Is Bitcoin Now a Smart Investment for Your Portfolio (Cryptocurrency:BTC-USD) – Looking for Alpha
On January 20, 2023, the price of Bitcoin (BTC-USD) broke through the bearish trend that has been observed for fourteen months, bringing a touch of optimism to the crypto market. Bitcoin has been consolidating in the $21,500-$25,300 range since late January, signaling the first significant signs of market stabilization as the Fed continues to raise interest rates and rising geopolitical tensions around the world due to a Chinese balloon entering US space and increased hostilities between Russia and Ukraine.
This article will present the factors that still exert downward pressure on the price of coins and do not allow to talk about a complete change from a bearish trend to a bullish trend. On the other hand, more and more signals in the market point to the start of a recovery in investment rates in cryptocurrencies after the devastating news of hacker attacks on crypto exchanges and even the bankruptcy of some of them in the second half of 2022.
Rising costs in the Bitcoin network
One of the first factors beginning to point to the crypto industry’s transition from a bearish cycle to a bullish cycle is the rise in average transaction fees across the Bitcoin network. The main reason for the increase in commissions is the increase in the number of transactions in the Bitcoin network, and as a result, competition for inclusion in blocks is increasing. Consequently, cryptominers are starting to select higher cost transactions to maximize their revenue for their services.
After reaching a multi-year high in November 2021, the price of BTC was in a bearish trend until January 16, 2023. At the same time, fee income remained extremely low for just four months after Bitcoin’s price hit $65,000 per coin. After many market participants became disillusioned with cryptocurrencies and apathy reigned, relatively low prices attracted new traders and investors who took advantage of the situation.
Right now, we see price momentum moving above one, indicating an increase in demand for block space. As a result, this not only leads to a recovery in miner profits, but may also confirm the rise of hope among members of the crypto community with the subsequent end of the crypto winter.
The balance of crypto exchanges continues to decline
In recent quarters, the cryptocurrency industry has been inundated with news of various exchange hacks. On October 6, 2022there were reports on many sources of information that hackers successfully hacked Binance’s blockchain and stole $566 million worth of BNB, Ethereum (ETH-USD), Fantom (FTM-USD), Polygon (MATIC-USD) and other coins.
And in mid-January 2023, FTX (FTT-USD) stated in a report to creditors that $415 million in digital assets had been stolen as a result of hacking attacks. And as a result, many investors began to become more conservative about holding Bitcoins, Litecoins (LTC-USD), and other coins, and turned to more secure offline crypto wallets. In addition, confidence continues to decline in exchanges that were actively used to transact with coins until Q3 2022, and at this point many of their clients prefer to keep their wealth under control.
On November 22, 2022, the total number of Bitcoins held by Coinbase (COIN) was approximately 531,242, and the following day saw a significant withdrawal of over 44,000 BTC due to the spread of negative reports of FTX’s bankruptcy. On a larger scale, there is a trend to reduce coin ownership by investors on a crypto exchange’s balance sheet. So since the beginning of 2022, Coinbase’s customers have withdrawn just under 195,000 Bitcoins, adding additional strain to the financial position of one of the largest exchanges in the world.
In addition, one of the additional reasons for Coinbase’s balance reduction may be investors’ desire to make a profit on their investments as a result of Bitcoin’s price increase of just over 40% in the past month and a half. Overall, the company posted an operating loss of $474.5 million in the fourth quarter of 2022, in stark contrast to the last three months of 2021, which saw Coinbase record its highest operating income ever. The continued downward trend in operating income from quarter to quarter is a red flag and could be a major concern for investors and the entire crypto community.
In addition, Binance’s partner in issuing Binance USD, Paxos, is under fire. The U.S. Securities and Exchange Commission has begun discussions with Paxos about the need to change the legal status of this stablecoin, and the regulator is also considering taking action against the company. In the event that Binance USD (BUSD-USD) is recognized as a security, this will open Pandora’s box, allowing many other stablecoins to gain this status, leading to more regulation and a loss of interest among traders and investors in the crypto -industry. You can already see how Bitcoin’s balance at Binance (BNB-USD) is down 10.6% from its peak in Q4 2022.
Fed rate hike
At the meeting of the Federal Open Market Committee, which was held from January 31 to February 1, the majority of participants agreed that it is necessary to raise interest rates by 0.25%, which is in line with the expectations of investors and traders. The negative moment, however, was the information that several participants in the meeting were in favor of a rate hike of 0.5%, which could therefore lead to higher borrowing costs and thus a slowdown in economic growth. One of the possible reasons for some members of the FOMC’s desire to tighten monetary policy and thereby raise key interest rates by 50 basis points may be that the pace of the inflation slowdown is slowing and therefore it is necessary to act more aggressively. to act. to meet the inflation target of 2%. For example, annual inflation in the United States was 6.41% on January 31, 2023, which is only 0.04% lower than the previous month.
If the Fed raises rates by 0.5%, it will strengthen the US dollar and increase investment interest in US Treasuries (US10Y) (US2Y) compared to Bitcoin, which is trying to get out of the bearish cycle.
After a 14-month bear market that caused frustration and apathy for various digital assets among members of the crypto community, the first significant signs of recovery finally appeared on the horizon.
During the bearish period, there has been a redistribution of Bitcoin ownership from investors who are less disciplined and less confident about ownership to those who clearly understand the value of cryptocurrencies in a rapidly evolving digital world. In recent weeks, the number of transactions has increased significantly, which has positively affected miners’ profits. In the first quarter of 2023, two major players in the crypto industry, Riot Platforms (RIOT) and Hut 8 Mining (HUT), announced an increase in Bitcoin mining. Given the increased price of cryptocurrencies and the rise in the number of mining equipment, it can be said with great confidence that the largest Bitcoin mining companies have successfully passed the test of the strength of their financial position of Mr. have endured.
According to a report from Fidelity Digital Assets, a subsidiary of Fidelity Investments, European and US institutional investors have reported an improvement in the perception of cryptocurrencies and continue to invest in various digital assets. In my estimation, there will be a tightening of regulation by various government agencies in 2023, which will, on the one hand, reduce the appetite of speculative short-term traders, but on the other hand, attract the attention of long-term and more conservative investors. investors. So according to ARK Invest’s optimistic forecast, the price of Bitcoin could reach $1.48 million by 2030, but with a more conservative estimate, Katie Wood’s (ARKK) company could reach the price of the most popular cryptocurrency at $258,500. which is significantly higher than current values. In addition, many institutional market participants continue to reduce their interest in commodity mastodons such as Exxon Mobil (XOM), Occidental Petroleum (OXY), and Chevron Corporation (CVX) and are beginning to increase their appetite for riskier assets.
Finally, I would like to note that according to my model, I expect a correction in the price of Bitcoin in the next two weeks due to the strengthening of the US dollar against other currencies during the Fed rate hike and also the growing tensions between the government of US President Joe Biden and the Chinese government. After that can come the accumulation phase, which I will use to buy shares in Bitcoin mining companies and ETFs involved in digital wealth management.
Editor’s Note: This article discusses one or more securities that are not traded on any major U.S. exchange. Be aware of the risks associated with these stocks.
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