2018 has been a dynamic year for cryptocurrencies. Off the back of a runaway 2017, we saw bitcoin prices fall as much as 50% in a few short weeks. With that said, we have recently seen a bull run in July 2018 — with the BTC:USD prices going from $6,350 to $8,200.
Here are 4 possible explanations for the current bull run and how prices may be influenced in the future. Let’s get started.
Reason 1: Exchange-Traded Funds
An exchange-traded fund (ETF) is a security that tracks a certain part of the market — whether that be a set of stocks, bonds, commodities, or an index. ETFs are purchased like normal shares — to purchase 100 shares of Apple, you would set a buy order for 100 AAPL shares. If you would like to purchase 100 shares of Vanguard’s S&P 500 ETF, you would set a buy order for 100 VOO (the stock ticker for this specific ETF).
ETFs are popular because they are simple, liquid, and have low fees. Recently, there has been a lot of news around crypto ETFs. At a very high level, there are two types of crypto ETFs. The first category tracks stocks that are correlated to the crypto economy, including stocks like NVIDIA, the most popular graphics card manufacturer, often found within mining rigs. The second category is even more interesting.
Bitwise, a San Francisco-based asset manager, has recently filed with the SECto launch a real crypto ETF. Purchasing the Bitwise crypto ETF would give you exposure to 10 cryptocurrencies. The Bitwise HOLD 10 Index includes: Bitcoin (BTC), Ether (ETH), Ripple (XRP), Bitcoin Cash (BCH), Stellar (XLM), Litecoin (LTC), Zcash (ZEC), Dash (DASH), Monero (XMR), and Ethereum Classic (ETC). These cryptocurrencies constitute roughly 80% of the entire market capitalization of all cryptos.
The recent rise in Bitcoin prices can be attributed, in part, to Bitwise’s plan to make crypto more accessible and liquid to a larger group of people.
Reason 2: Short Squeeze
Typically, investors look to make a return by purchasing an asset at Price A ($50) and looking for it to appreciate to Price B ($75 or $100). Holding this position is referred to as “going long”. There is also a group of investors who look to make a return off a price drop, holding this position is referred to as “going short”.
A short seller bets against the asset — a stock, bond, commodity, or token — and earns a profit when the prices drop. With that said, if prices continue to increase, then these shorts are required to “cover their position”. In essence, short sellers are required to cough up money to cover their position. This can lead to a short squeeze.
A short squeeze occurs when the price of an asset increases, then more and more short sellers are required to cover their position, which further increases the demand for shares and reduces the supply. As a result, prices are driven up even further.
Due to the sharp price increase in BTC and the higher-than-normal trading volume, people speculate that a number of short sellers had to cover their position.
Reason 3: Reduced Selling Volume
Selling volume is another factor that influences market prices. Recently, we have seen a decrease in the amount of BTC that has been sold (shown in the image below). As a result, there is less downward pricing pressure.
Bitcoin trading volume over the last 6 months.
When people are pessimistic about the future of an asset, they are motivated to sell. When a large number of people are motivated to sell, then prices can fall rapidly as the selling pressure exceeds the willingness to buy at that price. Early this year we saw large selling volumes that were driven by (1) tax burdens and (2) a fear that the market was too hot.
This trend has been settling and we are starting to see more people eager to get into the market because they believe BTC at $6000 or $7000 is a great price to buy and hold.
Reason 4: Optimism for Bitcoin’s Future
Lastly, we can attribute a portion of Bitcoin’s bull run to general optimistic about Bitcoin’s future. At the end of 2017, it seemed that cryptos could do no wrong. The biggest of 2018 (for a number of factors, including selling crypto to pay tax liabilities) proved that was not true.
But as one Bitcoin crept under $6000, people saw the asset as undervalued and began to purchase again. There are also those who, as usual, held out and are still bullish on the long-term value of Bitcoin.
As the most popular cryptocurrency, Bitcoin’s price influences perceptions well beyond BTC itself. We have also seen more use cases for crypto pop up, from Dubai’s proposed court system to Mount Sinai exploring blockchain technology in the medical industry.
Both Bitcoin becoming more accessible and an increase in the number of decentralized use cases help the long-term prospects of BTC and altcoins over the long term.
As with any market, there are a number of factors that come together to influence price. We find that renewed interest around crypto ETFs, a short squeeze, reduced selling volume, and general optimism have pushed BTC prices higher. Will this trend continue? We’ll have to wait and see.
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