate can signal excessive bullish leverage and often produces pullbacks similar to that seen in late November. Even with Monday’s price drop, the finance rate only dropped slightly to 0.122%.

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

“This may have pushed the denominated price of Bitcoin’s tie higher,” Poppe said, adding that the premium had started to normalize early on Monday. Tether (USDT) is the largest dollar-linked stablecoin in terms of outstanding amount.

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

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

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