With less than a month before the calendar turns to a new year, the cryptocurrency world has benefited from potential new players’ news. In December, one of the world’s largest index providers announced that it would begin to provide cryptocurrency indexing services in 2021. According to S&P’s announcement, the company will provide a service that will enable clients to create custom indices. The S&P services will include benchmarking tools related to cryptocurrencies. S&P Dow Jones Indices will partner with Lukka, a crypto data firm, for pricing data. S&P’s goal is to capitalize on the popularity of cryptocurrencies and bring price transparency to the marketplace.
What is Driving Bitcoin Prices
The news that S&P is getting into the cryptocurrency space should not be a surprise. In November, Japanese investment bank Nomura Holdings launched a hybrid custodian tool aimed at institutional investors. Bitcoin hit an all-time high in December. A new high always captures the general publics’ attention. Other players are also getting into the cryptocurrency space. Crypto indexing products in the market include the Bloomberg Galaxy Crypto Index (BGCI) and the ICE Cryptocurrency Data Feed, which will also provide indexed products.
Additionally, in November, PayPal announced that customers can now buy, hold, and sell cryptocurrencies like Bitcoin from their PayPal accounts. PayPal and Square, two payment processors, have users that are very active in the cryptocurrency trading space. Approximately $16 million worth of bitcoin is added to the market every day. According to a hedge fund, Pantera Capital, PayPal, and Square users scoop up 100% of these new bitcoins. During the past three months alone, Square users bought and sold $1.6 billion in bitcoin. The demand for bitcoin is rising at record rates, which is continuing to lift its price.
Lastly, investors are leery of holding the US dollar as the reserve currency. The dollar has long been used as the reserve currency around the globe. The combination of messages from the Trump administration and the recession in the US that was generated by the pandemic has conspired to weigh on the value of the US dollar. The dollar against a basket of currencies has declined to a 31-month low in December and is poised to move lower. US interest rates are at zero, and the Federal Reserve and the US government are poised to add stimulus. This will likely further weigh on US yields pushing the value of the greenback lower. While bitcoin’s exchange rate is measured again in many currencies, the rise against the US dollar is the most widely watched.
The technicals are also helping to drive prices higher. The December all-time highs made some mainstream newspapers, which helps to push the price of bitcoin higher. In August, the 20-week moving average crossed above the 50-week moving average, which means a long-term uptrend is now in place.
Momentum is also positive. The MACD (moving average convergence divergence) index generated a crossover buy signal in October. This occurs as the MACD line (the 12-week moving average minus the 26-week moving average) crosses above the MACD signal line (the 9-week moving average of the MACD line). The MACD histogram also generated a buy signal. The MACD histogram sliced through the zero-index level and continues to accelerate upward, reflecting accelerating positive momentum. One caveat is that the fast stochastic, a momentum oscillator, is currently printing a reading of 91. The fast stochastic generates readings between 1 and 100. Readings above 80 are considered overbought, while a reading below 20 is deemed to be oversold. The current reading of 91 is well above the overbought trigger level of 80 and could foreshadow a correction.
The Bottom Line
New players are making their way into the cryptocurrency space, which will increase transparency. The announcement that S&P will introduce new indices will provide more institutional players access and generate more interest in bitcoin. The price of bitcoin versus the US dollar hit an all-time high in December, which has increased interest in the cryptocurrency market.
Additionally, the US dollar continues to face headwinds, helping to buoy the demand for bitcoin. With the greenback at 31-month lows against a basket of currencies, the dollar’s value as the reserve currency is easing. Lastly, the announcement that PayPal will allow vendors worldwide to make payments in bitcoin will likely accelerate the use of cryptocurrencies as a payment mechanism. This announcement that came in November helped lift bitcoin, which eventually hit all-time highs in December. The outlook for cryptocurrency remains positive, and new larger players will generate transparency and greater interest in these products.