How Bitcoin has changed in pandemic
After the bear market of 2018-2020, according to Coinmarketrate.com, the price of Bitcoin has exceeded $68,000, which is 3 times more than the historical maximum of the previous bullish cycle. This bull run was marked by a special context, as two years have passed since the beginning of the pandemic, and several geopolitical tense events have filled the world. Therefore, it is important to understand what was going on in order to understand the dynamics of the Bitcoin price.
Let’s figure it out together.
Impact of key US Federal Reserve rates
No matter whether you like it or not, the Fed’s decisions are important for the price of Bitcoin. And the enemy of this institution is inflation.
Indeed, since the beginning of the pandemic, key rates have remained extremely low. This easy money has inspired the price of Bitcoin and all other cryptocurrencies until the end of 2021. The announcement of the interest rate increase was the starting point for Bitcoin’s decline for several months. However, European solutions are also important. The vote to ban mining in the European Parliament has created tension in the cryptocurrency world. Even if the proposed law has not been successful, it shows that the adoption of Bitcoin still has a long way to go, especially since Europe does not want to have a competitor to its digital euro (CBDC).
The price of BTC is stuck in the channel
Short-term traders have been in a waiting state for several weeks. The early impact of the pandemic caused the BTC price to drop to $3,600. In fact, despite several tests, the $50,000 threshold is unlikely to last very long, but other pessimistic analysts believe that if Bitcoin cannot break through this threshold, then we should expect a decline to $30,000. This threshold will most likely not be reached, as this would mean the end of the accumulation process. So it turns out that the market is preparing for the start of the next bull run?
Whale wallets are leaving trading platforms
If we accept the accumulation hypothesis, then everything is going just fine. Whales have accumulated a lot over the past year. Separate data from the analytical company CryptoQuant, specializing in blockchain analytics, confirm this trend and show that on 21 major exchanges that it covers, BTC balances are at the lowest level since the beginning of August 2018 – 2.32 million BTC.
Besides, the amount of ETH in circulation on exchange platforms is at its lowest level since 2018. These details show that investors do not intend to sell. Moreover, each downward fall in the current channel ends with a quick buyback of positions.
Should we worry about the volume reduction?
If we need another indicator, we can look at the trading volumes. A researcher from Cane Island Digital Research noted that “BTC volume is a terrible price indicator but a good indicator of sentiment”. He also stated that it is hard to imagine that the volume can reduce, and therefore, BTC should be close to the lows. In the same way, the fear and greed index remains at the “fear” level close to 20/100 mark which has been acting as a line in the sand since mid-February. There is no surrender yet, but there is a painful expectation…
Can El Salvador save Bitcoin?
However, geopolitical data may be on the side of Bitcoin. In addition to the role that cryptocurrencies play in the military arena in Europe, we should also pay attention to new statements from El Salvador. This country has really announced the issuance of its BTC bonds, informally known as volcaninc bonds. The country became the first to accept BTC as a legal tender last year. Since then, it has been using the volcano`s geothermal energy to mine BTC.
To achieve its goals, the country is looking for a long-term investment partnerships by issuing bonds directly related to the production of cryptocurrencies. It is expected that their creation will attract funds amounting to over one billion of dollars. The long-term consequences of El Salvador’s plan, if successful, are probably underestimated. They can lead to a change in the global economic paradigm, says Samson Mou, former chief strategist at Blockstream.
Although BTC has managed to stay above the $40K mark in recent weeks, concerns remain in the markets. Each jump in the altcoin rate is carefully studied for a real rise. We will probably have to wait a few more weeks for all these signals to be confirmed.
Mike Novogratz believes that inflation will be a catalyst for the adoption of Bitcoin
Can Bitcoin be an inflation hedge? This issue is the subject of quite a heated debate among portfolio managers. While some argue that the unlimited supply of this asset supports its safe nature, others argue that this is not the case. However, those who believe that the correlation of Bitcoin with risky assets should not make it an option to “escape into quality”.
Galaxy Digital CEO Mike Novagratz said that the acceleration of global price growth (CPI) will facilitate the adoption of Bitcoin. This year there is a lot of talk about stagflation – an economic situation characterized by high inflation and economic recession. Novogratz believes that such an environment will favor the emergence of cryptocurrencies.
Since last summer, the threat of inflation has been hanging over all developed economies. Central banks, instead of restraining the spread of this disaster, preferred to consider it as a transient phenomenon. They continued to print money, and liquidity in the markets was plentiful. By November, the consumer price index in the United States reached 6.8%, which was the highest in almost 40 years. It had to be above this level in order for Jerome Powell to stop calling inflation a transient phenomenon.
In addition to monetary drift, a crisis in supply chains characterized by a shortage of raw materials is fueling inflation. Moreover, in some countries, the demand for labor exceeds the supply. The Covid-19 pandemic has helped raise awareness of workers who demand better working conditions. Hence the emergence of the phenomenon of the “Great Dismissal”. Thus, there is no longer a question of monetary easing policy for 2022, the restoration of rates is the order of the day.
As a result of the military-political events in Europe, which are wrongly accused of being the source of all our troubles, have simply exposed the fragility of the Western economy. Europe, with which Russia has much more trade relations than with the United States, logically suffered more. In March, the ECB assumed that inflation would rise to 5.1% instead of the 3.2% predicted last year. In the US, the already serious situation is getting worse, and the consumer price index rose to 7.9%.
A Boon for Bitcoin
In an interview with CNBC Markets, Mike Novogratz says that Bitcoin may not succeed as a transactional currency, but it will become an excellent store of value, simply “digital gold”. He further explains that the community behind the number one cryptocurrency is much larger than any country. Bitcoin attracts citizens from all over the world who continue to lose confidence in their leaders.
He uses the Turkish lira as an example to illustrate his position. Then, finally, he states:
“Thus, if the economy is being managed incorrectly – and our management, frankly, is not very good, Bitcoin offers an excellent alternative.”
He is not the only figure in the financial world praising the reserve qualities of Bitcoin. Michael Saylor, CEO of MicroStrategy, which has 125,051 BTC in its portfolio, even dared to call the cryptocurrency the “American dream”.
Although Bitcoin has indeed outperformed all other asset classes over the past 10 years, it has long been noted that it correlates with Nasdaq, and is uncorrelated with gold and other safe haven assets. Is it becoming institutionalized or is it just a short-term correlation?
Despite the scarcity of the asset, only time will tell whether BTC is really a good means of protection against inflation.