Bitcoin suddenly shot up over $116,000 last week. This historic rally has many investors and analysts alike still reeling at the confluence of factors that produced it. This tidal wave of activity is being driven by a combination of political events, economic forecasts, and legislative trends and it’s got major technical implications. Together, they form a dangerous "perfect storm" for the #1 crypto.

Trump's Pro-Crypto Policies

Donald Trump’s sudden interest in cryptocurrency has resulted in a huge wave of optimism coming into the market. His administration has taken a commendable step toward fully embracing the digital asset space. Here are a few key policy initiatives and appointments that leave no doubt a more crypto-friendly approach is at hand.

Key Policy Changes

Perhaps the most prominent of these is Trump’s new executive order. U.S. Cryptocurrency and other alternative assets has been the hot topic this go around. This short-sighted move could very well create a tsunami of capital into the crypto market. Potentially millions more people will receive the chance to put their retirement nest eggs into these types of assets.

Furthermore, the SEC, under Trump's direction, has announced plans to launch a crypto task force aimed at developing a comprehensive and clear regulatory framework. A clear regulatory environment is essential not only to promote institutional investment, but to encourage wider adoption of cryptocurrencies.

Strategic Appointments

Trump’s administration has made strategic appointments of individuals who have already shown their willingness to protect the crypto industry. Travis Hill, the acting chairman of the FDIC, is reportedly willing to lead the charge on digital asset policies. Also onboard when it gets to the favorable initiatives that need Treasury support is Scott Bessent, the secretary of the Treasury Department.

The administration's overall aim is to provide a clearer regulatory framework for the crypto industry, which could lead to increased adoption and investment. The cryptocurrency lobby’s embrace was just the spark of positive momentum on crypto markets. At the same time, the deregulation of the digital currency ecosystem is enabling this positive boom.

Fed Rate Cut Expectations

Further monetary easing by central banks is the second big macro driver of Bitcoin’s breakout. History shows that lower interest rates create a ripple effect through financial markets, affecting the relative attractive of different asset classes.

Impact on Risk Assets

Even a slight reduction in interest rates can lower returns on fixed income investments, prompting traders to seek higher-yielding alternatives. This growing risk-on sentiment trend has naturally crossed over into cryptocurrencies such as Bitcoin.

A rate cut could push investors away from the $25.4 trillion government and corporate bond markets, potentially driving them toward cryptocurrencies like Bitcoin. One set of analysts even forecast a Bitcoin boost over $140,000. That would require the Fed to very aggressively cut interest rates—below the current 4% rate—to stimulus levels.

Dollar Weakness and Crypto Appeal

Lowered interest rates carries the risk of devaluing the US dollar, which increases the incentive to hold Bitcoin as a store of value. Finally, as interest rates fall, risk assets such as cryptocurrencies become more appealing with less benefit from a fixed income yield advantage.

In 2022 as interest rates rose, they brought significant downward pressure on the prices of cryptocurrencies. For instance, as these rates peaked, crypto prices bottomed out, only to soar again in 2023 and 2024—demonstrating that expected rate cuts can greatly improve cryptocurrency market values.

Technical Indicators

When combined with technical indicators, you can gain greater clarity about the market’s momentum and where it may be headed moving forward. There are a few major indicators pumping out bull signals for Bitcoin right now.

Bullish Signals

When this occurs, the Hash Ribbons produce a printed buy signal which can presage an emerging upward trend, as will be the case in August 2024. It’s reassuring to see both moving average lines sloping upward, the same as the Pi Cycle Top Indicator’s first bullish signal.

  • Hash Ribbons: Buy signal indicates potential upward trend.
  • Pi Cycle Top Indicator: Moving average lines sloping upward suggests positive momentum.

Other Key Indicators

Second, the Short-Term Holder Realised Price (STH RP) is important for traders that are looking at short-term price movements. The MVRV Z-Score can be a useful metric to determine when Bitcoin is overvalued or undervalued. If the MVRV Z-score is above 6.9, Bitcoin is almost certainly overvalued, while a value under 0.1 indicates it is undervalued. Watch the RSI (Relative Strength Index). When it drops below 30, that suggests that a coin is oversold and could be poised for a price jump.

Expert Opinions and Alternative Scenarios

Although the outlook for BTC seems optimistic at the moment, always be sure to listen to industry experts and think about potential other possibilities.

Risk Management

Malcolm Ethridge, a financial planner with CIC Wealth in Lanham, Maryland, suggests starting out with only 5% of what you invest going into crypto. This strategy prevents you from ever suffering a complete loss if that asset class were to implode. This underscores the critical need to manage risk when investing in highly volatile assets such as Bitcoin.

Skepticism and Concerns

Irreparable barriers to BTC becoming a new global currency Schwab does not expect the launch of bitcoin ETFs to shift overall barriers to bitcoin becoming a new global currency. After all, U.S. Treasury Secretary Janet Yellen has recently expressed concern about cryptocurrencies being used “for illicit financing.” These concerns highlight the regulatory and public adoption challenges that Bitcoin has yet to overcome.

Investment Debate

After over a decade Bitcoin has been around, there’s still controversy about what type of investment Bitcoin is. Bitcoin is a risky asset but has historically produced some of the highest returns available. Investors just need to be ready for those drawdowns as well.

Bitcoin’s price increase over the past few months is the result of a perfect storm. Pro-crypto policies, as well as hoping for Fed rate cuts, bullish technical indicators combined making this a perfect storm. Though tomorrow is always going to be anyone’s guess, knowing these dynamics is key in order to make sense of the continuously changing world of cryptocurrency.