Bitcoin: Is a price correction looming in 2021?

Bitcoin (BTC) has enjoyed a record-breaking year, surging more than 220% thus far in 2020, on a wave of new money.

The world’s biggest cryptocurrency by market capitalisation last week soared past US$20,000 for the first time. It then reached an all-time high of US$24,299.75 on Sunday (20 December 2020).

Although unease over a new Covid-19 strain in the UK dragged bitcoin to plunge as much as 6% on Monday (21 December) to around US$22,000, it has since recovered. The cryptocurrency climbed almost 3% to US$23,493.17 as of 14:56pm GMT+8 on Wednesday.

Unfettered investor enthusiasm

Despite the price volatility, corporate and institutional interest in bitcoin is booming.

Larger, longer-term investors are snapping it up, seeing bitcoin as a risk-on asset, a future payment mode, or a hedge against inflation risk and US dollar weakness.

Recent investors include New York-listed fintech company Square Inc and Nasdaq-listed business intelligence provider MicroStrategy Inc. On Monday, MicroStrategy picked up an additional US$650 million of bitcoin at US$21,925 apiece, bringing the firm’s total year-to-date purchases to over US$1 billion.

American billionaire hedge-fund managers Paul Tudor Jones and Stan Druckenmiller have also backed the digital asset. US-based Massachusetts Mutual Life Insurance said earlier in December it had bought US$100 million of bitcoin for its general investment fund.

Elon Musk on Sunday asked MicroStrategy’s CEO Michael Saylor about the possibility of converting ‘large transactions’ of Tesla Inc’s balance sheet from US dollars into bitcoin.

What’s the bitcoin outlook?

However, JPMorgan analysts wrote last Friday (18 December): ‘We find it difficult not to characterise bitcoin as overbought.’

Flows into the world’s largest traded cryptocurrency fund are key to bitcoin’s outlook, JPMorgan added. The odds of a price correction for bitcoin will increase if the Grayscale Bitcoin Trust sees its inflows slow significantly, the analysts said.

The fund’s assets under management have ballooned to US$13.1 billion, from US$2 billion in December 2019, as the digital currency’s price tripled this year. Inflows into the fund are running at about US$1 billion per month, JPMorgan wrote.

These flows are ‘too big to allow any position unwinding by momentum traders to create sustained negative price dynamics’, in the analysts’ view.

Yardeni Research analysts meanwhile are watching bitcoin’s price action ‘as a gauge of speculative excesses’.

This year’s bull run is likely to last till the second half of 2021, according to more than half of panellists featured in Finder’s Bitcoin Price Predictions report published Friday. On average, the panel – comprising 47 experts and fintech leaders – expected bitcoin to more than double by end-2021 to US$51,951.