Bitcoin Rally: Here Is Why the Asset Is on The Rise

I recently published a comprehensive report on the emergence of the DeFi market and its implication on the broader crypto space. In it, I highlighted bitcoin’s unusual passive streak and the possibility of a shift in market dynamics. All indicators pointed to the inevitability of an altcoin season fueled by the increase in demand for decentralized financial products. However, ever since I published this article, Bitcoin seems to have jerked back to life. According to the latest market metrics, there is a renewed bullish stance on the part of investors.

Due to the surge of the price of bitcoin above the $10,000 mark, analysts have begun to explore the reason for this sudden movement and project future price trends. In this article, I will analyze the prevailing trends that could have spurred this price rally.

How Bitcoin Switched from Stable to Volatile

For the better part of June and July, bitcoin had a relatively quiet streak with the only buzz coming in the form of the Twitter hack that exposed the flaws of the social media network’s security system. All through this period, the spotlight was on DeFi-enabled protocols and the meteoric rise of their tokens. Within two weeks, the market cap of these DeFi tokens increased by $1 billion, which signaled the start of an alt season. The prevailing narrative was that DeFi had begun to take its rightful place at the heart of the crypto conversation and will over time topple Bitcoin at the top of the market’s rankings.

This assertion became valid when news broke that the dominance index of bitcoin had dropped to its lowest in 12 months. What this means that: bitcoin’s share of the crypto market had shrunk because of a recent spike in demand for other cryptocurrencies. However, this narrative did not last for long as a string of events seemed to have reestablished the crypto asset’s dominance. The digital asset experienced a sudden price rally and has reemerged as the top trendsetter in the crypto space. Although this volatility is long overdue, it is vital to identify the events and factors that caused it and forecast whether it is sustainable or not.

What Spurred the Surge Of BTC?

US banking regulator allows federally chartered banks to custody cryptocurrencies

On the 22nd of July, the Office of the Comptroller of the Currency (OCC) announced that it is giving greenlights to federal banks to accept and store crypto on behalf of their customers. The regulator announced:

“The OCC recognizes that, as the financial markets become increasingly technological, there will likely be increasing need for banks and other service providers to leverage new technology and innovative ways to provide traditional services on behalf of customers.”

As such, the OCC is looking to enable a technology-inclined banking sector that meets the requirements of Americans. And so, national banks may begin to “escrow encryption keys used in connection with digital certificates because a key escrow service is a functional equivalent to physical safekeeping.”

According to OCC Acting Comptroller, Brian Brooks, the decision to allow regulated financial institutions to custody cryptocurrency opens up the possibility for banks to cater to the rising number of Americans currently engaging with the crypto market. He explained:

“From safe-deposit boxes to virtual vaults, we must ensure banks can meet the financial services needs of their customers today. This opinion clarifies that banks can continue satisfying their customers’ needs for safeguarding their most valuable assets, which today for tens of millions of Americans includes cryptocurrency.”

Following this announcement, the price of bitcoin registered a 5% uptick that lifted it over the $9,500 barrier. Perhaps, investors viewed this development as a crucial turning point in the crypto market, and instinctively positioned themselves to capitalize on its benefits. This news provides American investors with one more reason to join the crypto bandwagon. With regulated banks receiving permission to dabble into the crypto custodial sector, it becomes easier to access and store digital assets. This sentiment was echoed by Peter Van Valkenburgh, the research director at CoinCenter, a non-profit organization when he explained that the new policy would drive competition and spur more institutional investors to gamble on cryptocurrency:

“Accepting that centralized entities for cryptocurrency safekeeping and storage are unavoidable and essential, then it is excellent news that, thanks to the OCC’s new policies, there will be even more competition for providing those services. National banks entering the game expands that competition and may also allow more traditional institutional investors to deal in cryptocurrencies.”

However, not all crypto proponents believe that this is an exciting development. Some skeptics are uncertain about the prospect of banks in the crypto custodial space. Jake Chervinsky, a lawyer to Compound Labs, emphasized the complex nature of the regulatory framework of the US. He noted that OCC might lack the sovereign power to allow national banks to provide crypto services. Besides, there are no guarantees that banks will pursue this opportunity. He said:

“Banks are ultimately businesses like any other, so they’ll respond to customer demand. But OCC is only one of many relevant regulators, Brian Brooks may not be in charge there for much longer, and banks are psychotically risk-averse / compliance-focused.”

Regardless of this hint of skepticism, it may seem that this development could have contributed to bitcoin’s recent price rally.

Americans Await the Second Stimulus Check

In light of the unrelenting state of the global financial and health crises, the US government is planning to embark on the second phase of monetary intervention targeted at vulnerable residents. The first, which commenced in April, saw Americans receive a $1,200 check to cushion the effect of lockdown directives implemented as a Covid-19 prevention measure. Surprisingly, there were indications that a significant percentage of recipients might have used their stimulus checks to purchase bitcoin. Brian Armstrong, CEO of Coinbase, made it known that its crypto exchange had processed more bitcoin purchases worth $1,200 during this time frame. If this is the case, then crypto participants might have strengthened their position in the crypto market, in hopes that the next monetary intervention will have a similar effect on proceedings.

As noted by Cointelegraph, US residents who chose to invest their stimuli checks in bitcoin in April would have realized over 50% return. As such, the anticipation of the same level of crypto engagement might have served as one of the reasons the digital asset is pumping. Note that, before the official announcement of the plan to distribute another set of stimulus packages in the US, the European Union had agreed on a massive economic recovery fund worth $857 billion. Perhaps these developments played a significant role in current price movements.

Bitcoin Emerges as A Safe Haven

Another factor that might have influenced the current bitcoin rally is the growing reputation of the digital asset as a store of value. Although skeptics often identify bitcoin’s rising correlation with the stock market as the main reason why it cannot function as a safe haven, recent price movements, on the other hand, suggest the complete opposite. As a result of the ongoing plans by governments to shield their economies from a financial crisis by injecting funds to capital markets among other stimulus programs, there is a risk that hyperinflation could set in. Hence, prominent voices have begun to stress the implications of the uncontrolled creation of fiat currencies and advised investors to opt for safe havens.

Larry McDonald, a Wall Street veteran, recently discussed the consequences of the excessive spending of governments to reduce the impacts of the global financial and health crises. He mentioned that the economic policies designed to cushion the effect of coronavirus would further complicate matters. “Basic economic assumptions, or structures, will turn out to be much more fluid than policymakers can anticipate. Therefore, the results will be disastrous and unimaginable,” McDonald explained.

He added that the prevailing economic indicators suggest that “we are at the early stage of the biggest cobra effect in the history of economics.”

“As the massive monetary and massive fiscal stimuli (over $15T globally) conjoin to save the economy from a deflationary depression, they will cause instead a hyperinflationary economic collapse.”

Hence, it comes as no surprise that gold is currently experiencing an upsurge. In contrast, the US dollar is struggling. Remarkably, bitcoin has benefitted from the market frenzy pushing the price of gold to new highs. If we analyze these events objectively, it is clear that bitcoin has reinstated itself as a store of value. Nigel Green, chief executive and founder of deVere Group, reiterated this sentiment and explained that it is likely to drive the digital asset to an even more prominent status. He explained:

“Bitcoin is currently realizing its reputation as a form of digital gold. Up to now, gold has been known as the ultimate safe-haven asset, but Bitcoin—which shares its key characteristics of being a store of value and scarcity—could potentially knock gold from its long-held position in the future as the world becomes evermore tech-driven.”

Rakesh Upadhyay, in a comprehensive analysis on Cointelegraph, echoed a similar view when he forecasted that the demand for gold could rub off on bitcoin. He wrote:

“Most investors buy gold because they are looking for a way to preserve their wealth against the devaluation of fiat currencies. However, as gold continues to climb, investors might start looking for other assets where they can find considerable value. This is when Bitcoin (BTC) could come into greater focus. The next bull run in the top-ranked asset on CoinMarketCap is likely to be a sustained up-move, unlike the vertical rally seen during the previous bull market in 2017. Hence, crypto investors should be patient with their holdings.”

Nonetheless, some believe that bitcoin is not all that immune to the happenings in traditional markets. These skeptics have handpicked the crypto market crash in March as an indicator that bitcoin will experience a dump if there is a reversal of the stock market recovery. Regardless of this, a majority of market participants expect this rally to last for a while. Or just maybe, it could lead to a new all-time high.

A Possible Shift in Market Dynamics

As stated earlier, the vast majority of crypto media networks and investors fixated on the buzzing DeFi landscape for the better part of June. While this is a given, investors may have begun to take profit and divert funds to established cryptocurrencies like Bitcoin. This may explain why several DeFi tokens are experiencing a reversal. Hence, it comes as no surprise that Ethereum is one of the biggest gainers at the early stage of this market movement. Joseph Young hypothesized that a profit-taking pattern could have caused the swift surge of the price of Bitcoin. He wrote:

“When the price started to rally, major altcoins, as well as well-performing DeFi tokens, began to slump. Ethereum declined from $322 to $311, and DeFi tokens, including Aave and YFI, saw steep rejections. The simultaneous rejections of major altcoins and the price surge of Bitcoin suggest that traders took profit from recent altcoin rallies. As traders moved their altcoin gains to Bitcoin, it possibly triggered a BTC uptrend, while altcoins declined. ETH, as an example, rose from $247 on July 23 to $322 on the day’s peak, recording a 30% gain. Despite the strong sentiment around altcoins, investors are possibly taking a more cautious approach by hedging their gains.”

As for Simon Peters, a crypto asset analyst at eToro, he believes that this price rally is just a case of investors scrambling to take advantage of the ongoing boom of altcoins. He explained:

“In my view, this is merely investors looking to take advantage of altcoin prices, which are now gaining momentum compared with Bitcoin… Tether (USDT) crossed mark this month and USD Coin (USDC), Circle’s stablecoin, is also at its highest level, having reached a market cap of over $1 billion. Perhaps som the $10 billione of this liquidity has made its way into Bitcoin.”

Whatever the case may be, the verdict is that bitcoin has regained its lost volatility, and it remains a prominent component of the crypto market.