First Mover: Bitcoin Could Get a Boost From Central Bank Digital Currencies

Bitcoin price is caught in a downdraft after a series of rallies in recent weeks that repeatedly fizzled out at the $10,000 mark. 

“There is no clear understanding where bitcoin will go,” Yuriy Mazur, head of data analytics at cryptocurrency exchange CEX.IO told CoinDesk’s Omkar Godbole. “It may either retrace back to $6,500 or reach $10,000.”

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With the near-term picture cloudy, some analysts are focusing on a longer-term trend that could be surprisingly bullish for bitcoin: the emergence of digital currencies issued by central banks. 

It’s not an obvious investment thesis because bitcoin was invented to be used in an electronic peer-to-peer payment system that would be free of government control and operate outside of the traditional banking system. 

And most central bank digital currencies, or CBDCs, would, by their very nature, be issued and controlled by governments, and in many cases distributed through banks. 

But Jack Purdy and Ryan Watkins of the research firm Messari wrote last week in a report that the “coming digitization of money,” including the launch of CBDCs, could provide a “secular tailwind” for bitcoin. 

CBDCs have gained momentum over the past year as countries consider whether to roll out digital versions of their currencies to keep up with Facebook’s proposed Libra and China’s forthcoming digital currency electronic payment, which is already in testing.

The journal Central Banking, which is supported by the Bank of International Settlements and the European Central Bank among others, found in a survey earlier this month that some 46 countries are considering CBDCs using a constrained form of distributed ledger technology. 

Federal Reserve Chair Jerome Powell told Congress in February the U.S. central bank is in the early stages of researching digital currencies, and that having a “single government currency at the heart of the financial system is something that has served us well.” 

Even so, JPMorgan said last week in a report that “there is no country with more to lose from the disruptive potential of digital currency than the United States,” as reported by Bloomberg News. “This revolves primarily around U.S. dollar hegemony.” 

The largest U.S. bank’s warning merely reinforces the urgency and significance of the efforts, and that’s what the Messari analysts were homing in on. 

“Catalyzed by bitcoin and the recognition of the benefits of blockchain technology, many countries and companies around the world have begun researching, testing and launching their own digital currencies,” the analysts wrote. 

“When these projects launch, they will have the combined effect of exposing billions of people to cryptocurrency-related technologies,” according to the report. “This will increase people’s comfort with and understanding of cryptocurrencies, get more people creating and using cryptocurrency wallets, and provide on-ramps into decentralized cryptocurrencies like bitcoin.”

So CBDCs might be used to facilitate purchases of bitcoin? That’s the idea.

BTC: Price: $8,878 (BPI) | 24-Hr High: $9,011 | 24-Hr Low: $8,672

Trend: While bitcoin has recovered from two-week lows reached on Monday, the cryptocurrency is yet to beat key resistance above $9,300.

At press time, bitcoin is changing hands near $9,000, having put in a low of $8,630, according to CoinDesk’s Bitcoin Price Index. Prices need to cross Sunday’s high of $9,310. That would invalidate the lower highs setup on the 4-hour chart and confirm an end of the pullback from $10,000 and the revival of the bullish trend. 

However, as long as prices are held under $9,310, the bearish view put forward by Sunday’s downside break of the ascending trendline connecting March 13 and April 21 lows would remain valid. 

The uptick from $8,630 to $9,000 seen in the last 24 hours lacks substance, as volumes have remained low throughout the price recovery. A low-volume bounce is often short-lived. Hence, prospects of a strong move above $9,310 look bleak. 

Besides, higher time frame charts are reporting a failed breakout. “The previous weekly candle below the long-term downtrend line support (drawn from June 2019 and February 2020 high), which locally invalidates the bullishness,” said Adrian Zduńczyk, chartered market technician and CEO of trading community The BIRB Nest. 

So another move lower toward $8,630 cannot be ruled out. A violation there would expose 78.6% Fibonacci retracement marked at 8524. “If that level is broken, it would result in tapping into range lows support $8,000-$8,100. The 50-day average at $8,300 could also offer support,” said Zduńczyk. 

However, if prices rise above $9,300 with strong volumes, a falling wedge breakout would be confirmed on the 4-hour chart. That would open the doors to a re-test of $10,000.