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Bitcoin Market Dynamics See Change After BTC Reward Halving

Bitcoin Market Dynamics See Change After BTC Reward Halving

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One month after the Bitcoin halving, several key factors seem to point to a pivotal change in the BTC market and investor behavior.

One month has passed since the 2020 Bitcoin (BTC) miner reward halving, and a lot has happened for the predominant cryptocurrency since then. From changes in investor and trader behavior to an exponential growth in institutional interest, the halving seems to have marked the start of a new reality for all Bitcoin market participants.

Although the halving did not come with the immediate price surge that many had associated with the event, there are a few key factors that indicate the start of some changes that may be here to stay, some of which may even be pivotal for the future of Bitcoin as a new asset class. 

In fact, some believe that 2020 has all the fundamentals to be a great year for Bitcoin in terms of price and visibility. A recent report by Bloomberg even expects Bitcoin to outperform its record prices from 2017 and go as high as $28,000. Recently, Simon Dedic, a co-founder of cryptocurrency analysis company Blockfyre, even went as far as to say that $150,000 could be a target in the case of a bull run

Institutional interest

Although the start of 2020 showed decreasing volumes for regulated Bitcoin derivatives on the Chicago Mercantile Exchange, this trend seems to have been completely reversed following the halving, which came shortly after veteran hedge fund manager Paul Tudor Jones showed his appreciation for Bitcoin and revealed a stake in the digital asset, stating: “The best profit-maximizing strategy is to own the fastest horse. If I am forced to forecast, my bet is it will be Bitcoin.”

Data from Skew reveals that Bitcoin derivatives on the CME started to post record figures shortly after the halving. This trend continued throughout the month of May. According to the CryptoCompare May exchange review, volumes for CME Bitcoin derivatives soared 59% and hit $7.2 billion. The document reads:

“CME total options volumes reached an all-time monthly high of 5986 contracts traded in May. This figure represents 16 times that of April’s volumes. CME futures volumes have also recovered since April, increasing 36% (number of contracts) to reach 166,000 in May.”

Following the news of the 3iQ Bitcoin fund listed on the Toronto Stock Exchange roughly a month before the halving, Grayscale revealed that their crypto funds brought in over $500 million in the first quarter of 2020, signaling that institutional interest continues to populate headlines. 

On June 10, the London-based ETC Group announced the listing of the first crypto exchange-traded product on Germany’s Xetra digital stock exchange and a recent survey published by Fidelity has found that more than one-third of institutional investors globally are long on digital assets like Bitcoin, with 80% of all investors surveyed finding this asset class appealing to some degree. Cointelegraph asked Jonathan Hobbs, the chief operating officer of digital asset hedge fund Ecstatus Capital, for his views regarding the rationale behind the recent institutional interest in BTC. Hobbs stated:

“The Fed’s bond buying program has increased its balance sheet by about $6 trillion since the 2008 financial crisis, with about half of that coming from its fourth round of QE earlier this year. As a result, more investors are seeing Bitcoin as a potential hedge against inflation. The Bitcoin halving has certainly played into this narrative. Institutions are also seeing Bitcoin as an uncorrelated asset with good risk to reward.”

Decoupling from traditional markets

Correlation with traditional markets, both in stocks and gold, has been a major point of discussion in the Bitcoin world and one that intensified greatly before the halving and following the Black Thursday crash on March 12. While some pointed to the correlation between Bitcoin and the stock market as a breaking factor for the “digital gold” comparison, it’s worth noting that all markets tended to trade in a fairly correlated manner amid the coronavirus crisis.

While the correlation between the Bitcoin and stock markets remains and with Bitcoin’s correlation with the S&P 500 having reached its highest point since January 2011, data suggests that the relationship between major markets and Bitcoin tends to shifts just before and after each halving event, which means that investors may continue to see a decoupling from stocks in the second half of 2020, especially as the effects of the pandemic decrease. 

In fact, Bitcoin has been outperforming the stock market in the second quarter, boasting returns of more than 50%. According to Matt D’Souza, CEO at Blockware Solutions and hedge fund manager, the correlation may come back as Bitcoin matures as an asset class. He stated:

“I think as more institutions get involved, the more correlated bitcoin will get with other assets. when the same people start owning the same assets or have access to the same assets is when you start to see correlations develop.”

Derivatives are growing — looming danger?

While institutional interest and relation to legacy markets can serve as an outlook of what lies ahead for Bitcoin following its third halving, the unregulated market continues to dominate BTC, particularly derivatives, which have seen substantial growth in terms of trading volume. Although volume has been rising, market data doesn’t seem to point to a clear price direction following the pre-halving bearish trends. 

According to CryptoCompare, global derivatives trading increased by 32% in May, reaching an all-time high of $602 billion. Much like previous months, options continue to see an increasing demand, with the Deribit Options volume rising by 109% to $3.06 billion in May.

As derivatives keep growing, some seem to be worried they can cause unnecessary volatility due to highly leveraged positions that cause long squeezes, where a sharp drop in price causes positions to be liquidated and brings the price further down, a scenario that was also witnessed during the March 12 crash.

Concerns that the growing interest in Bitcoin derivatives will lead to an unhealthier market do not stop there. Su Zhu, the CEO of Three Arrows Capital, recently stated that patterns like the one observed on June 1, dubbed the “Bart Simpson” pattern due to its resemblance to the cartoon character, are mostly due to the volume and interest on Bitcoin derivatives exchanges that allow for manipulation:

“I see it as the fact the vast majority of Bitcoin being held off these exchanges [...] and it’s not being traded around, so a very small amount of the Bitcoin that are out there are moving the price.” 

A “Bart Simpson” pattern in BTC

A “Bart Simpson” pattern in BTC

On-chain metrics paint a pretty picture

In fact, on-chain metrics have also showcased that these patterns have been connected to large movements by a few whales to Binance and BitMex. CryptoQuant CEO Ki Young Ju previously stated: “Multiple significant BTC inflows from Binance and BitMEX a few hours before the dip.”

While large inflows to derivatives exchanges and liquidated positions on said exchanges are a concern for the future price of Bitcoin, on-chain metrics also reveal another bullish sign for the digital asset. Investors are moving their Bitcoin away from exchanges in record-breaking numbers, a factor that has preceded positive price action for BTC before.

In the week after the halving, reserves across 17 major exchanges totaled 1.18 million BTC — the lowest value since November 2018 — signaling that investors are planning to hold their BTC for some time. On June 8, an additional 27,000 BTC was withdrawn from exchanges than was deposited. The last time there was such a significant outflow, Bitcoin appreciated by 88%.

Stablecoins

The day after the halving also marked the day that United States dollar-backed stablecoin Tether (USDT) surpassed XRP as the third-largest cryptocurrency by market capitalization, according to the Stablecoin Index. The growth in USDT follows its trend from pre-halving days, and still accounts for ~98% of all BTC-to-stablecoin volume.

Research has shown that there’s a positive relationship between the issuing of USDT and the Bitcoin price, and although stablecoin volume slowed down in April and May, according to CryptoCompare, the growth in USDT issuance still bears a positive outlook for the short and medium-term. Brian Quinlivan, marketing and social media director at cryptocurrency data provider Santiment, recently told Cointelegraph:

“When people aren’t using USDT, they most often put it in Bitcoin. And what’s cool is the fact that this USDT percentage often fluctuates a few hours or days in advance of BTC’s price reacting to it. So monitoring this metric in advance can end up producing a tremendous advantage by catching a sudden fluctuation early enough.”

The road ahead

Although only one month since the Bitcoin halving has passed, things seem to be heating up for Bitcoin as institutional interest soars alongside general derivatives volume. One week after the event, data from crypto data company The TIE showed Bitcoin’s sentiment is the highest that it has been since 2017. 

Several data points hold bullish signs for Bitcoin, but instability and market manipulation are still a major challenge, especially as more serious players continue to join its market. Changes in the way investors and traders are looking at Bitcoin are bound to have a long- to medium-term impact on the price action of BTC as more people decide to hold the asset and acquire stablecoins as a gateway into crypto. A decoupling from traditional markets may also bring new developments to Bitcoin as a new asset class, although this may change as investors decide in which category this digital asset should be placed.

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Bitcoin mining revenue mirrors 2021 lows, right before BTC breached $69K

The key to survival for Bitcoin miners boils down to the delicate balance between the revenue and the operating cash flow.
Bitcoin…

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The key to survival for Bitcoin miners boils down to the delicate balance between the revenue and the operating cash flow.

Bitcoin (BTC) visiting the $20,000 range after one and a half years made mining — the most important job of the ecosystem — a costly affair. However, if history were to repeat itself, BTC investors may witness another epic bull run that previously helped Bitcoin reach an all-time high of $69,000.

Changes in Bitcoin prices directly impact the miners’ income, who earn fixed block rewards and transaction fees in BTC for running their mining operations. In June 2022, the total mining revenue dipped below the $20 million range, with Blockchain.com data recording the lowest dip of $14.401 million on June 17.

Total miners revenue over time. Source: blockchain.com

As shown above, the recent dip in Bitcoin mining revenue was last seen one year back when the total value tanked to $13.065 million on June 27, 2021 — back when BTC traded at roughly $34,000. What followed after that was Bitcoin’s five-month-long epic bull run, which was supported by pro-crypto initiatives such as El Salvador’s BTC acceptance and crypto-friendly regulations across the globe. 

Despite mixed sentiments about the recovery of the crypto ecosystem, small-time investors are found to have increased their investment efforts amid the bear market as they fulfill their long-term dream of owning one full BTC (1 BTC). Global recession, geopolitical tensions, falling crypto economies like Terra and the ongoing COVID-19 pandemic currently hold the Bitcoin ecosystem from unleashing its true potential.

Monthly operating cash flow vs. mining revenue. Source: Arcane Crypto

A report shared by crypto-focused financial services firm Arcane Crypto revealed that potential of several public Bitcoin miners to survive the ongoing bear market. The key to survival for Bitcoin miners boils down to the delicate balance between the revenue and the operating cash flow. 

Based on the report, Argo, CleanSpark, Stronghold, Marathon and Roit are the best-positioned miners to sustain the crypto winter. At the same time, major player Core has nearly matched its operational costs to its total revenue.

Related: Compass Mining loses facility after allegedly failing to pay power bill

Bitcoin mining hardware and hosting company Compass Mining lost one of its Maine-based hosting facilities after failing to pay the electricity bills.

Dynamics Mining, the owner of the mine hosting facility, alleged that Compass Mining has six late payments and three non-payments related to utility bills and hosting fees, stating “all you had to was pay $250,000 for 3 months of power consumption.”

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Is Bitcoin Really A Hedge Against Inflation?

The long-standing claim that bitcoin is a hedge against inflation has come to a fork in the road as inflation is soaring, but the bitcoin price is not.

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The long-standing claim that bitcoin is a hedge against inflation has come to a fork in the road as inflation is soaring, but the bitcoin price is not.

This is an opinion editorial by Jordan Wirsz, an investor, award-winning entrepreneur, author and podcast host.

Bitcoin’s correlation to inflation has been widely discussed since its inception. There are many narratives surrounding bitcoin’s meteoric rise over the last 13 years, but none so prevalent as the debasement of fiat currency, which is certainly considered inflationary. Now Bitcoin’s price is declining, leaving many Bitcoiners confused, as inflation is the highest it’s been in more than 40 years. How will inflation and monetary policy impact bitcoin’s price?

First, let’s discuss inflation. The Federal Reserve’s mandate includes an inflation target of 2%, yet we just printed an 8.6% consumer price inflation number for the month of May 2022. That is more than 400% of the Fed’s target. In reality, inflation is likely even higher than the CPI print. Wage inflation isn’t keeping up with actual inflation and households are starting to feel it big time. Consumer sentiment is now at an all-time low.

(Source)

Why isn’t bitcoin surging while inflation is running out of control? Although fiat debasement and inflation are correlated, they truly are two different things that can coexist in juxtaposition for periods of time. The narrative that bitcoin is an inflation hedge has been widely talked about, but bitcoin has behaved more as a barometer of monetary policy than of inflation.

Macro analysts and economists are feverishly debating our current inflationary environment, trying to find comparisons and correlations to inflationary periods in history — such as the 1940s and the 1970s — in an effort to forecast where we go from here. While there are certainly similarities to inflationary periods of the past, there is no precedent for bitcoin’s performance under circumstances such as these. Bitcoin was born only 13 years ago from the ashes of the Global Financial Crisis, which itself unleashed one of the greatest monetary expansions in history up until that time. For the last 13 years, bitcoin has seen an environment of easy monetary policy. The Fed has been dovish, and anytime hawkishness raised its ugly head, the markets rolled over and the Fed pivoted quickly to reestablish calm markets. Note that during the same period, bitcoin rose from pennies to $69,000, making it perhaps the greatest-performing asset of all time. The thesis has been that bitcoin is an “up and to the right asset,” but that thesis has never been challenged by a significantly tightening monetary policy environment, which we find ourselves at the present moment.

The old saying that “this time is different,” might actually prove to be true. The Fed can’t pivot to quell the markets this time. Inflation is wildly out of control and the Fed is starting from a near-zero rate environment. Here we are with 8.6% inflation and near-zero rates while staring recession straight in the eyes. The Fed is not hiking to cool the economy … It is hiking in the face of a cooling economy, with already one quarter of negative gross domestic product growth behind us in Q1, 2022. Quantitative tightening has only just begun. The Fed does not have the leeway to slow down or ease its tightening. It must, by mandate, continue to raise rates until inflation is under control. Meanwhile, the cost-conditions index already shows the biggest tightening in decades, with almost zero movement from the Fed. The mere hint of the Fed tightening spun the markets out of control.

(Source)

There is a big misconception in the market about the Fed and its commitment to raising rates. I often hear people say, “The Fed can’t raise rates because if they do, we won’t be able to afford our debt payments, so the Fed is bluffing and will pivot sooner than later.” That idea is just factually incorrect. The Fed has no limit as to the amount of money it can spend. Why? Because it can print money to make whatever debt payments are necessary to support the government from defaulting. It’s easy to make debt payments when you have a central bank to print your own currency, isn’t it?

I know what you’re thinking: “Wait a minute, you’re saying the Fed needs to kill inflation by raising rates. And if rates go up enough, the Fed can just print more money to pay for its higher interest payments, which is inflationary?”

Does your brain hurt yet?

This is the “debt spiral” and inflation conundrum that folks like Bitcoin legend Greg Foss talks about regularly.

Now let me be clear, the above discussion of that possible outcome is widely and vigorously debated. The Fed is an independent entity, and its mandate is not to print money to pay our debts. However, it is entirely possible that politicians make moves to change the Fed’s mandate given the potential for incredibly pernicious circumstances in the future. This complex topic and set of nuances deserves much more discussion and thought, but I’ll save that for another article in the near future.

Interestingly, when the Fed announced its intent to hike rates to kill inflation, the market didn’t wait for the Fed to do it … The market actually went ahead and did the Fed’s job for it. In the last six months, interest rates have roughly doubled — the fastest rate of change ever in the history of interest rates. Libor has jumped even more.

(Source)

This record rate-increase has included mortgage rates, which have also doubled in the last six months, sending shivers through the housing market and crushing home affordability at a rate of change unlike anything we’ve ever seen before.

30-year mortgage rates have nearly doubled in the last six months.

All of this, with only a tiny, minuscule, 50 bps hike by the Fed and the very beginning of their rate hike and balance sheet runoff program, merely started in May! As you can see, the Fed barely moved an inch, while the markets crossed a chasm on their own accord. The Fed’s rhetoric alone sent a chilling effect through the markets that few expected. Look at the global growth optimism at new all-time lows:

(Source)

Despite the current volatility in the markets, the current miscalculation by investors is that the Fed will take its foot off the brake once inflation is under control and slowing. But the Fed can only control the demand side of the inflationary equation, not the supply side of the equation, which is where most of the inflationary pressure is coming from. In essence, the Fed is trying to use a screwdriver to cut a board of lumber. Wrong tool for the job. The result may very well be a cooling economy with persistent core inflation, which is not going to be the “soft landing” that many hope for.

Is the Fed actually hoping for a hard landing? One thought that comes to mind is that we may actually need a hard landing in order to give the Fed a pathway to reduce interest rates again. This would provide the government the possibility of actually servicing its debt with future tax revenue, versus finding a path to print money to pay for our debt service at persistently higher rates.

Although there are macro similarities between the 1940s, 1970s and the present, I think it ultimately provides less insight into the future direction of asset prices than the monetary policy cycles do.

Below is a chart of the rate of change of U.S. M2 money supply. You can see that 2020-2021 saw a record rise from the COVID-19 stimulus, but look at late 2021-present and you see one of the fastest rate-of-change drops in M2 money supply in recent history. 

(Source)

In theory, bitcoin is behaving exactly as it should in this environment. Record-easy monetary policy equals “number go up technology.” Record monetary tightening equals “number go down” price action. It is quite easy to ascertain that bitcoin’s price is tied less to inflation, and more to monetary policy and asset inflation/deflation (as opposed to core inflation). The chart below of the FRED M2 money supply resembles a less volatile bitcoin chart … “number go up” technology — up and to the right.

(Via St. Louis Fed)

Now, consider that for the first time since 2009 — actually the entire history of the FRED M2 chart — the M2 line is potentially making a significant direction turn to the downside (look closely). Bitcoin is only a 13-year-old experiment in correlation analysis that many are still theorizing upon, but if this correlation holds, then it stands to reason that bitcoin will be much more closely tied to monetary policy than it will inflation.

If the Fed finds itself needing to print significantly more money, it would potentially coincide with an uptick in M2. That event could reflect a “monetary policy change” significant enough to start a new bull market in bitcoin, regardless of whether or not the Fed starts easing rates.

I often think to myself, “What is the catalyst for people to allocate a portion of their portfolio to bitcoin?” I believe we are beginning to see that catalyst unfold right in front of us. Below is a total-bond-return index chart that demonstrates the significant losses bond holders are taking on the chin right now. 

(Source)

The “traditional 60/40” portfolio is getting destroyed on both sides simultaneously, for the first time in history. The traditional safe haven isn’t working this time around, which underscores the possibility that “this time is different.” Bonds may be a deadweight allocation for portfolios from now on — or worse.

It seems that most traditional portfolio strategies are broken or breaking. The only strategy that has worked consistently over the course of millennia is to build and secure wealth with the simple ownership of what is valuable. Work has always been valuable and that is why proof-of-work is tied to true forms of value. Bitcoin is the only thing that does this well in the digital world. Gold does it too, but compared to bitcoin, it cannot fulfill the needs of a modern, interconnected, global economy as well as its digital counterpart can. If bitcoin didn’t exist, then gold would be the only answer. Thankfully, bitcoin exists.

Regardless of whether inflation stays high or calms down to more normalized levels, the bottom line is clear: Bitcoin will likely start its next bull market when monetary policy changes, even if ever so slightly or indirectly.

This is a guest post by Jordan Wirsz. Opinions expressed are entirely their own and do not necessarily reflect those of BTC Inc. or Bitcoin Magazine.

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Final Capitulation — 5 reasons why Bitcoin could bottom at $10,000

Bitcoin. The bottom. Are we there yet? Several higher timeframe metrics suggest BTC’s real bottom will be somewhere around $10,000.

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Bitcoin. The bottom. Are we there yet? Several higher timeframe metrics suggest BTC’s real bottom will be somewhere around $10,000.

Bear markets have historically been challenging to navigate for traders and the conventional set of "reliable" indicators that determine good entry points are unable to predict how long a crypto winter might last.

Bitcoin’s (BTC) recent recovery back above the psychologically important price level of $20,000 was a sign to many traders that the bottom was in, but a deeper dive into the data suggests that the short-term relief rally might not be enough proof of a macro-level trend change.

Evidence pointing to the need for caution was provided in a recent report by cryptocurrency research firm Delphi Digital, which suggested that “we need to see a little more pain before we have conviction that a market bottom is in.”

Despite the pain that has already been felt since Bitcoin’s price topped in November, a comparison between its pullback since then and the 2017 market top points to the possibility of further decline in the short-term.

BTC/USD price normalized since all-time high (Current vs. 2017 peak) source: Delphi Digital

During previous bear markets, the price of BTC fell by roughly 85% from its top to the eventual bottom. According to Delphi Digital, if history were to repeat itself in the current environment it would translate into “a low just above $10,000 and another 50% drawdown for current levels.”

The outlook for Ether (ETH) is even direr as the previous bear market saw its price decline by 95% from peak to trough. Should that same scenario play out this time around, the price of Ether could drop as low as $300.

ETH/USD price percent drawdown (current vs. prior ATH). Source: Delphi Digital

Delphi Digital said,

“The risk of reliving a similar crash is higher than most people are probably discounting, especially if BTC fails to hold support in the $14K–16K range.”

Oversold conditions prevail

For traders looking for where the bottom is in the current market, data shows that “previous major market bottoms coincided with extreme oversold conditions.”

As shown in the weekly chart below, BTC’s 14-week RSI recently fell below 30 for the third time in its history, with the two previous occurrences coming near a market bottom.

BTC/USD weekly price vs. 14-week RSI. Source: Delphi Digital

While some may take this as a sign that now is a good time to reenter the market, Delphi Digital offered a word of caution for those expecting a “V-shaped” recovery, noting that “In the prior two instances, BTC traded in a choppy sideways range for several months before finally staging a strong recovery.”

A view of the 200-week simple moving average (SMA) also raises question on whether the historical support level will hold again.

BTC/USD price vs. 200-week SMA and 14-week RSI. Source: Delphi Digital

Bitcoin recently broke below its 200-week SMA for the first time since March 2020. Historically speaking, BTC price has only traded below this level for a few weeks during the previous bear markets, which points to the possibility that a bottom could soon be found.

Related: Bitcoin price dips under $21K while exchanges see record outflow trend

The final capitualation

What the market is really looking for right now is the final capitulation that has historically marked the end of a bear market and the start of the next cycle.

While the sentiment in the market is now at its lowest point since the COVID-19 crash of March 2020, it hasn’t quite reached the depths of despair that were seen in 2018.

According to Delphi Digital:

“We may need to see a bit more pain before sentiment really bottoms out.”
Crypto Fear & Greed Index. Source: Alternative

The weakness in the crypto market has been apparent since the end of 2021, but the real driving force behind the market crumbling include run-away inflation and rising interest rates.

BTC/USD vs. Fed funds rate vs. Fed balance sheet. Source: Delphi Digital

Rising interest rates tend to be followed by market corrections, and given that the Federal Reserve intends to stay the course of hiking rates, Bitcoin and other risk-off assets are likely to correct further.

One final metric that suggests that a final capitulation event needs to occur is the percentage of BTC supply in profit, which hit a low of 40% during previous bear markets.

BTC/USD price vs. percentage of supply in profit. Source: Delphi Digital

This metric is currently at 54.9%, according to data from Glassnode, which adds credence to the perspective that the market could still experience another leg down before the real bottom is in.

The views and opinions expressed here are solely those of the author and do not necessarily reflect the views of Cointelegraph.com. Every investment and trading move involves risk, you should conduct your own research when making a decision.

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