Will 2021 Be Another Historic Year for Crypto?

We’ve also seen the market cap of the entire crypto space breaking above $1 trillion for the first time ever. Having covered the entire run-up since the end of the bear market, it’s been fascinating to observe these shifts in sentiment.

Aversion Gives Way to Appetite

The crash of 2018, followed by the coronavirus sell-off last year in March, weighed heavily on investor confidence. Each new high was met with expectations of an imminent sell-off. Remember that the asset was already looking overbought before it broke its 2017 highs at the close of 2020. As bitcoin traded closer to those highs, many expected a prolonged correction because it had already rallied by almost 200% in 2020 alone, and this sentiment was held despite coronavirus.

However, as we learned back in 2017, expectations are easily confounded when animal spirits are woken in crypto. We’re barely into the first half of January and bitcoin has doubled again, trading as high as $42,000 on January 8. Over the past weekend, we’ve seen profit-taking as traders hunt for a top. At the time of writing, the price has dipped as low as $32,600.

So, where to next?

As much as the entire market has already run, there are a number of factors possibly converging to support higher crypto prices. What’s notable about the shift in sentiment is that it seems to be remaining positive, even at these inflated prices. It’s worth noting that even as recently 2019, there were nowhere near as many institutional traders publicly discussing bitcoin, making price predictions, or allocating a percentage of their capital to it. Bitcoin seems to have become a part of the broader reflation narrative that sees 2021 ushering in a commodity bull cycle and a cheaper dollar, both of which should be positive for crypto assets.

All this is happening while bitcoin itself is at a very bullish part of its own internal cycle. The “halvening” event, where the number of new bitcoins minted per block is cut in half, takes place every four years and the last one almost went by unnoticed with coronavirus dominating the headlines throughout 2020. Now, with less supply and more interest from institutional and retail alike, we could be at a crucial turning point in the asset’s history. In November, it was reported that PayPal and Square’s CashApp alone, had been scooping up 100% of all newly minted bitcoins, and that’s just for the retail crowd.

Then there’s the amount of fiscal and monetary stimulus that’s already been conducted globally, and all that’s to transpire due to COVID-19 still not firmly in the rearview. The debate as to whether or not inflation is here due to unprecedented central bank largesse is moot when you’re trying to purchase anything that cannot be “eased.” Hard assets like gold, bitcoin, and even industrial metals like copper, have undoubtedly inflated since last year. So, with more printing on the cards, there will be more money vying for the same scarce assets.

How to handle it

If you’re new to the crypto space, keep in mind that it’s a highly volatile asset class and the experience of trading it with no leverage at all is similar to using leverage on less volatile markets like FX. For this reason alone, be very judicious in your use of leverage (if any) when trading crypto. If you’re completely new to trading as a whole, it is best to use no leverage at all. This will help you avoid large losses of capital as you learn how to trade, and is critical in many traders’ long-term ability to stay in the markets.

For those of you with both a basic grasp of trading and crypto markets, it pays to remember that a rising tide lifts all boats, so inflated bitcoin prices eventually spill over into the rest of the crypto market. Some of you will be holding bitcoin all the way up, others will attempt to capitalise on short- and medium-term corrections. For those wanting to trade the chop, a rudimentary understanding of technical analysis will stand you in good stead.

The more ambitious among you who are considering venturing into the other cryptocurrencies should be aware that there’s a relationship between bitcoin and the rest of the “altcoin” market that needs to be researched and understood. If past is prologue, investing in the strongest of the “alts” at the right point of the cycle can lead to trades that outperform bitcoin itself. In 2017, it was all about ether. It may be the same story in 2021-2022, however, there are a few notable contenders out there in the smart contract vertical who are bringing some interesting technologies to market. These should be researched and understood by anyone seeking to trade the altcoin market in 2021.

by Giles Coghlan, Chief Currency Analyst, HYCM

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Note: Cryptocurrencies are not available for trading under HYCM (Europe) Ltd and Henyep Capital Markets (UK) Ltd.

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