bitcoin falling

After a brief rally above $20k, the Bitcoin price has once again declined and is now resting at $19,500 once more. Many are wondering why the Bitcoin price isn’t excelling in such an adversarial environment but fail to recognise the ongoing correlation between Bitcoin and traditional markets.

Bitcoin price falls below $20k again

After a brief rally above $20k, the Bitcoin price has once more retraced.

The ongoing bear market has brought the price down significantly, and many market participants (particularly short-term holders) are now holding assets that are underwater.

One of the largest holders of Bitcoin, Michael Saylor, has been very vocal about the benefits that Bitcoin has for the world, and has continued to accumulate with a long-term time horizon – Microstrategy now controls 130,000 Bitcoin. Nevertheless, despite plans to issue more debt with which to accumulate Bitcoin, his optimism has not been reflected in the wider market.

Bitcoin looks very bearish short term

At the moment, the Bitcoin markets don’t look remotely bullish. “Risk-on” assets are still falling and stock markets around the world are now in recession, whilst at the same time being forced to contend with high degrees of inflation thanks to profligate spending during the during the pandemic.

Despite the inflation rate of 8.3% in the US, the most significant trend of the past few weeks in the markets has been the continued and ongoing devaluation of other fiat currencies against the US dollar.

A move to “risk-off” assets and a desire to deleverage now that higher interest rates have been announced by the Federal Reserve, the Bank of Japan, and the EU have meant that assets such as stocks and cryptocurrencies have declined in value.

Since the war in Ukraine is ongoing, and foreign exchange is as much a vector as inflation is, it appears that there is no reason why investors should suddenly be imbued with ebullience and begin to take greater and greater risks.

The Grayscale discount on Bitcoin persists

Grayscale, which controls over 3% of all the Bitcoin in existence, has its fund set up in such a way that the Bitcoin can never be sold.

Grayscale offers an attractive way for institutions to gain exposure to Bitcoin, since they take care of all the compliance and custody questions, and institutions have to jump through fewer regulatory hurdles when buying GBTC rather than spot Bitcoin.

The fact that the Bitcoin in the Grayscale fund can never be sold means that GBTC often trades at a premium or a discount to the underlying NAV.

Throughout the last bull market, GBTC usually traded at a slight premium against BTC – institutions were willing to pay a significant premium to be able to gain exposure to Bitcoin.

However, collapse of LUNA, Celsius, and others, meant that many institutions that had taken on debt to buy GBTC had their positions liquidated and tens of thousands of GBTC were sold on the market.

Failing to catch a bid, the discount of GBTC against the underlying NAV has continued to fall throughout the bear market, and now stands at 35%.

It is highly unlikely that a Bitcoin bull market will recommence without the presence of large funds and institutions and their sustained acquisitions of Bitcoin. If this arrives then it would be reflected in the closing discount of GBTC – until that happens, it is highly unlikely that to see a bull market in Bitcoin.

The next halvening is two years away

One of the most significant innovations in Bitcoin achieving digital scarcity has been the certainty of the future inflation rate.

Every four years, the block rewards that are paid to miners are cut in half. Currently, miners are able to earn 6.25 Bitcoin per block that they mine, whereas after the next halvening in 2024 they will only be earning 3.125.

These halvenings mean that there is less and less Bitcoin that can be sold on the market, since miners are being remunerated with less (in BTC terms) for every block that they mine.

This steadily decreasing inflation rate means that the hash rate can continue to rise as Bitcoin becomes scarcer and the price increases.

Halvenings are an extremely important part of Bitcoin market cycles and often trigger the next bull market. Some analysts have predicted that the price could recover before then, but it would be historically unusual to recover in any meaningful way and could quite reasonably fall another 50% in such uncertain times.

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