Wednesday 15 May 2019 10:49 amMarkets Talk

Where next for Bitcoin?

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Bitcoin is on the up again. The biggest crypto asset has rallied above $8,000, reaching its highest since last summer after more than doubling this year.It seems momentum is building for bulls and you cannot ignore that once Bitcoin builds up a head of steam, the mania can come back, and the momentum traders will pile in. This is a pure momentum play and the chart is looking parabolic again.

What’s behind the rally?

Searching around for a reason for why Bitcoin or any other crypto asset moves can be like finding a single line of code among the blockchain. The market is opaque, if not entirely dark.One thing that almost certainly has led to Bitcoin catching a bid lately is the report that Fidelity Investments, one of the world’s largest asset managers, is about offer the asset to institutional clients in the coming weeks. The potential inflows could be significant.Other theories suggest traders may be hedging exposure to risk assets by buying Bitcoin, although I don’t particularly buy that theory. We note also that various hacks and concerns about other alt-coins has increased the appeal of Bitcoin.The other reason is technical. Bitcoin bottomed out around the end of 2018 had traded sideways for some time as buyers fished around. The classic rounded bottom, or saucer formation, on the price charts heralded a bullish reversal from the steep sell-off in 2018. As the bulk of the short-term speculators had sold down, and we were left only with ‘hodlers’, pressure built and there was only one way for it to escape and that was up.

The only way is up?

It’s not entirely one-way. Even as this goes out we are seeing a mild pullback in prices. This is to be expected after such a sharp rally, but we need to wait and see if it builds into a more sustained drawdown.The $8,000 handle is proving an area of resistance. As it broke through the 8k level the market increasingly looked overbought, which as we noted to clients, could precipitate a pullback. The 14-day Relative Strength Index (RSI), a measure of momentum, rose above 90, suggesting it is extremely overbought. In April when the RSI was last at this level it did presage a pullback, but it was only a very temporary one. Meanwhile price action extended well north of the upper Bollinger band, another gauge of whether markets are looking overly-extended.So, while there is clearly a lot of momentum behind this rally, it’s not a guarantee that it will keep rising. If Bitcoin fails to break out above the $8,500 level – last July’s peak – then bears may take over again.