It looks like bitcoin has had a revival lately as it topped $50K on Monday.
Now, I’m not a buy-and-forget investor because I have no idea what the future will hold for cryptocurrencies. As a trader, I’m more concerned about what’s happening right now and whether I can make money from it.
But, before I recommit to long (or bullish) positions, I want to know one thing: Who else is buying?
A news story on Friday answered that big question for me.
Today, I’ll show you what I mean – along with a potential way to play it. But first, some background…
Lately, I’ve been thinking about what could fuel the next big move higher in the cryptocurrency markets.
In 2020, money printing – on a scale we previously couldn’t have imagined – provided the fuel for the big rally in cryptocurrencies.
Central bank balance sheets increased by about $10 trillion (or 50%) during the pandemic. And a significant percentage of that flowed into crypto and other markets – helping push prices higher. From March 2020 to the peak in May 2021, the crypto market rallied 1712%.
Today, the crypto market has a total value of over $2 trillion. And, for it to keep climbing higher, new money has to come from somewhere…
There are three potential areas it could come from: 1. More money printing on a large scale, 2. investors selling other assets to increase crypto holdings, or 3. leverage.
And that brings us back to the news story I mentioned earlier…
Four days ago, The Wall Street Journal reported:
In the past two weeks, ProShares, Invesco Ltd., VanEck, Valkyrie Digital Assets and Galaxy Digital have all filed plans for bitcoin futures ETFs [exchange-traded funds]. If approved, the funds would make trading bets on bitcoin’s future value akin to buying a stock.
In other words, some of the biggest asset managers are trying to get their hands on more bitcoin products.
But, I’m not recommending you invest in any of these futures-based funds.
These kinds of vehicles are designed for day traders. They are not appropriate for long-term holders.
However, these kinds of products will increase demand for bitcoin futures. And that has the potential to increase the scope for leveraged bitcoin trading in a big way.
One of the things gold bugs tend to complain about is how the market for “paper” gold is much larger than the physical market. This reflects how much leveraged and hedged trading goes on in the futures market for gold.
Today, there are only 7301 open contracts in bitcoin. With a notional value of $243,650 that implies a $1.778 billion total value for the futures market. That’s less than 2% of bitcoin’s total market value.
As more investment products become available, the size of bitcoin’s futures market will increase.
In time, it could exceed that of the unleveraged market for bitcoin and other cryptocurrencies. That’s the clearest near-term rationale for higher prices I can think of.
With all that said, I’m not interested in trading bitcoin today. Instead, bitcoin-related stocks have my attention.
Bitcoin stocks have not yet bounced like bitcoin. But it appears to be only a matter of time.
For example, the crypto exchange Coinbase (COIN) formed a well-defined base between May and early August. And it broke upwards just two weeks ago. It popped back above $250 – its initial public offering (IPO) price – on Friday.
That’s usually a good sign that the stock is being looked on favorably by investors, and there is always enthusiasm around an IPO.
After the furor dies down, investors look at the prospects for the company. If they are still willing to pay the IPO prices, then it suggests they believe there is a solid future for the company. As an exchange, it should benefit from increasing flows as trading increases.
Then there’s Riot Blockchain (RIOT), a bitcoin mining company.
RIOT invested heavily in capturing the bitcoin mining market share during the big correction in March. It stands to benefit from that investment as bitcoin continues to trend higher, because it now has the capacity to successfully mine more bitcoin which should go directly to the company’s bottom line.
Now, for the last three months, Riot Blockchain shares have traded in a range. But during consolidation of earlier gains, RIOT has held a succession of higher reaction lows.
That generally indicates that traders are buying on the dip and are not waiting for lower prices to initiate their positions. It bounced from the region of the 200-day moving average (MA) again on Friday. That suggests RIOT is still in an uptrend.
So, what’s the best way to play this?
The Bitwise Crypto Industry Innovators ETF (BITQ) has holdings in both these companies. And it looks likely to follow the wider crypto market higher as this bull trend resumes.
I’d keep an eye on this ETF as it could follow these shares higher.
All the best,
Co-Editor, Market Minute