20% drop!? - Lets zoom out on Bitcoin

Crypto-Mastermind summary:

This artice addresses the criticism of Bitcoin's high volatility. It shows what price stability depends on and why Bitcoin is subject to so many fluctuations.
It takes a look at the long-term development of Bitcoin. It examines the different market phases and the problem of the current banking policy.
And it describes events in the background, that the BTC-price does not show directly.

In the past, Bitcoin has repeatedly been a volatile asset. This volatility has been a major criticism of many banks, such as "Deutsche Bank". Due to its high volatility, Bitcoin would be too uncertain an investment for investors. Also currently the price of BTC has temporarily fallen from the $12,000 price level back down to about $9,800. But how does the price development of Bitcoin look in the long run and what happens behind the scenes?

Is Bitcoin too volatile?

Critics have repeatedly criticized cryptocurrencies like Bitcoin to this effect. Money, which can be worth 20% less tomorrow than today, could not become generally accepted on a long-term basis. Therefore Bitcoin for example is often negatively evaluated in comparison to gold.

A substantial factor for stable assets is on the one hand the market capitalization. Today, Bitcoin has a market cap of approximately $190 billion. In comparison, the total market volume of gold is currently around $9 trillion. This is more than 45 times the Bitcoin capitalization. Most other known cryptocurrencies besides Bitcoin, Ethereum and Ripple are in the range of a few billion $.

The price of assets like Bitcoin is based on current supply and demand. Higher demand with less supply means a higher price and vice versa. This also explains the high volatility. Great greed and demand would drive up the price enormously, while fear leads to a drop. Of course, assets with a much higher market capitalization like gold are also affected by these rules. But the higher the market capitalization, the less volatile the respective asset usually becomes.

A long-termed view on BTC

But what does the situation look like if we take a long-term view of Bitcoin? At the 'birth' of Bitcoin in 2008, its value was a few dollar cents. Since then, the cryptocurrency has gone through a series of so-called 'bull markets' and years of subsequent 'consolidations'. The prices in the bull markets have risen by more than a thousand percent so far. During the consolidation phases, prices often fell by more than 80%.

The big bull runs took place astonishingly similarly in the period of 1-2 years after the so-called 'Bitcoin-halvings'. In these halvings, the block reward, that miners receive for validating transactions in the Bitcoin network is halved. And thus its potential inflation. Basically, this is the opposite of the current bank policy, which tries to stabilize the economy with a gigantic flood of money.

Higher demand with less inflation (= less supply) inevitably leads to higher prices. And higher inflation with less demand leads to devaluation. The well-known stock-to-flow model tries to represent this relationship between price and deflation for assets like gold or bitcoin. This model predicted a strong long-term increase in the price of Bitcoin. Up to now, the cryptocurrency at least in its core corresponded to this model.

The bank policy is obviously a large reason, why particularly since the Corona crisis investors such as Robert Kiyosaki or George Ball flee into Bitcoin:

"The government cannot stimulate the markets forever. The flood of liquidity will end. ... And thus Bitcoin or another cryptocurrency will become very attractive.“

A large money flight into the limited cryptocurrency would lead to a gigantic price increase. And the more capital flows on a long-term basis into Bitcoin, the more stable becomes inevitably also the price. Until then however still another far way lies before Bitcoin.

Despite the high volatility, at the current price of around $10,300 at the time of writing, one would still be in profit at just under 50% if one had invested in Bitcoin continuously with the cost-average method since the all-time high of $20,000 in late 2017/early 2018.

What's happening in the background?

Often the things that happen in the background are more interesting than the temporary price fluctuations. What has been happening in the Bitcoin-network over the last few months? Well for one thing, we had the Bitcoin halving in May 2020. But other developments are also very interesting.

In previous articles we already mentioned developments such as the accumulation of BTC-whales (major investors). Other positive signs were the profit factor of over 95% for UTXO's and the increasing number of active BTC addresses.

Also worth mentioning is the decreasing number of Bitcoin located on Exchanges. This shows, that more and more BTC are transferred to external wallets. It could be concluded from this, that there is more willingness, to hold Bitcoin in the long term than to sell. The supply of stablecoins, on the other hand, which enable quick and easy transactions in Bitcoin, has risen to unprecedented levels in recent months.

After a temporary price drop and a related miner capitulation, the hashrate has shot up again to new all-time highs. The development of the 'Puell multiple' displayed by Glassnode is also interesting. Here the daily Bitcoin output is calculated by that of the annual average. In the past, particularly low values indicated a kind of 'bottom' from which Bitcoin experienced massive price increases.

As already shown in past articles also more in former times critically thinking investors changed their opinion to cryptocurrencies. So did also the 'Deutsche Bank', which was mentioned at the beginning. And continuously more large institutionals and also smaller companies put on money in Bitcoin. Just recently another company published investments in BTC. The Canadian software company Snappa announced, that it's holding 40% of its reserves in BTC. The long-term setting is:

"We Are Not Considering Selling Bitcoin."

Last words

One reason for the currently declining Bitcoin dominance could also be the DeFi boom. Many new investors come directly over DeFi in connection with the crypto-world and thus mainly with Ethereum. Also we still could see in the last months, that Bitcoin is affected by price movements at the stock market. It will show up whether the cryptocurrency can detach itself with the time from this correlation.

Even though Bitcoin is still a volatile asset, the data provided give a very good and stable overall picture. Of course fluctuations are expected further in the near future. But the more money flows into Bitcoin, the more likely it is, that it will get more stability.

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