Is Bitcoin’s Price Recovery Ahead of the Halving a Reason to Accumulate?

Colin Muller

April has been an exceptional month for Bitcoin (BTC) price action. The leading cryptoasset is currently in the throes of its second huge breakout of the month. Speculation abounds that the crypto bear market, which started in 2018, is definitively at an end. The time has come, perhaps, to ask the question: Is it time to accumulate Bitcoin?

Regarding the question of whether or not to accumulate BTC, we can highlight two important price action events — one that has just occurred and one that has not yet come. These are the so-called “Golden Cross,” and Bitcoin’s expected halving which should occur in mid-2020. Both of these suggest — cautiously — that it is safe to resume buying Bitcoin for the long term.

The Halving

Bitcoin's “halving” event occurs when the mining reward is cut in half, in other words, Bitcoin’s inflation halves. Occurring about every four years, the upcoming event will be Bitcoin’s third halving, and is projected to occur in mid-2020.

The halving has historically been a big deal for Bitcoin traders and investors, as the two halvings to date have been preceded by a bear market and occurred during or after a market reversal.

The simple value proposition of a halving is that, with decreased supply of Bitcoin, similar or greater demand for the cryptocurrency will see the price rise. Miners will get half as much Bitcoin for their efforts to secure the network and it is thought that to compensate for this, Bitcoin’s price will rise.

We take a look at the focus on the timing of the halving and how that interacts with the Bitcoin price. The timing of the two previous halvings with the turnover in market cycles could, frankly, just be a coincidence. The fact is the self-fulfilling expectation will probably continue to play a role in the price action leading to all future Bitcoin halvings.

This possible effect can be observed in the recent price action of Litecoin (LTC), a very similar and closely related cryptoasset to BTC, whose halving is quickly approaching. This upcoming event has possibly fueled significant gains for the beloved testbed companion to Bitcoin.

LTC’s halving is expected to occur in early August of this year. Consistently in the top 10 cryptos in terms of market capitalization, LTC has done better than most other large-cap cryptoassets since finding its lows, along with the rest of the market, in mid-December of 2018, putting in over 350% worth of gains.

Bitcoin's gains close to LTC's halving

The easy rebuttal to this observation is that Bitcoin Cash (BCH) has enjoyed similar gains since December, and doesn’t have a halving event until next year, along with Bitcoin.

This is indeed true, but it is worth remembering also that BCH’s price fell by over 98% last year, whereas LTC’s price “only” fell by about 94% from its all-time high. This may not seem like much, but the deeper retrace for BCH on the way down matters more coming back up, and a deeper retrace would suit a more dramatic price rebound.

At any rate, we should continue to monitor litecoin’s behavior during its halving event, to get an idea of what we can expect Bitcoin to do in a year.

Getting back to Bitcoin, one analysis that supports the prediction that the halving will occur during a bull market is research conducted by Delphi Digital on UTXO ages. Delphi analyzed the historical trend of accumulation through these UTXO ages, with the growing age representing HODLing. It found that peak UTXO ages have always come around the time of the halving.

Delphi's study

Indeed, just looking at a Bitcoin chart from the previous halving, we can see that it occurred in the midst of a giant uptrend.

Bitcoin's performance during the last halving

The Golden Cross

We might also look at the famed Golden Cross (hereafter “cross”), which has only occurred with Bitcoin’s recent rally. A cross occurs when a short, uptrending moving average (MA) crosses a longer downtrending or flat MA.

The cross is commonly considered a bullish event, signaling an overall uptrend in an asset. and even a general trend reversal. It is also commonly measured as the intersection of the 50-day and the 200-day MAs. Yesterday’s cross can be seen below.

Bitcoin's Golden Cross

Indeed, with the cross achieved, it seems harder and harder to make the bearish case that Bitcoin could retest, or break its yearly lows.

But as covered in CryptoGlobe’s recent price analysis, it has happened before. During the previous Bitcoin bear market of 2014-2015, a cross occurred near Bitcoin’s market bottom, and the accumulation area instantly reversed its course almost as soon as it was achieved.

Bitcoin bottom reversal in 2015

Then the breakout, which occurred just before the cross, quickly proved to be a fakeout. In just over a month, the price collapsed to retest the market’s lows—and held. The golden cross turned into a death cross, which quickly turned back into another golden cross as the Bitcoin price recovered. From there, Bitcoin began a years-long bull run that concluded in 2018.

There are some obvious lessons here. Crosses, bullish or bearish, do not set in stone the direction of the traded asset. They are indicators, suggestions, theories, and not facts. The April rally could still roll over to retest December’s lows, just like in 2015.

This isn’t to say that this month’s rally resembles the 2015 bear market. Bitcoin’s breakout from $4,200, and its enduring strength following the move appear to have more momentum to them than any price action during the 2015 bear market cycle.

Now that the cross has occurred, we must be very vigilant of the rally’s sustainability. This second April breakout should at the very least achieve a price of $5,800 before a correction. A correction will more than likely come, of course. And depending on how good Bitcoin looks now and in the coming days or weeks, investors could consider accumulating more BTC between $5,000-$4,000.

Time to Accumulate Bitcoin?

Between the upcoming halving, the Golden Cross, and Bitcoin’s very promising behavior in April, the Bitcoin water is looking more and more appealing to wade into.

It will be critical to see, in the coming days and weeks, how far Bitcoin retraces or corrects from its incredible showing so far in April. A correction anywhere above $4,200, the level of the initial April 2 breakout — now so important to Bitcoin’s market structure — seems like sufficient strength to consider accumulating Bitcoin.

CME Looks to Double Bitcoin Futures Limit, but Is This Wise?

The Chicago Mercantile Exchange (CME) has a new request for its regulator, as it looks to double open position limits on bitcoin futures contracts in the face of significant interest.

Nasdaq reports that the CME has already petitioned its regulatory body, the Commodity Futures Trading Commission (CTFC), asking for an increase from 1000 contracts per spot month to 2000 per investor. Each contract represents five BTC, so essentially, at its peak,  a single investor's total position may edge towards a monumental 10,000 BTC.

This is in direct response to the contract's recent growth which is currently depicting record levels of activity, citing $370 million being traded per day. A spokesperson for the CME noted that the idea to increase limits was proposed on the continued maturity of the market:

Based on the significant growth and acceptance of our financially-settled CME Bitcoin futures markets, as well as our analysis of the underlying bitcoin market.

However, as Nasdaq writes the increase in the upper limit of positions is somewhat superfluous. As of July, the number of open interest contracts reached an all-time high of just 6100; given this, it seems the CME may be future-proofing.

Open to Manipulation?

However, concerns remain about the limit increase, as without them, the potential for manipulation rises; often to the detriment to the underlying asset. Although, as per the CTFC website, the threat of manipulation from bitcoin futures contracts is "low":

In general, position limits are not needed for markets where the threat of market manipulation is non-existent or very low.

Instead, Nasdaq posited that this might point to a lessening on the CTFC's strict rule of bitcoin; as well as a maturing of the market in general.

Nevertheless, some believe the CME's bitcoin futures contracts do pose a significant threat to the price of BTC; with some suggesting that blatant manipulation continues unchecked within the market.

As reported, there seems to be a correlation between the expiry dates of CME bitcoin futures contracts and a lull in the price point of BTC. In several instances, a significant drop in bitcoin's price has coincided with a closure from the CME. The most recent example of this occurred on Labor Day, September 2, when bitcoin rose an extraordinary 8% shortly after the CME shut.

Crypto analyst, Alex Kruger, highlighted this, noting the large gaps which formed on the CME chart, from the price discrepancy before and after closing.

This has become a pretty accepted practice within the market. Kruger has even gone to the lengths of compiling statistics each time this phenomenon transpired:

On these occasions, bitcoin cited an average 4.6% price discrepancy following the close of the CME.

Whether this is a coincidence or the market is indeed being actively manipulated is as yet unclear. Either way, with the increase of these limits it might be only a matter of time until we know for sure.

Featured Image Credit: Photo via Pixabay.com