I don't know if you noticed, but last weekend, bitcoin's price soared from around $7,500 to over $9,600 - a +28% gain!
Many cryptocurrency market analysts pointed to comments made by China's president President Xi Jinping that the country should "seize the opportunity" of bitcoin's blockchain technology, as the reason behind bitcoin's sudden rally.
You see, China banned bitcoin and cryptocurrency exchanges in 2017. So investors saw the positive remark by Xi, as a sign the country could ease bitcoin and crypto restrictions.
However, Xi's comments might not have been the driver behind bitcoin's recovery.
Let me explain why…
How sentiment drives the bitcoin’s price
To explain the real reason, let’s go back to 23 September.
It was launch day of the long-awaited Bakkt
– a futures exchange and digital assets platform. And for the crypto universe, it was a big deal, as it opened the flood gates for wealthy investors to trade bitcoin futures.
However, Bakkt experienced a difficult launch
with minimal contracts traded. While trading volumes did pick up in the weeks following the launch, many investors were still not convinced.
Bitcoin’s price dropped from over $10,000 to just over $7,800 in one week.
By 11 October, it rebounded back to over $8,500, and traded around this region for just less than two weeks.
Then on 23 October Facebook’s CEO, Mark Zuckerberg faced intense scrutiny from US senators over plans for Facebook’s cryptocurrency, Libra.
This caused crypto investors to panic thinking, a global crackdown on bitcoin and other digital tokens, could be on the cards.
So what happened?
In just a few hours, Bitcoin experienced another sudden price drop – from just over $8,000 to around $7,500.
To put it simply, sentiment in the crypto market was low.
And this sentiment slump meant investors bet against the bitcoin price, predicting it would move lower.
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Here’s the problem…
There is a generally accepted misnomer in the financial sector that the numbers aren’t real, that there are no products behind them, no real money.
It’s as if they’ve forgotten that when you buy gold, you get a lump of physical gold to hide away in your shed.
That when you invest in corn futures, there’s an actual freight carriage full of corn sat in an industrial train yard somewhere, or in a farmer’s field, ready to be harvested.
And, that the currency markets determine the value of the sterling coins you carry around in your pocket every day.
This brings us to the real reason for Bitcoin’s 28% jump
Now during the early morning of 25 October, bitcoin’s price jumped a couple of hundred dollars in just a few minutes.
When this happened, some $150 million worth of short positions on the Seychelles-based BitMEX crypto exchange were liquidated, according to bitcoin and cryptocurrency analytics provider, Skew.
This triggered a "short squeeze" - where an asset rapidly increases in value due to short sellers trying to cover their positions. This meant buying volume rose, which drove the price up.
But let me just say, that doesn’t mean China’s backing of blockchain isn’t a big deal. It just shows you that blockchain implementation is moving quickly.
And if one of the largest economies in the world wants to use it, then I’m sure the rest of the world will eventually follow – especially the US.
The race for superior blockchain technology is on and hopefully this will turn investor sentiment positive going into the future and push bitcoin (and other cryptos) back to their all-time highs, and even higher.
See you next week.
Joshua Benton, The South African Investor