The cryptocurrency market sprang back to life with bitcoin’s surge to 4.5-month highs yesterday. But why?
The leading cryptocurrency by market value jumped nearly $1,000 to $5,080 in a sixty-minute window early on Tuesday, confirming a transition from a bear market to a bull market.
While the bullish breakout is a welcome development following a year-long bear market, many traders are still unsure of what suddenly drove prices higher.
However, a big move was overdue, as bitcoin’s average daily trading range had slipped to two-year lows in March. An extended period of low volatility often ends up with a violent move on either side.
That low volatility period ended with a strong bullish breakout, possibly due to the following three reasons:
1. Mining reward halving
Bitcoin is set to undergo a mining reward halving in August 2020 and historical data indicates the process tends to put a bid under the cryptocurrency at least a year in advance.
Markets first took note of this possibility in December 2018 after the sell-off ran out of steam near $3,100. The particular price pattern was reminiscent of how the previous bear market had ended at lows near $150 in early January 2015 – 17 months before a reward halving in August 2016.
The narrative that BTC is set to repeat history by breaking into a bull market at least a year ahead of the next mining reward halving (due August 2020) has only strengthened over the last three months, possibly leading to the bull breakout yesterday.
2. Technicals were foreshadowing the bullish move
Several longer duration indicators, like the weekly money flow index and the moving average convergence divergence (MACD), had signaled a bearish-to-bullish trend change in February.
Further, lagging indicators like the bearish crossovers of the long-term moving averages (MA) were flashing seller exhaustion.
These technical developments likely reinforced expectations of stronger rally ahead of the incoming halving.
3. Market activity
Reuters reported yesterday that a single algorithmically managed order worth $100 million spread across several major exchanges – Coinbase and Kraken and Bitstamp – triggered the sudden rally to multi-month highs.
Meanwhile, Bitfinex data indicates that the unwinding of bearish bets created upward pressure on prices. BTC/USD short positions plunged from 20,654 BTC to 17,103 BTC between 04:00 and 06:00 UTC yesterday; later declining further to 16,978 BTC – the lowest level since March 2018.
Looking forward, BTC could witness a minor pullback to levels below $4,700 in the short-term. The overall outlook, however, will remain bullish as long as BTC remains above $4,236.
BTC revisited yesterday’s high of $4,080 earlier today. The bullish move, however, was accompanied by a lower high on the relative strength index (RSI).
That bearish divergence indicates scope for a pullback to the ascending (bullish) 50-hour MA, currently at $4,572.
Both the triangle breakout and the bullish higher high above $4,236 indicate the tide has turned in favor of the bulls. Validating that argument are the ascending 5- and 10-week moving averages.
That said, with the short duration charts reporting overbought conditions, a break above the crucial 21-month exponential moving average (EMA), currently at $5,200, may not happen in the next few days.
Disclosure: The author holds no cryptocurrency assets at the time of writing.