4 Sep, 2021

Bitcoin’s 2021 Outlook Clouded by Several Risk Factors

Although Bitcoin has managed to stage a rebound recently, its outlook for the remainder of 2021 remains uncertain, the same as with other major asset classes. The largest cryptocurrency in the world recently topped $40,000 for the first time since June on the back of a strong short squeeze and thus far, there doesn’t seem to be follow-through buying, communicating market participants remain cautious.

Bitcoin tokens

Rising interest rates

If the COVID-19 pandemic is no longer the biggest concern for the market, bond yields and prospects for monetary policy normalization are now at the top of the list. On the interest rates front, the situation has eased, due to demand for bonds. The future policy moves of central banks like the Federal Reserve or Bank of England depends on continued recovery from the pandemic, and they will be reluctant to quickly remove the financial stimulus that was put in place.

Bitcoin and other altcoins managed to stage a strong rally during a period of ultra-low interest rates and significant fiscal spending. Now that both are about to reverse, the upside in BTC remains uncertain.

Global economic reopening

Due to a strong interest in Bitcoin trading, retail traders have been active in trying to spot trading opportunities for the past year. The pandemic shut down businesses and kept people inside their homes for an extended period, which led to a rapid rise in trading/investing interest. Although Bitcoin is stated to be less affected by macroeconomic events, its price increased in 2020 due to the pandemic.

If the economic reopening will continue, experts believe people will gradually get back to their normal lives, allocating less time and capital for trading in the financial markets. That could be a headwind for Bitcoin, given the retail sector continues to account for a big share of overall activity in the crypto space.

Seasonality – the only positive factor

On the positive side, as the autumn approaches, Bitcoin buyers might be favored given the seasonality over the past several years is tilting the balance on the upside. The first technical area to break is located between $40,000 – $45,000 and in case buyers manage to push BTC above it, that could put the current all-time high under pressure over the next few months.

However, if buyers are unable to keep the momentum going, Bitcoin could weaken further and a breakout below $30,000 could see capitulation emerging, potentially driving the price towards $25,000 or even $20,000 if selling will be impulsive. The long-term Bitcoin chart is still pointing upward, but short-term setbacks have been witnessed along the way after impulsive bullish moves.

USD or crypto – which one will prevail?

Another important factor that could impact bitcoin’s price is the performance of the US dollar. At the beginning of 2021, the consensus was for continued weakness in the global reserve currency and that failed to materialize. The US Dollar Index (DXY) formed a short-term bottom around 90 and it is not threatening to further break on the upside.

Markets expect policy normalization to occur first in the US, as inflation is high, GDP has already reached pre-pandemic levels, and vaccination progress at a faster pace, as compared to other countries.

Bitcoin and USD can’t rise in tandem for an extended period, which is why a stronger dollar will weigh on BTC sentiment. On the flip side, renewed dollar weakness will be a positive development, signaling better prospects down the road.