$20K for Bitcoin still possible? Analyst sees „excess dollar liquidity“ as a factor
The Bitcoin market suffered heavy losses in the middle of the week when its price fell from its high of $19,500 to as low as $16,200.
Some analysts believe that the crypto currency has more room for decline given its 100% rally before the recent correction. Nevertheless, macroeconomic fundamentals continue to favour the bullish outlook for the young asset.
One of the main upward drivers of Bitcoin is a weakening US dollar. The crypto currency was one of the biggest beneficiaries after the US Federal Reserve flooded Bitcoin Lifestyle global markets with excessive dollar liquidity after a flood of emergency measures to contain the economic impact of the coronavirus pandemic.
Many strategists expected the dollar to recover after the US government reopened the economies. There have been attempts, but the US dollar index still fell, having reached its lowest level since 2018 only this week.
Its downward bias showed the likelihood of investors maintaining their exposure to riskier assets, giving Bitcoin ample opportunity to resume its upward trend.
„Excess dollar liquidity [from the Fed] is still in the system,“ Salman Ahmed, global head of Fidelity International’s macro department, told the WSJ. And that’s bullish for Bitcoin because:
„As soon as things improve and reflation returns, that liquidity can flow back into riskier assets.
20% decline of the dollar imminent
Investors are still heavily invested in the US, which in turn keeps demand for the greenback up. However, the arrival of a potential COVID-19 vaccine, coupled with expectations of a friendlier trade policy on the part of Joe Biden’s government, makes foreign assets more attractive.
But this does not mean massive capital inflows into developed and emerging economies already suffering the consequences of the pandemic. Interest rates remain at lower levels in most countries, leaving them exposed to their riskier markets.
As a result, for many strategists, the US dollar remains an overvalued asset, being traded high above its actual interest rates due to the lack of global investment alternatives. A report by Citigroup even points to a 20% fall in the value of the dollar as global investors hedge their exposure to US markets.