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Markets can remain irrational for long periods of time, and this is doubly true for Bitcoin (BTC), an esoteric cryptocurrency that continues to divide the wider financial community on its utility and intrinsic value.
Whatever your opinion around Bitcoin, it is a near certainty at this stage that BTC’s bullish calculus has been severely dented in the past few weeks as the world’s largest cryptocurrency fell to December 2020 price levels, helped along by the utter implosion of Terra’s UST stablecoin.
Against this backdrop, Bitcoin is about to undergo another test. To wit, the world’s premier cryptocurrency is now nearing a crucial support level against the price of gold. Bear in mind that many analysts value Bitcoin’s relationship with gold, especially in light of the store-of-value narrative around both assets.
As can be seen on the BTCUSD/Gold chart above, Bitcoin is nearing a multi-year support. If the cryptocurrency fails to hold this level, its price is likely to undergo further correction. After all, the next major support zone is located at the 9 - 11 ratio level, corresponding to a theoretical Bitcoin price of around $16,000, based on the low end of this range and the current gold price of around $1,800.
Readers should note that Bitcoin usually falls around 80 percent relative to its all-time high in bearish cycles. This relationship held during the last three bearish phases, and there is a hefty probability that the current phase of weakness might also entail similar losses, corresponding to a low of around $13,000.
Combing these two factors, we believe that Bitcoin might feasibly touch the $15,000 price level should it fail to hold its proximal support in relation to gold.
Tailwinds: Long-term Holders and Spot ETFs
Of course, Bitcoin is also enjoying secular tailwinds that can play an important role in stabilizing the sentiment around the world’s largest cryptocurrency.
It’s interesting (but not surprising) that the 60% decline in Bitcoin has not deterred the HODLers. The number of Bitcoin held for more than 10 years is holding in steady at 13%. /7 pic.twitter.com/ksibTyBOhT
— Jurrien Timmer (@TimmerFidelity) May 16, 2022
For one, long-term holders of Bitcoin – also called HODLers – are currently holding steady. The absence of any capitulation among this hardcore set of investors is a major tailwind for the cryptocurrency.
Moreover, recent weeks have seen major developments around spot Bitcoin ETFs. Bear in mind that the SEC has only permitted futures-based BTC ETFs. However, these suffer from a major flaw – contango.
Contango is the norm in the futures market and refers to a situation where the forward price of a commodity increases as contract expiration time increases. This leads to a forward curve that is upward sloping. ETFs that invest in futures have to roll over the front-month contract as it approaches expiration by buying one at the tail end. For example, consider a scenario where an ETF retains exposure to six consecutive monthly contracts. Also, assume that the January contract is nearing expiration. Consequently, the ETF would buy the July contract, with the February one becoming the front-month contract. However, due to contango, the ETF would be buying the July contract at a price that is at a substantial premium to the spot price. Over time, should contango persist, this practice leads to higher costs and ETF underperformance relative to the spot price. Due to this phenomenon, the futures-based Bitcoin investment avenues are not conducive to large-scale institutional adoption.
Nonetheless, Canada recently approved the Purpose Bitcoin ETF, which has now commenced trading and currently holds over 36,000 Bitcoins. Additionally, Australia has also allowed the trading of two spot-based ETFs: the 21 Shares Bitcoin ETF and the Cosmos Purpose Bitcoin Access ETF, which allows Australian investors access to Canada’s spot-based Bitcoin ETF from Purpose Investments.
These are major developments that can play an important role in facilitating greater financialization around Bitcoin. However, as with almost all good things in life, there is a downside to this. As most of our readers would know, we’ve been consistently highlighting Bitcoin’s growing correlation with US equities in recent months, which we believe is a function of greater institutional adoption. This correlation regime has prevented Bitcoin from acting as a true store of value in light of the ongoing inflationary impulse. Nonetheless, financial trends never last, and we do believe that the current high-correlation regime will end once enough secular demand around Bitcoin materializes.
This brings us to the growing headwinds around the world’s premier cryptocurrency.
Bitcoin Headwinds: The Growing Role of China and the Mess That Is the Stablecoin Universe
Our readers would remember that China had unleashed a crypto destabilization wave back in 2021 when it completely banned the mining of Bitcoin and other cryptocurrencies, heralding a mass migration of mining activity into the US and other parts of the world.
#Bitcoin mining in China is ~20% of total hash rate
- and growing again!
— Bitcoin Archive ��� (@BTC_Archive) May 17, 2022
Well, we have bad news on that account now. China’s role in the mining of Bitcoin is again gaining ascendancy, having clinched the second spot in terms of the hash rate in recent days.
Given Beijing’s penchant for dropping the hammer on Bitcoin at anytime the cryptocurrency begins to gain prominence in the Asian country, we do believe that Bitcoin miners are setting themselves up for another regulatory crackdown under the auspices of China’s Communist Party.
On the other front, the stablecoin universe continues to contend with the fallout from the implosion of Terra’s algorithmically adjusted UST. To wit, the Fantom stablecoin (DEI) recently became the latest stablecoin to lose its dollar peg. Moreover, Tether’s (USDT) circulating supply has slipped by $7 billion in recent days amid soaring redemptions. Stablecoins act as the engine oil in the crypto world, allowing liquidity to flow seamlessly from one corner of the market to another. Tether is by far the largest player in this sphere. Even though USDT is fully backed by reserves, there are pockets of investors and analysts who continue to question whether Tether indeed holds sufficient reserves.
A stablecoin is a tokenized money market fund
And there is no "secret sauce" in money market funds. They are the most basic of investment funds
— Julian Klymochko.eth (@JulianKlymochko) May 15, 2022
Under these conditions, if Tether were to suffer a black swan event, the implications for Bitcoin and the wider crypto universe would be truly horrific.