Cryptocurrencies have been going through a period of relative stability, which is almost unheard of for the asset class that gained notoriety for its volatile price movements.
The stock market selloff that punished the tech sector in the first half of October coincided with Bitcoin losing 7.5% of its value in a single day. Does this correlation in market movements suggest that as Bitcoin and other cryptos have become more mainstream, and adoption by centralised financial institutions has risen, the price is now at the mercy of the same institutions and financial markets it was seeking to circumvent? Or could the selloff be more indicative of general investor sentiment at that time when confidence in the markets was low?
One interpretation of the current market movement suggests that the correlation between the crypto class to the major indices are largely unrelated. This interpretation may be supported by the fact that as the more traditional markets have continued to fall through October (with tech having its worst month in a decade) bitcoin’s price action has remained stable, whilst simultaneously seeing a 17-month low volatility rate, even with yesterday’s 2% fall.
Technical analysis of the price of Bitcoin shows that the coin was hitting its resistance line and the markets were already likely to turn bearish. The below chart illustrates a falling wedge formation with an almost horizontal support of $6000 that has developed since the February market sell off which shows bitcoins price consolidate and volatility reduce. The wedge shows that the support and resistance lines are expected to congregate by early November but it’s important to remember that a breakout can occur at any time as the price boundaries tighten as investors may take any breach of these lines as an indication of the future price of Bitcoin over the medium to long term. The fake-out of Monday the 10th suggests that investors are poised for any news that can drive price action.
Coinciding with this November timeline is a deadline set by the SEC to allow the public to submit opinions on whether to allow Bitcoin ETF’s in the United States. The deadline, which has been moved from October 26th to November 5th follows the SEC’s original decision to reject the ETF’s citing a lack of compliance to prevent market manipulation.
This decision by the securities authority could fundamentally define how investors perceive the currency as a further integration into financial markets is either halted again or finally given the green light. The ability for this type of announcement to move prices should not be underestimated as bitcoin hit its all-time high just six days after the first Bitcoin futures contract was announced by the CBOE. Granted this happened during an upwards trending bull market, but it undeniably added to that movement.
The announcement to review the initial decision just one day after rejecting the first application, as well as a published statement of official dissent by commissioner Pierce of the SEC, could indicate a potential swing in judgement from the SEC. However, this may not represent a full shift of opinion by the commission as it only takes one commissioner to open a review. Following the deadline, an official decision will not come from the SEC until they have had a chance to review the public submissions, but investors will be listening intently for any early indication of how the decision might go.
More recently, reports that some of the concerns that the SEC have over introducing the ETF have been mitigated by the organisations producing the ETF’s have saw speculators expectations heighten for a prospect that at one point seemed rather unlikely. The concerns of the SEC include market liquidity, volatility, pricing and market manipulation. However, proponents have argued that the SEC’s demand for a ‘significant’ futures market allowed them to be non-committal as they have not defined what they classify as significant.
The imminence of impending large technical and fundamental focal points implies we may be on the brink of a spike in volatility but what price can investors reasonably expect the currency to move to if the market were to shift? The previous decision by the SEC preceded a $400 dip in the price of the coin in one day and fell back down almost $2000 in the following two weeks to the previously mentioned support level of $6000. Speculators may be hoping a reversal in the decision could see Bitcoin return to $8000 or higher. It’s hard to predict how low the price could go as these prices haven’t been seen since before the all-time high but proponents of the technology wishing for continued stability will be hoping that the lack of a bitcoin ETF is already priced into the market.