Bitcoin has soared since March's bloodbath, and traders say the rally has legs

Bitcoin soared above $9,000 late Wednesday evening, and over-the-counter cryptocurrency traders say that this rally might have legs.

Although the cryptocurrency pared back some gains, falling to $8,890 just before 5:30 a.m. ET, it has still climbed 12% over the last 24 hours. Over the last week, it has appreciated 24%. What's more, the price has risen more than 70% since the lows seen on March 13.

While it's difficult to pinpoint what is driving bitcoin's price action, professional traders are speculating that this rally might be different from previous ones. Max Boonen, the cofounder of B2C2, said in a message to The Block that a few dynamics are at play here.

"First, it appears not to be driven by derivatives first, meaning that it is not speculative. Secondly, the macro setup is perfect," he said.

"Equities close to all time high, money printing, and a halving narrative to support it," Boonen added, referring to measures by the Federal Reserve to pump money into Wall Street to shore up the financial system. Indeed, several investors have told me over the course of the last week that the juxtaposition of the Fed's actions – which many view as inflationary – and bitcoin's halving has heightened interest in the burgeoning asset amongst more professional investors.

"Now in the face of the Fed printing more dollars and bitcoin going into the halvening next month they better understand the contrast between bitcoin and the current system," Joe DiPasquale, founder of crypto fund of funds Bitbull Capital, noted during a recent conversation.

Jakob Palmstierna, director of investments of GSR, made a similar observation. Here's Palmstierna:

"As the halving is less than 2 weeks away, it is clearly helping to build positive momentum. There are increased signs of institutional adoption as bitcoin's recent resilience has been attractive to investors who are searching for new sources of uncorrelated returns, and as recent deflationary concerns due to increased unemployment and the oil price collapse is muddled with long term inflationary concerns from excess monetary easing."

An increase in volumes across both spot and derivatives exchanges has underpinned the current rally, according to data provided by Skew. I, a surge in trading volumes precedes a rise in the price of an asset. On Wednesday, Coinbase's bitcoin trading volume hit a monthly high above $400 million, while LMAX Digital hit its own monthly high above $160 million.

Source: Skew

According to Boonen, the recent price action could have been driven by new entrants into the market. As noted by my colleague Yogita Khatri in an April 6 report, cryptocurrency exchanges reported an uptick in user registrations as coronavirus has battered the global economy. 

San Francisco-based Kraken told Khatri it saw a "significant uptick in sign-ups and a 300% increase in verified accounts."

Newer data from Deribit, the crypto options exchange, indicates that this trend has continued. A spokesperson for the derivatives marketplace told The Block that it had seen a 100% increase in the number of users signing up for a trading account relative to a normal week in March. 

Data suggests that the new participants entering the market could be a mix of retail and more professional traders. Open interest for CME Group's bitcoin futures product has soared above $300 million – the highest level since February, according to Skew data.

As my colleague Ryan Todd has noted in previous columns, CME's contracts are perhaps the best indication of institutional involvement in the cryptocurrency market. This is because they are among the few products to trade on a liquid, U.S.-regulated exchange. 

Source: Skew

But despite bitcoin's recent returns, crypto lovers would be wise to curb their enthusiasm.

Per CoinMetrics, 90-day rolling correlation between the S&P500 and bitcoin has held steady since soaring in March. Such a high level of correlation leaves the door open to one big stock market drop sucking the air out of the crypto rally.

Source: CoinMetrics