Bitcoin Crosses $57,000 on Inflation Bets; Major Corrections Ahead?

Bitcoin hit a fresh high on Saturday as traders continued to add capital into the world’s largest cryptocurrency under an impression that it would become a de-facto anti-inflation asset.

The BTC/USD exchange rate surged above $57,000, a move that pushed its market capitalization above $1 trillion for the first time in history. In the first 51 days of 2021 alone, the total gains logged by the pair reached 97 percent.

Bitcoin, cryptocurrency, BTCUSD, BTCUSDT
Bitcoin hits $57,000 in weekend trading. Source: BTCUSD on TradingView.com

Institutional Boom

A big portion of Bitcoin’s profits surfaced because of a flurry of institutional investment into the cryptocurrency. US carmaker Tesla invested $1.5 billion of its cash balances to Bitcoin, calling it an alternative reserve asset.

Public-traded software intelligence firm, MicroStrategy, also raised its bitcoin holdings by investing another $10 million. It now holds more than 71,000 BTC worth about $4.057 billion at the current exchange rates.

New York investment firm Grayscale Investments, which enables institutional investors to gain exposure in cryptocurrencies via its trusts, also upped its bitcoin holdings from 600,000 BTC on January 1 to 655,470 BTC as of this Saturday, according to data provided by ByBt.com.

At the core of institutional accumulation is inflation fears. Corporates who have purchased Bitcoin directly fear that the Federal Reserve’s ultra-accommodative policies during the coronavirus pandemic would stress the US dollar lower. In turn, that would make their operations more expensive.

US dollar index, DXY, cryptocurrency
US dollar index slips 12.22 percent from its mid-March. Source: DXY on TradingView.com

The International Monetary Fund forecasted in October that inflation in advanced economies would increase from 0.8 percent last year to 2.3 percent in 2021. Meanwhile, the Fed clarified in its January meeting that it would continue its $120 billion monthly asset purchasing program until the policy takes inflation rate above 2 percent.

“The supply of US Dollars increased by $4 trillion in the last 12 months alone,” said Charles Edwards, founder of Capriole Investments, in his tweet earlier Saturday. “$2 trillion more is about to be printed at any moment. Bitcoin is not a bubble, it’s just getting started.”

As a result, institutions like Grayscale anticipate more demand for Bitcoin from family offices, hedge fund managers, and other mainstream investors for its GBTC shares, prompting them to accumulate more bitcoins to back their instruments. Mastercard and Bank of New York Mellon have announced new crypto services under similar expectations.

Bitcoin Supply Crisis

The institutional accumulation has sucked bitcoin liquidity out of the markets, noted analyst Ben Lilly in its note to followers. He added that retail traders have withdrawn massive amount of the cryptocurrency from exchanges to hold against a rising demand. That is effectively pushing BTC/USD rates upward.

“Bitcoin were, and still are, leaving exchanges by the bucket load,” said Mr. Lilly. “In effect, this means the amount of bitcoin available for willing buyers is drying up. Which in turn creates scarcity, demand pressure… And the reason many of us are here: higher prices.”

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