Bitcoin's rally is gathering pace with the mining reward halving now just 14 days away.
The top cryptocurrency by market value rose to $7,800 early on Monday to hit its highest level since March 12 – dubbed "Black Thursday" – when prices fell from $7,950 to $4,700 as the coronavirus pandemic crashed most markets.
At press time, bitcoin is changing hands near $7,700, representing a 100 percent gain on the low of $3,867 registered on March 13.
While the major part of the recovery rally could be associated with the uptick in the S&P 500 and the global stock markets, the recent move from the April 21 low of $6,800 to $7,800 looks to have been fueled by factors other than moves in equities.
That's evident from the fact that bitcoin rose 8 percent last week, while the S&P 500 suffered a 1.3 percent loss and oil markets cratered on oversupply concerns.
Bitcoin looks to have partly decoupled from the equity markets due to the bullish narrative surrounding the upcoming halving. “The rally is being sustained by the rapidly approaching halving,” Jehan Chu, co-founder and managing partner at Hong Kong-based blockchain investment and trading firm Keneti Capital, told CoinDesk.
Bitcoin will undergo the halving process on May 12, after which the reward per block mined will drop to 6.25 BTC from the current 12.50 BTC.
A popular narrative is that halving creates a supply deficit and, thus, bodes well for bitcoin's price. Some observers are of the opinion that the bull markets seen in 2017 and 2013 were the result of the halvings in 2016 and 2012, respectively.
“Look for prices to attempt the $10,000 level on speculative buzz leading into the halving,” Chu added. Meanwhile, Marcus Swanepoel, CEO of cryptocurrency platform Luno, said, “History tells us that we should expect an uplift in bitcoin's price as we get closer to the halving in just a few weeks' time. We've seen an increase in the price of bitcoin in previous halvings.”
If the historical pattern repeats, we could see a rise to levels above $13,880 (2019 high) before the third halving, due in two weeks.
While that target looks far-fetched, a convincing break above $8,000 cannot be ruled out, as on-chain data shows a significant improvement in network activity.
For example, the seven-day average of the number of active bitcoin entities recently rose above 260,000 for the first time since June 2019, signaling an influx of new investors into the market, according to blockchain intelligence firm Glassnode.
The active entities metric counts clusters of bitcoin addresses controlled by the same network entity. It shows the number of individuals or businesses using the network, in effect.
Further, bitcoin balances on exchanges continue to drop ahead of reward halving – a sign users are withdrawing their assets for longer-term holding. The metric appears to reflect bullish expectations tied to the halving.
What’s more, institutions and macro traders are returning to the crypto markets after last month's crash, as suggested by the rise in open interest, or open positions, in bitcoin futures listed on the Chicago Mercantile Exchange (CME) – widely considered to be synonymous with institutional activity.
Open interest rose to 233 million last Thursday to hit the highest level since Feb. 26, according to crypto derivatives research firm Skew.
However, while on-chain activity and derivatives data suggest scope for further gains, the equity markets are calling for caution.
As of Friday, the S&P 500 was up nearly 30 percent from the low of 2,192 reached on March 24 and down 17 percent from record highs. While the recovery rally looks impressive on the surface, the breadth of the move has been quite narrow, meaning the rally has been fueled by an uptick in few heavyweight stocks.
“The S&P 500 now trades just 17 percent below its all-time high, however, the median S&P 500 constituent trades 28 percent below its record high," said Goldman Sachs' chief equity strategist David Kostin.
Such rallies are often short-lived. If equities begin falling again, cash may again become a safe haven. In that case, bitcoin may come under pressure, too.
Disclosure: The author holds no cryptocurrency at the time of writing.
The leader in news and information on cryptocurrency, digital assets and the future of money, CoinDesk is a media outlet that strives for the highest journalistic standards and abides by a strict set of editorial policies. CoinDesk is an independent operating subsidiary of Digital Currency Group, which invests in cryptocurrencies and blockchain startups.