Cryptocurrency Swings – Why and What’s Next?

05 Jan 2021

The cryptocurrency market is trading in all directions. Bitcoin saw a record breaking surge to $34,792 on 3 January 2021 and a volatile 2020.

While he maintains a longer-term bullish view, our expert shares why things can still go either way.

Cryptocurrency prices could soar in the long term because:

1. Increasing and enduring institutional interest as they see the appeal of BTC as:

  • An inflation hedge against huge “money printing” around the world
  • A (resultingly) weak US dollar
  • An alternative to gold
  • Increasingly limited bitcoin supply
  • Increasing ease of acquiring and transferring bitcoin

2. Medium-to-long term Federal Reserve asset purchases
There is a long-term positive correlation between the Federal Reserve’s balance sheet and bitcoin bull/bear cycles.

3. The weak US dollar environment right now tends to drive bitcoin’s price up.

4. Low interest rates will increase incentive for investors to move out of low-yield investments

5. High retail interest due to high savings rates around the world. 

Despite some recovery, consumers are spending less due to reduced economic activity (from lockdowns, pandemic concerns, restricted gathering and activities, reduced tourism etc.) – US hit record high savings rates in the middle of 2020 due to enhanced unemployment benefits, and a $1,200 handout from the government.

6. Tech stocks impact

If tech stocks begin to give lower returns this year, many investors who jumped on the tech bandwagon last year will begin to rotate out of tech – and possibly into the cryptocurrencies given the relatively low-yield environment.

7. What the tech indicators say

Long-term technical indicators for Bitcoin such as the Puell Multiple and MVRV Z-Score still show further upside on bitcoin, although the assessment window for those indicators could take months to be realised.

On the contrary, some factors could keep cryptocurrency prices low.

1. Earlier-than-expected tightening of liquidity 

Higher interest rates and reduced asset purchasing would likely see a similar unwinding of bitcoin, like end-2017. This tightening may be brought forth by concerns of inflation, which traditionally would be when the US hits full employment (probably around 4%, although they used to benchmark it around 5%). Inflation concerns may however be premature at the moment.

2. Increasing scrutiny of bitcoin/cryptocurrency’s use for criminal activity could see governments attempt to impose identification requirements on crypto wallet holders. 

This could put off some investors – as the authorities would gain access to every transaction ever made by individual wallets, and it might also add an extra layer of transactions e.g. ‘Exchange > KYC Wallet > Individual Wallet’ instead of just ‘Exchange > Wallet’.

3. Regulatory disapproval

Similarly, (likely) incoming Treasury Secretary Janet Yellen has publicly expressed disapproval of bitcoin for its utility in illegal activity, although she has endorsed blockchain for its applications in finance. This could provide a clue to the likelihood of bitcoin regulation during the Biden administration.

4. Mining by higher-risk jurisdictions

Increasing evidence of countries such as Iran, Russia, and North Korea using bitcoin and engaging in bitcoin mining may see the Biden administration explore options to gain leverage over this flow of income to those states. This would also serve as a way to curb cyberattacks and tighten US sanctions.

Crude oil prices had a dramatic year in 2020, as travel demand collapsed in the wake of the Covid-19 pandemic. Oil prices even went into negative territory in April 2020, as oil companies sought to rent tankers to store its surplus supply, over fears that they could run out of storage capacity. Oil companies continue to feel the spill over effects from last year’s crude oil price fluctuations. Saudi Aramco, the world’s largest oil company, saw its profits fall by 44% to US$49 billion for the full year, and cut its forecast capital expenditure for 2021 to just US$35 billion. 2021 appears to be little changed from 2020, with volatility remaining high for the crude oil market. Fears of newer and more infectious strains of the coronavirus continues to plague large economies, including Europe, Brazil and India. India reported the appearance of a “double mutant” variant of the coronavirus and, both Brent crude prices and West Texas Intermediate (WTI) crude futures prices slid 2% from the news. That decline would prove to be short lived. Within 24 hours, Evergreen’s Ever Given container ship would run aground in the Suez Canal, block an essential shipping route, raise concerns of a potential supply shortage, and lift oil prices again.

Understanding what really matters for crude oil prices

Instead of being swayed by every piece of news – including what happens when the giant container ship is refloated after nearly a week – it is important that investors understand what really matters with crude oil prices. Avtar Sandu, senior manager for commodities at Phillip Futures, points out that factors affecting the supply and demand for crude oil is far more significant that the actual movement of oil prices. “The structural drivers that were driving crude oil prices higher over the last 2 quarters are still very much a part of the bigger picture.” “OPEC+ has been consistent in its intention to balance the crude oil market; Covid-19 vaccines have been rolled out and distributed to many parts of the globe which means the coronavirus pandemic is gradually being eradicated on a massive scale; Travel and fuel demand is picking up slowly and airlines are working on plans and processes for mass travel.” Returning to the example of Saudi Aramco, Sandu explains that the oil giant’s earnings were entirely within expectation. “Oil companies’ earnings are dependent on oil prices, and Saudi Aramco is no exception. In a year where demand fell and oil prices were negative for a short period of time, their earnings were not unexpected.” “We should note that Saudi Aramco is still maintaining its US$75 billion dividend payout for the year – the largest pay out among oil giants and the main source of income for the Saudi Arabian government – and the company remains upbeat about its outlook. If Saudi Aramco had not paid dividends, that is when we need to be concerned.” As such, Sandu remains optimistic about crude oil prices for the rest of the year. “Although the crude oil has appreciated about US$30 a barrel in the last 5 months, there is still room for further upside, given that the fundamentals are still favouring it. WTI oil prices are expected to average US$80 a barrel this year.”

Other major events investors should look at

There are other major events that crude oil and commodity investors should pay close attention to this year, according to Sandu. “China has clearly emerged from the ravages of Covid-19 faster than other giants like the US and the EU – many of whom are still struggling to contain the virus among its people. With that, China is expected to led the world in restarting its economy and that fallout would help other countries who are tied to its exports and consumption needs.” “The old adage that ‘when China sneezes, the world catches a flu’ would still hold true in the economic sense.” In fact, Sandu points out that many investment banks, like Goldman Sachs, are already calling for a start of a multi-year commodity supercycle. “Many commodity prices have rebounded strongly in the last quarter of 2020 and the first quarter of 2021 due to the expectation that the world would experience a V-shape recovery from the vaccine roll-out.” “Covid-19 is expected to bring long term structural changes, from the global economy down to the way we live and interact. These changes could drive commodity prices to a structural bull market. For instance, Copper – the bellwether of the industrial metals sector – has risen to record highs not seen in the past 10 years. Furthermore, the green revolution is driving demand for new clean energy products in a big way, and that would propel commodity prices further.”

Investing wisely in crude oil

Sandu cautions that there is no ‘one size fits all’ trading strategy that can suit all investors and all market conditions. “The key lies in knowing and being clear about your own objective in trading, and what sort of gains you are looking for. Some markets, like crude oil futures, are more volatile than others, like fixed income markets. This also illustrates the importance of prudent risk management.” “If you are not familiar with the inner workings of the oil markets, it is best to talk to professionals in the field who can advise you further.” Phillip Futures, a leading regional brokerage, offers a wide range of financial derivatives which investors can partake to trade oil. That includes oil futures, options, CFDs, and spread trading in oil. Among them, the CME WTI Futures contract remains the most popular among traders. Investors can also choose to trade on a wide range of platforms, including the two most popular platforms: Phillip MT5 and Phillip Nova. The Phillip MetaTrader 5 (MT5) is a powerful multi-asset platform which offers an expanded range of asset classes including Forex, Gold, and Crude Oil, Indices and Shares CFDs. It is also integrated with Trading Central indicators and the popular Autochartist pattern recognition tool. The Phillip Nova trading platform is a mobile-responsive, fully customisable, and user friendly web-based trading platform, which allows investors to trade oil futures, options, forex, CFDs, and stocks within one platform. Start with a Phillip MT5 demo account or a Phillip Nova demo account, to try out the charts, indicators and the platform for yourself. Get first-hand experience on how Phillip MT5 and Phillip Nova can help to support your trading and risk management strategies.

CFD is available for trading on Phillip MetaTrader 5 (MT5).

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  • Trade in both the bull and the bear markets
    The ability to enter a long and/or short position allow traders to take advantage of both rising and falling markets.
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