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The start of 2021 brought a change in view toward cryptocurrencies. The chaos and mayhem that circled the Trump Administration started to spill over into the currency markets, weighing in the greenback. Cryptocurrencies began to steal market share from gold as an alternative currency and benefit during risk-on and risk-off trading days. The price action during 2020 was volatile but not pales to the whipsaw price action already seen in 2021. December trading volume in bitcoin futures and options eclipsed the all-time highs experienced in November 2020. The pandemic has generated more interest in trading. Upstarts like Robinhood sprang to life, gaining as much trading volume as Stallworth like Charles Schwab. The combination of the pandemic's spread the loss in confidence in the dollar led to bitcoin reaching all-time highs in 2020 and 2021.


Cryptocurrency Volumes
Bitcoin, the most active cryptocurrency, has seen an explosion in volume. During the first week of January in 2020, bitcoin volume was approximately 19-billion. This volume compares to 78-billion in volume in the first week of 2021. This change was a 410% increase in volume over just one year. Ethereum, the second-largest cryptocurrency by market capitalization, saw an even more considerable increase in volume. Trading volume in Ethereum was 7-billion in January of 2020, compared to 45-billion in January of 2021, a 640% rise.

Derivatives trading volume in bitcoin also surged. According to The Block's data, in 2020, December eclipsed November for all-time highs in bitcoin future and options trading volumes. Bitcoin futures trading volumes reached $1.06 trillion in December, increasing 21.6% from November.

The Road to $40,000
In January of 2021, bitcoin prices hit $40,000. The Road to $40,000 was not easy. Recall, there was a lot of hype surrounding bitcoin in late 2017, when prices hit a multi-year high (all-time high at the time), near $17,000. In 2019, bitcoin hit an 18-month high near $13,00, and in 2020, in February, prices tested the $10,000 range before experiencing a massive selloff as the pandemic took hold.

The panic in riskier assets was not pleasant for those who held bitcoin. Prices tumbled 63% from a high in February of $10,500 to a low in early March near $3,850. Concerns that the price would continue to fall were eased as the Federal Reserve cut interest rates to zero and introduced multiple bond purchase programs. The Fed's move put downward pressure on U.S. interest rates, which eventually drove the U.S. 10-year yield below 1%. The decline in U.S. interest rates also put downward pressure on the dollar, which whipsawed. The dollar index hit a high near 103 in early March, but riskier assets started to gain traction due to monetary policy and fiscal stimulus.

Has the Slide in the Dollar Helped Bitcoin
As U.S. yields fell relative to its trading partners, the attractiveness of the greenback declined. The dollar index (a basket of sovereign currencies versus the U.S. dollar) dropped from 103 in March 2020 to 89.20 in the first week of January 2021. The drop in the dollar index of 14% helped generate a selloff in the USD/BTC, after tumbling to $3,850. The grind lower in the greenback allow bitcoin to move higher, recapturing all of the losses experienced in February and March by July 2020. The acceleration in the greenback losses began in Q4, but those losses did not spill over into bitcoin until December. The decline in the dollar somewhat reflected the loss in respect of the world's reserve currency. The drop in the value of the greenback helped buoy bitcoin. This movement can be seen in the value of bitcoin relative to other currencies. In January of 2021, bitcoin hit an all-time high versus the Euro. As the dollar declined in Q4, bitcoin started to surge. Bitcoin surged more than 257% in the Q4 of 2020. The movement was very sharp and very fast, accelerating the trends in volatility. The Q4 movements were accompanied by an increase in momentum, reflected by a surging relative strength index (RSI). The RSI, a momentum index created by J. Welles Wilder, is a momentum oscillator that measures the speed and change of price movements. Reading on the RSI above 70 is considered overbought. Reading on the RSI below 30 is deemed to be oversold. During December, the RSI on bitcoin hit a record level of 93.


What Has Happened in 2021
Price action in bitcoin continued to surge, and pundits continued to sing the praises of an alternative to the greenback. Bitcoin rallied past $40,000, rising quickly in the first two weeks of the year. The overbought conditions in conjunction with a rally in U.S. yields and the U.S. dollar finally generated a bitcoin correction. Prices dropped sharply on January 11 but closed well of the lows of the day.


Negative momentum accelerated as the fast stochastic generated a crossover sell signal. The fast stochastic, also a momentum oscillator, moved to a higher of 93, above the overbought trigger level of 80, and foreshadowed a correction. Medium-term momentum has also started to decelerate. The MACD (moving average convergence divergence) histogram peaked in the first week of January and has started to move lower, reflecting decelerating positive momentum. The fast decline in the RSI still has the index above the overbought trigger level of 70, which means that there could be room for bitcoin to fall.


Where Do We Go From Here
Bitcoin and other cryptocurrencies are here to stay. In October of 2020, the announcement by PayPal that they would offer vendor services in cryptocurrency to its 27-million vendors was a catalyst that started the rally in bitcoin. Cryptocurrency during COVID now has several partners, including Square, that see the potential in alternative metrics for payments. The rapid movement higher will likely be followed by consolidating. The fast movements lower in the exchange rate versus the dollar are probably signs that the easy money trend is temporarily halted. The technicals show that bitcoin is still overbought and will likely need to consolidate before making another move higher.