Notes 4/1: Bitcoin Price

This past quarter will go down as one of the most eventful in bitcoin’s short history.

In the last decade, despite criticisms and regulatory threats, bitcoin price and those of the larger crypto ecosystem coasted – even thrived – thanks to low interest rates and public curiosity. The tides turned last year and continued to roil its already volatile waters during the first quarter.

A Tempestuous Quarter

Regulators commenced on an unprecedented assault on crypto’s plumbing last quarter.

Each week brought news of fresh action against companies. Banks servicing the sector were shut down or collapsed. Exchanges and cryptocurrencies came under fire from the SEC and CFTC.

No one was spared. The list of those served with legal notices and charges included top exchanges like Coinbase and Binance and Ethereum’s ether, the crypto world’s second biggest cryptocurrency by market capitalization.

Even disgraced FTX CEO Sam Bankman-Fried reentered the news cycle in the waning days of March after the Department of Justice (DoJ) slapped a thirteenth charge of bribery against him. The miasma of regulation engulfing crypto is such that it has spawned theories about an “Operation Chokepoint” orchestrated by the federal authorities to stamp crypto out of existence.

Rising Prices Amid Crackdowns

And yet, bitcoin price continued to rise.

It has skyrocketed by 70% since the start of this year, making it the cryptocurrency’s best performing quarter since 2021. It has been flirting with the $30,000 price target, a figure it last touched in June 2022, for much of the last week.

Many attribute the cryptocurrency’s price rise to a surge of investors piling into bitcoin after a series of banking crises. The failures proved that even government securities – the safest and most stable of investments – are not immune to risk.

An era of “hyperbitcoinization” is about to begin, say the cryptocurrency’s proponents. To that end, many institutional firms with bitcoin-related products have reported increases in the number of investors soliciting their services.

This narrative of bitcoin as an investing asset is bolstered by macro developments. After a year of punishing interest rate hikes, the Federal Reserve is moderating its tempo. It announced a quarter point hike during its last meeting and dot plots indicate that the agency’s officials see only one more hike before the end of this year. Theoretically, fewer increases should leave investors with more money for risky assets like Bitcoin and propel a further rise in its price.

A Different Narrative On the Ground 

On the ground, however, things looked a lot less bullish this quarter. Falling prices are a time to scoop bargains in the market. But there is not much proof of investors flocking to bitcoin markets.

Trading volumes declined and many bitcoin whales – investors holding more than 1,000 BTC in their wallets – fled its ecosystem.  The liquidity buttressing bitcoin’s previous flights to the moon shrank this quarter. Investors and funds cashed out of their positions as crypto’s legal and economic standing looked increasingly fragile.

Regulatory clarity, of the sort that the crypto ecosystem craves, remained distant. The Securities and Exchange Commission (SEC) and Commodities Futures Trading Commission (CFTC) continued to jostle with one another for the right to regulate crypto even as they sow confusion about the legal status of prominent cryptocurrencies.  

Meanwhile, the difficulty level of the algorithm used to mine bitcoin touched a new high in the last week of March. While the hash rate, or the total computing power devoted to mining the cryptocurrency, has also increased, the pace of issuance of new bitcoin has declined to match the change in liquidity conditions.

What Does the Future Hold?

Bitcoin has no intrinsic worth or real-world use cases. It also does not have quantifiable metrics, like cash flows, for investors to discount future assessments. The cryptocurrency’s price narratives are cobbled together from developments in and around its ecosystem. Those don’t look good right now.

On the macro front, a looming recession or, at least the threat of a further economic slowdown, predicted for the second quarter of this year will act as a headwind to bitcoin price’s perceived revival. There are no tailwinds to counter it, however.

Court cases against a slew of crypto entities are still pending. Bitcoin’s evolution to being a mechanism for daily transactions is still years away from being realized. Its network continues to struggle with high fees and slow transaction times.

A Tethered Bitcoin

A further complication is the increasing dominance of controversial stablecoin Tether amid the chaos afflicting crypto. The stablecoin, which is bitcoin’s biggest trading pair at Binance – the world’s top cryptocurrency exchange by trading volume, rolled out fresh supplies of its tokens to boost its market capitalization this quarter. It accounts for roughly 60% share of the stablecoin market, according to recent reports.

But it remains as opaque and unregulated as ever. The composition of its reserves is a mystery and there is enough in its murky past for regulators to obliterate it out of existence.

Even as unregulated entities like Tether gain ground in crypto, their regulated counterparts are being wiped out of the picture.

USDC, a regulated stablecoin, lost its bearings and, consequently, its market capitalization after a run on Silicon Valley Bank, the holder of USDC’s reserves. Binance’s USD (BUSD) was the third biggest trading pair against Bitcoin at Binance and provided a regulated counterpoint to Tether at the beginning of this quarter. It fell to the regulatory scythe in January and is being sunset

TrueUSD (TUSD), another unregulated stablecoin, has replaced BUSD. Like Tether, it trades in obfuscations and generic statements about its regulatory status and reserves. The BTC/TUSD pair has become the second biggest trading pair for the cryptocurrency now.

A concerted effort is underway to identify and fill up pockets of risk and fortify them with government backing In mainstream markets. The opposite is happening in bitcoin markets. Unregulated entities now dominate trades involving the cryptocurrency and, consequently, multiply the risk associated with its trading. That is not a good sign for its future price action.

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