Bitcoin's October price rise suggests near-term crypto bull run amid regulation

Bitcoin and other cryptocurrencies are shooting up the charts this week, continuing their break-away pattern from the stock market over the last month. While bitcoin's (BTC-USD) volatile behavior still baffles plenty of investors, it's increasingly the safest bet as regulators worldwide signal a tightening over the crypto sector.

While the overall crypto market at times moves in lockstep with other risk-on assets, since October the asset class is showing some divergence. The S&P 500 (^GSPC) is down over the past month, but bitcoin, the largest cryptocurrency, is up more than 15%, and was trading at around $54,000 on Thursday. Ethereum (ETH-USD) and Doegcoin (DOGE-USD) have also gained more than 15% in the past week. Meanwhile, Shiba Inu coin (SHIB-USD) has risen more than 150% but is still trading well below the value of a penny.

Though 24/7 crypto markets remain in perpetual price discovery, investors tend to agree this week is bullish for BTC. Bitcoin's $1 trillion market cap and store of value – attributes that liken it to gold – are more appealing than ever for long-term holders. For larger institutional investors, its regulatory clarity makes it more attractive than many other crypto assets. Other macro indicators such as decisions coming out of the Federal Reserve could swing the market further in bitcoin's favor.

A leading risk indicator

"Bitcoin is looking very technically clean, to the upside," said Christopher Vecchio, senior strategist at DailyFX.com. While Vecchio pointed out that it's difficult to call an asset with bitcoin's level of volatility a safe haven, he said if anything, bitcoin is a leading risk indicator for technology stocks and that BTC could trade higher in the coming weeks.

Long-term holders of the asset tend to agree that bitcoin's largest players are tracking its risk-on behavior at the macro level.

“What the big money traders are watching are the SEC, the Fed, inflation, ETF regulation. That’s price-moving news,” Ben Cousens, a principal at the U.K. based venture capital firm Lakestar told Yahoo Finance.

An owner of bitcoin himself, Cousens said bitcoin's price volatility has made the last few months what those who are dyed-in-the-wool bitcoin investors call a “stackers paradise.” “Throughout this volatile period, longtime holders [of BTC] have just been accumulating. That typically results in a supply-squeeze which looks like what we’re seeing,” he said.

The regulation effect

Bitcoin is also benefiting from an increased focus on regulation, according to a number of sources.

During a period of increasing scrutiny of the crypto sector, bitcoin – as risky as it might be – has broken out as one of the safest crypto assets in the case of a clampdown.

Speaking Wednesday before the U.S. House Committee on Financial Services, Securities and Exchange Commission Chair Gary Gensler reiterated his belief that the crypto sector needs to be more heavily regulated. Gensler said most cryptocurrencies aren't currencies but investment vehicles that should be overseen by U.S. securities law.

“It's unlikely that 5 or 6,000 forms of private currency are going to persist. Economic history tells us that's unlikely,” Gensler said in his testimony. “So a lot of these are not really currencies. They're not being used to buy a cup of coffee at Starbucks... Most of them are investment vehicles, ways to raise money for entrepreneurs in the U.S."

However, Gensler did say a handful of crypto assets “might be competing with gold or silver,” representing a “digital speculative store of value as gold is a speculative store of value over the centuries.” Gensler's statement follows precedent laid out before him by the SEC under former Chairman Jay Clayton which ruled that bitcoin and ether, the cryptocurrency that fuels the Ethereum network, aren't securities.

Looking forward, Gensler and other U.S. regulators such as the Treasury Department and Federal Reserve, seek to layout more comprehensive regulation around stablecoins at the issuer and platform level. While regulation of stablecoins may not appear to directly impact the price of bitcoin and ether, there could be knock-on effects for the broader crypto market in the near-term if stablecoins see tighter regulation.

For one, it would reduce liquidity, according to Eswar Parsad, economics professor at Cornell University and author of "The Future of Money." "Such regulations might be seen as the leading edge of a broader regulatory crackdown on cryptocurrencies and crypto assets," said Parsad.

"It will halt some trading flows, assuming people don't switch to other algorithmic [stable]coins," said Gina Pieters, assistant professor at the University of Chicago who has researched stablecoins. Most often pegged at a 1:1 ratio with the U.S. dollar, more active crypto traders often use stablecoins as a way to get in and out of other non-pegged cryptocurrencies like bitcoin during periods of high volatility.

While regulation could reduce investor exposure to stablecoins and halt trading flows, at least temporarily, bitcoin's divergence from the S&P 500 might also mean investors again see it as a safe haven.

At a $1 trillion market cap, bitcoin is most often likened to "digital gold." Gold carries a market capitalization of $10 trillion. For bitcoin to equal that size, it would need to reach $500,000.

David Hollerith covers cryptocurrency for Yahoo Finance. Follow him @dshollers.

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