Will bitcoin price continue its path to revival in February?

The cryptocurrency’s price movement in the past month has chuffed its enthusiasts and traders, who are optimistic this might be the start of another bull run that culminates in a price record. They point to similar previous instances, when the cryptocurrency was left for dead but seemingly resuscitated itself.

But they forget that the circumstances for history to repeat itself this time around are different.      

Technicals And Fundamentals

After a prolonged period of stagnation last year, Bitcoin price jumped by 40% in January. Bitcoin futures are in contango, meaning traders are betting that its prices in the future will be higher than they are today.

The narrative of optimism around Bitcoin and its price relies on a combination of fundamental and technical developments.  

The cryptocurrency’s technical indicators look primed for an increase in prices. The difficulty level of its algorithm remains constant even as the network hash rate, or the amount of computing power devoted to mining the cryptocurrency, has increased.

Taken together, the developments should make it easier to mine more bitcoin. Some are pointing to the innovations in Bitcoin’s Lightning network that make its payment system more efficient as enticements for investors to bet on the cryptocurrency.

The story of its fundamental indicators relates to interest rate action. The Federal Reserve began moderating its aggressive interest rate regime during its last meeting and traders are expecting a continuation at the FOMC meeting next week. A moderate interest rate hike would leave more money on the table for both institutional and retail investors. Some of it could flow towards Bitcoin, say traders.   

A Flawed Narrative

Through its volatile spikes and troughs, bitcoin price has consistently defied sensible explanations. It seems to shrug off major crises and adverse regulatory developments in its ecosystem to move upwards. At the same time, it reacts to the slightest macro provocation even as it advertises itself as a hedge against developments in the mainstream economy.

It will continue to behave in a similar fashion in the future. Technical advancements in its ecosystem are germane to its price only insofar as they bring in profits and revenues. Bitcoin is decentralized and does not have an income statement or balance sheet. How do investors then profit from an investment into its ecosystem?

The other narrative of fundamentals affecting its price is also flawed. When the economy does well, and everyone has more cash in their pockets, crypto booms. Recent economic data points to just such a situation.

Consumers are spending less even as inflation is waning. That means an overheated economy is cooling. Look closely, however, and there are red flags. The savings rate for Americans has declined and their credit card balances have increased. They might become wary of putting money from credit cards into risky assets like bitcoin, when there are other regulated options available.

That leaves the burden of propping up bitcoin price with institutional investors. But they are a skittish lot. CoinDesk claims that institutional investors are pouring money into bitcoin investment products. That might be false hope. According to CoinShares, bitcoin shorts numbers have gone up in recent times and American institutions are leading the charge, meaning investors expect bitcoin price to fall in the coming days.

A Long Trek  

The throughline to these narratives is a growing instability in the cryptocurrency ecosystem. While it has always made news, crypto’s liquidity problems confined it to the backwaters of mainstream finance.

The scale and numbers associated with scandals in the last couple of months has made front page headlines. They have intensified scrutiny of the crypto ecosystem. There’s talk of another shoe, a big one, falling in the coming months.

Regulatory scrutiny could also turn into an existential threat for crypto tokens and companies. Already many crypto companies and tokens face the threat of being regulated out of existence due to action by authorities. All of this means that the road to another bull run for bitcoin, if it does occur, might be a long way off.