Bitcoin Hit An All-Time High Then Fell More Than 10%, All In A Day. What’s Next?

If you’re a bitcoin (BTCUSD) investor, Tuesday was a wild ride. After briefly surpassing $69,000 to an all-time high, bitcoin fell fast on likely profit taking to a shade above $60,000 just a few hours later before clawing back some of those gains. 

While bitcoin is climbing again today, no one can predict which way the price will ultimately head. Here are some cues that market watchers are trying to decode to get a better picture of the cryptocurrency markets.

Demand Pressure To Continue As Supply Goes Down

Inflows and trading activity in the spot bitcoin ETFs have been hectic over the past few days, especially for Blackrock’s iShares Bitcoin Trust (IBIT), which already accumulated $10.6 billion worth of bitcoin as of the end of the trading day Tuesday since it began trading in January.

In terms of direct effects on supply and demand, spot bitcoin ETF inflows, or the demand, were more than 10 times the supply or the amount of new bitcoin generated by miners on Monday, according to Bitwise Research Analyst Gayatri Choudhury.

Add to that, the halving event, where the amount of new bitcoin created roughly every 10 minutes is cut in half, is expected to take place on April 20. Remember, bitcoin supply is capped at 21 million, and with fewer new ones getting created at a slower pace, the demand and supply imbalance is what most people are betting on to make bitcoin prices pop.

Fast and Furious Rise May Not Be Sustainable

Of course, not all crypto market observers see nothing but blue skies ahead for bitcoin.

"Things always look bullish at the peak. I was originally calling for this move higher when we were down in the low $30k, but I expected this to top out in the mid-to-high $50k region. This extension feels like a blow off top to me,” said John Glover, Chief Investment Officer at digital assets financial services company Ledn, in a statement emailed to Investopedia.

And Glover is not alone. Analysts at JP Morgan indicated that bitcoin could fall to around $42,000 following the halving event. Others say that the two factors—ETFs and impending halving—driving prices up are also the ones contributing to bitcoin's price volatility.

Even with the greatest investment potential, there’s one more thing that could work against a meteoric run from here—scale. When something becomes too big, its hard to deliver eye popping returns. Even Warren Buffett admits that.

Bitcoin doubled in price in 18 days or less following three of the previous four new all-time highs, Pomp Investments founder Anthony Pompliano told CNBC in an interview, and though he expects higher prices for bitcoin thanks to the ETFs and halving, he's not necessarily calling for it to hit $140,000.

Prior Halving Cycle Price Trends May Be History

A lot of investment models are built on patterns around how assets tend to behave over time. And ideally, that should make the April halving an indicator of how the price of bitcoin should be expected to move, but it's about to diverge from its price history trends.

Bitcoin has soared to a fresh all-time high within roughly a year and a half of each of the prior three halvings, never right before the event. For example, the first halving occurred in November 2012 when bitcoin was trading at roughly $13, its price shot up to a record high of over $1,100 by November 2013.

The year after its second halving in July 2016, saw bitcoin climb to another lifetime high over over $19,000, while the most recent May 2020 halving occurred roughly 18 months prior to the $69,000 record that was surpassed yesterday.

So, past performance is definitely not indicative of future returns.

The Fed Could Break Up The Bitcoin Party, Yes That Fed

As much as bitcoin was considered decoupled from stock markets, it is still vulnerable to certain macroeconomic cues, especially those coming from the U.S. Federal Reserve.

Researchers at Grayscale pegged the Fed’s monetary policy stance as “main risk to digital asset valuations” in a commentary last week, citing stubborn inflation and a delay in rate cuts could prove to be a negative for cryptocurrency prices.

“Lower real interest rates and rising public sector debt could both weigh on the value of the Dollar and support competing assets, including Bitcoin,” a separate Grayscale commentary noted yesterday.

It Isn’t Altcoin Season Just Yet

Typically, rising bitcoin lifts other cryptocurrencies. Due to the concentration of the crypto narrative around bitcoin right now, it's unclear if a so-called "altseason" will take place again, especially considering the development of various Bitcoin Layer-2 projects that intend to bring many of the sorts of applications found on other crypto networks back to Bitcoin.

Ether (ETHUSD), the second-largest cryptocurrency by market capitalization, has climbed to over $3,800 thanks to the hype around bitcoin and the potential approval of a spot ether ETF but it is nowhere close to the more than $4,800 high it saw in 2021.