Yesterday, for the first time, Bitcoin broke above the $50,000 level, a breach that was confirmed on Wednesday. Crypto enthusiasts are expecting the largest cryptocurrency by market capitalization this time around to be only at the beginning of its upward trajectory.
According to them, this time differs from the last time BTC took off, when it reached the $20,000 level in late 2017 before plummeting in a correction that lasted more than a year. However, the “things is different now” argument exhausts our senses about the market.
To be fair, the current environment has changed in two main ways:
- state of the economy
- Increased acceptance of the crypto asset class
Unprecedented stimulus measures, including in the United States, used to counter the global economic crisis caused by the coronavirus pandemic, are expected to trigger inflation for the first time in 12 years. This will cause the dollar’s yield to fall proportionately, prompting investors and savers to store the value in another form. In December 2017, when Bitcoin reached its peak, the dollar index was at 94.00. Now it is below 91.
Even today when the dollar hit a high, Bitcoin broke above $51,000 at the time of writing, another breakout.
In addition, controversy continues to rage over the claim that Bitcoin is capturing the safe haven demand from gold. But the digital token has reached a new all-time high and is trading ahead of today, despite the precious metal’s decline due to the strength of the dollar, which may reinforce the idea that the cryptocurrency, which many have dubbed digital gold, is at least now usurping its safe-haven status.
Add to this what appears to be a massive reassessment of the new asset class by investors. In 2017, Bitcoin was seen by many as a gimmick, or a silly dream among young people with starry eyes looking to exchange fiat currencies.
Today, institutions are increasingly interested in bitcoin and the crypto asset class. In September 2017, Ray Dalio, the billionaire founder of Bridgewater Associates, the world’s largest hedge fund, said that BTC “is not an effective wealth protection because it is volatile, unlike gold.”
This year, however, on January 30th, Dalio made a facial. “I am really impressed by how well Bitcoin has stood the test of 10 years of time,” he said, adding:
“It seems to me that Bitcoin has managed to cross the line between a highly speculative idea that may not exist in the immediate future and one that may have some value in the future.”
It was revealed on February 8 that Tesla Inc (NASDAQ:) has invested $1.5 billion in cryptocurrency and that the company plans to accept it as an additional payment in the future for the case of Bitcoin. This isn’t a huge surprise, of course, given that the electric car maker’s founder and CEO, Elon Musk He has been supportive of cryptocurrencies for quite some time.
Mr. Dalio continues to warn that Bitcoin is highly volatile and that investors could lose 80% of their investment if the volatility continues. He even went so far as to say that countries around the world could ban the digital currency if it continues to rise.
Ironically, for older, more acceptable assets, market tops are usually signaled when retail investors jump in. However, for this new asset class, it looks like the top could be within reach when institutional “smart money” joins the party. This is why we are issuing a warning that Bitcoin is overheating and appears to need a breather.
As the price rose, its momentum slowed, showing weakness to the upside, a signal that a pullback is likely. Moreover, RSI above 70 indicates overbought territory.
In this context, here is an example of taking a stand to profit from a Bitcoin correction:
- Admission: $50,000
- Stop Loss: $52,000
- Risk: $2000
- Target: $40,000
- Return: $10,000
- Risk/Reward Ratio: 1:5