The Fear of COVID-19 Is Back, and This Could Trigger a Major Correction in Bitcoin Price

Volatility could increase in the coming days.

After a week that saw the Bitcoin price break the psychological barrier of $20K, then the barriers of $21K, $22K, and $23K, we had a historic weekend as the Bitcoin price reached $24.2K on Saturday, December 19, 2020. The next day, the Bitcoin price was still very close to $24K.

We were heading into another week of records. And then, an event changed everything. On December 20, 2020, Boris Johnson, the Prime Minister of the United Kingdom, announced strict confinement of a major part of England because of a much more contagious variant of COVID-19.

This new strain of COVID-19 has just been discovered in England, and it appears to be spreading much faster than the previous strain. This has raised enormous fears around the world at the same time that the first vaccines against COVID-19 are being given to some people.

While optimism about the medium-term prospects of these vaccines has returned, the big question now is whether they will be effective against this new strain of COVID-19.

As you know, financial markets do not like uncertainty.

If Bitcoin is also a hedge against uncertainty, the institutional investors who have arrived in this new world in large numbers over the last few weeks may not necessarily have this vision. Their reactions when uncertainty about COVID-19 returns to the forefront will be the same as in traditional markets.

This may explain the drop in the Bitcoin price yesterday just above $22K to $22.1K:

Bitcoin price then rebounded, driven by demand from institutional investors but also from large companies. MicroStrategy took advantage of yesterday's drop in price to purchase $650 million of BTC.

MicroStrategy now owns 70,470 BTC purchased for $1.125 billion, with a current valuation of $1.591 billion.

Grayscale Investments has also accumulated even more BTC for its customers in its Bitcoin fund. Grayscale holds more than 570,000 BTC for its clients, representing more than $13 billion at the current Bitcoin price.

All this is still impressive but has not prevented Bitcoin price from falling below $23K again to $22.6K at the time of writing.

In the hours and days to come, a larger correction may occur. If Bitcoin can break $24K again, there is still the possibility of breaking $25K before the end of the year. But this does not appear to be what will happen.

The first support to hold is the $20K that could be tested quickly if the uncertainty around this new strain of COVID-19 were to intensify. If the $20K does not hold, the $18.5K zone would be crucial. The bullish trend would be reversed if the Bitcoin price were to fall below $17.5K, which is the recent higher low.

As a sign of a possible change in trend due to this uncertainty, the DXY began a rebound yesterday, December 21, 2020. If this trend were to be confirmed, it could increase the likelihood of a larger correction for the Bitcoin price in the coming days.

Greater volatility could be observed around December 25. Skew, a crypto data provider, has indeed just published a tweet indicating that 102,000 Bitcoin options will expire this Friday:

Options contracts allow holders to buy or sell Bitcoin at a specific price, known as the strike price. In another tweet, Skew gives us more details. In particular, we can see that the options contracts expiring on December 25, 2020, have notable clusters around the $15K strike price and $20K strike price:

The expiration of these Bitcoin options contracts is an event that induces volatility because as the expiration date approaches, holders adjust their contracts. Traders who are in profit may also decide to receive the payout and dumper the Bitcoin.

Typically, most of the impact on the Bitcoin price occurs one or two days before the expiration date. We can therefore expect high volatility in the Bitcoin price on Wednesday, December 23, and Thursday, December 24, i.e. tomorrow and the day after tomorrow.

Finally, in addition to this, there will be the expiration of $2.3 billion of Bitcoin futures on Christmas Day as well. The coming days are therefore likely to be extremely volatile for Bitcoin price.

It will be an opportunity to see to what extent institutional investors believe in Bitcoin, as they may take advantage of this to buy all the Bitcoin price drops as it has been the case since the end of November 2020.

If demand from institutional investors were to calm down during the holiday season, likely, the correction expected by many players is finally taking place.

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