Notes 3/17: Bitcoin Price

St. Patrick’s day is a day of celebration and revelry. And so it is for the premiere cryptocurrency. Bitcoin price is pumping again.

The cryptocurrency went past the $27,000 mark earlier this morning before retracing some of those gains. As of this writing, it is at $26,407.09, up by more than 6.5% from its price a day ago.

A Mysterious Price Rise  

Bitcoin’s current price movements remain a mystery because it has occurred amid a challenging set of circumstances.

At the macro level, interest rates continue to weigh on its future trajectory. An almost certain moderation in rates – to quarter point hikes instead of a half percent hike – by the Federal Reserve was complicated by economic data last week that strengthened the case for a half percent point hike. A half percent hike in interest rates translates to a difficult environment for risky assets like bitcoin because it diverts investment funds away towards government securities.

Then, a series of rapid bank failures tilted the argument back towards a moderation, or a possible pause in hikes, in interest rates to assess “demand destruction” due to a liquidity crisis in the banking sector. Right now, 64% of traders are betting on a target Fed funds interest rate of between 4.75% to 5% after next week’s FOMC meeting, indicating a quarter point hike.    

Low Liquidity and Choke Points

Bitcoin’s technical indicators are also showing mixed signals. The total hash rate is down. That means there is less computing power to support the network. But the difficulty level of its algorithm is up, meaning it is more difficult to mine a bitcoin. A constrained supply of new bitcoin coupled with increased demand should be good for bitcoin price.

But regulators have increased their action against crypto businesses. Even the world’s second biggest crypto by market cap, ether, hasn’t been spared. A ‘supposed’ choke point operation that is throttling banking access to crypto companies has affected operations at crypto businesses. It is also weighing on bitcoin price and broader crypto markets.

One could chalk down bitcoin’s current price movements to resiliency and faith of investors in the cryptocurrency. But they are running scared. Whales, of those with holdings of bitcoin greater than 1,000 bitcoins are departing from the network according to data from Glassnode. According to asset management firm ByteTree Asset Management, the number of bitcoin held in funds fell to a 17-month low of $409 million.

Meanwhile, liquidations at addresses holding bitcoin has increased in the last week. The number of liquidations of short positions in bitcoin peaked three days ago at $178.482 million, according to data from Coinglass, and is currently sitting at $104.36 million. Trader confidence on the future of bitcoin has collapsed from $123.865 million in long positions to $47.13 million at the same time.

An Ominous Backdrop  

Even as traders flee crypto, an ominous backdrop of rising dominance for controversial stablecoin Tether is forming in its markets. While other stablecoins like USDC and BUSD are caught up in regulatory and peg problems, Tether’s market capitalization continues to jump.  

The problem with this development is that the stablecoin functions outside the pale of regulators worldwide. It is also the most traded cryptocurrency at exchanges that regularly pump trading volumes. Along with Binance – the world’s biggest exchange by trading volume, Tether has been accused of inflating bitcoin price by calibrating its supply.

A recent series of articles at the Wall Street Journal have catalogued how the stablecoin has conducted fraud across its ecosystem. More scrutiny of its operations will likely bring new infractions to light. Given its dominance in crypto, Tether’s fall could be catastrophic for crypto.

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