Bigger, Better, Brighter: 3 Reasons Why There’s More Upside for Bitcoin’s Explosive Rally

Talk about a Bitcoin breakout. BTC briefly cut through $24,000 over the weekend, setting a new ATH, before easing back to the $23,000 range. The record price comes four days after BTC first sliced through the $20,000 barrier. For more than two weeks, Bitcoin prices had repeatedly rejected a key $19,400 resistance level before finally breaking out of that hurdle on December 16. 

The big question on traders’ minds is: What’s driving this rally and, more importantly, what’s next for the world’s leading cryptocurrency? 

There are three compelling reasons why we think Bitcoin has more room for growth:

  1. Recovering volumes
  2. Cascading liquidations
  3. Rising stablecoin inflows

Healthy Volumes 

On most top exchanges, including Coinbase, Binance, and Bybit, the volume of Bitcoin increased by around eight to nine-fold since December 16 — the day BTC broke past $20,000. 

1-hour price chart of Bitcoin with moving averages and volume

Source: TradingView.com

Arguably, the primary reason behind Bitcoin’s long-time struggle to break out of the all-time high was its stagnating volume. When Bitcoin was hovering under $19,400, heatmaps on various exchanges showed large sell walls between $19,400 and $20,000. This meant that unless Bitcoin surpassed that resistance range with a large spike in volume, a new all-time high would have been unlikely.

But in the moments leading up to Bitcoin’s breakthrough, volumes increased nearly nine-fold across top spot and derivatives exchanges within a span of hours. It eventually led to cascading liquidations, causing a short squeeze. 

Cascading Liquidations

A short squeeze occurs when the market is dominated or overwhelmed by short-sellers and the price of Bitcoin goes up. 

If sellers are increasingly shorting Bitcoin, or betting against the price of BTC, and the price of BTC increases, it causes short-sellers to adjust their positions. To cover for their short positions, they then need to market buy, leading to heightened buyer demand.

The premium index of perpetual contract price relative to index price was negative during the period BTC price pushed through $20,000, which means that the spot market was leading the surge. Similar surges have been observed in the derivatives market – massive orders were made. On Bybit alone, the number of orders that are larger than 5 BTC jumped by more than 300% on December 16. Those with more than 10 BTC doubled on the same day, and tripled on December 17. Collectively, massive orders made on these days have pushed the price of Bitcoin above $20k.  

Since Bitcoin was overwhelmed by short-sellers as it started to rally beyond $20,000, it caused short contracts to get liquidated en masse. The cascading liquidations of short contracts inevitably fuelled by the buy volume to increase in a short period, fuelling the rally.

Stablecoin Inflows Rose

While a large short squeeze occurred in the Bitcoin futures market, stablecoin inflows began to spike simultaneously across all exchanges.

CryptoQuant’s “Stablecoin Inflow Address Count” indicator showed that stablecoin deposits began to increase rapidly as BTC surpassed $19,700.

Stablecoin inflows is a crucial metric to gauge the overall buyer demand in the cryptocurrency market. Many investors on cryptocurrency exchanges hedge their holdings with stablecoins rather than cashing out because of accessibility. Hence, a large portion of sidelined capital within the cryptocurrency exchange market are stored in stablecoins, like Tether and USDC.

Source: CryptoQuant

When stablecoin deposits rise, it typically shows that sidelined capital is entering back into Bitcoin. The synergy of growing stablecoin deposits and the major short squeeze caused an explosive upwards movement.

Ki Young Ju, the CEO of CryptoQuant, noted that the sentiment likely turned to buy BTC as the price approached $20,000. He explained, “Lots of people deposited stablecoins to exchanges 7 mins before breaking $20k. Price is all about consensus. I guess the sentiment turned around to buy $BTC at that time. This indicator is helpful to see buying power.”

3 Reasons Why There is More Upside for Bitcoin 

The price of Bitcoin could continue to rally upwards as long as it satisfies three key factors. First, the volume has to remain high in order for BTC to break past the $23,800 resistance level, which was realized on December 20 shortly after the price of BTC briefly broke through $24,000. Second, stablecoin deposits would have to refrain from stagnating to supply buyer demand. Third, the institutional demand has to remain consistently high to offset whale-induced sell-offs.

So far, various metrics, such as the volume of institution-focused exchanges, such as the CME Bitcoin futures market and Bakkt indicates that the institutional demand for BTC remains high.

CME’s plans to launch Ethereum futures in early 2021 further boosts the outlook of Bitcoin and the overall cryptocurrency market. This move shows that CME is seeing sufficient volume and trading activity from its Bitcoin futures market to justify expanding its coverage of other cryptocurrencies.

Source: Skew

Data from Skew also shows that the open interest of CME is the second-largest among the top Bitcoin futures exchanges. Not bad for a start. The continuous increase in the trading activity of institutions would remain a critical catalyst to maintain the momentum of Bitcoin. As far as we’re concerned, institutional adoption isn’t coming — it’s already here.