Notes 4/11: Bitcoin and Ether Prices

Bitcoin price made short work of touching $30,000, sweeping past the mark in less than 24 hours from yesterday. As of this writing, it is changing hands at $30,237, up more than 6.2% from its price a day earlier. Traders are predicting a further increase into the mid-to-high 30’s for the cryptocurrency.

Per usual, it is impossible to identify a catalyst for that price surge. Open interest in the cryptocurrency’s derivatives has risen in the last week, according to many reports. But open interest is a double-edged sword that can run both ways – long and short. Data from Coinglass indicates that more long positions in bitcoin have been liquidated this month as compared to short ones at unregulated derivatives exchanges.

The cryptocurrency’s network’s hash rate – the number of systems employed to mint new coins – rose slightly in the last week in conjunction with an increase in the difficulty of algorithms used to mine new bitcoin.   

A Correlation with Gold  

Bitcoin’s identity crisis – Is it a store of value or a medium of payment? – means it is a destitute asset that latches onto prevailing narratives to justify its price movements. The latest such narrative concerns the cryptocurrency’s price correlation with those for gold.

Gold has traditionally functioned as a haven during times of economic distress. Its prices rose by 9.1% in the first quarter of this year, amid rising uncertainty about Fed policy. An imminent recession, as reflected in economic data, should further drive traders towards the precious metal. Bitcoin price is hoping to move along in its slipstream.

According to a CoinDesk chart this morning, bitcoin’s correlation with gold has topped 50% this year. “In other words, bitcoin’s immediate prospects are more closely tied to gold,” the publication writes.

Problematic Trading Volumes

That correlation is not one of the maturity or magnitude of its ecosystem, however. Gold markets are well-developed and, to a certain extent, regulated. Bitcoin’s markets are nascent and unregulated. Nowhere is this more evident than in the cryptocurrency’s trading volumes.

As of this writing, slightly more than 21% of the crypto’s trading occurs against three dubious coins – Tether, Binance’s stablecoin BUSD, and TrueUSD (TUSD). Two out of those three trading pairs have been the subject of regulatory action while the third one is full of red flags. Those trading volumes also occur at Binance – a venue that was recently charged by the CFTC and is infamous for employing questionable tactics, such as wash trading, to inflate and manipulate prices.  

It may be easy to make bitcoin price track gold prices in the short run. But the cryptocurrency will take a long time, if it does ever, to become a precious commodity.

Ether Prices and Shapella Upgrade

Ether Prices, meanwhile, continue to prevaricate in the $1900 price range. The world’s second biggest cryptocurrency by market capitalization is on a mission to become ultrasound money and a Wall Street asset. But traders don’t seem to be buying either moniker. According to research firm Kaiko, liquidity for ether has fallen by 40% in recent weeks.

The decline in liquidity is puzzling because an upgrade to its network tomorrow will enable withdrawals of staked ether. As of this writing, 18 million ether is staked at validators to bolster the security of Ethereum’s network. That staked ether has been earning yields comparable to those currently offered by government securities.   

Withdrawals will enable investors, some of whom have parked their ether at validators since 2020, to sell their tokens in crypto markets. It could induce selling pressure on the token. To prevent this, Ethereum’s developers have staggered the withdrawal process. Thus, not more than 1800 out of the currently 562,792 validators in Ethereum’s network will be allowed to exit their holdings in a single day.

An Inefficient Design

While it ameliorates selling pressure on the token, the process’s design also disincentivizes investors from future staking through tight control on withdrawal timeframes.

How do you expect to guarantee liquidity, and become a Wall Street asset, after placing restrictions on withdrawals? Crypto enthusiasts criticize the absence of instant settlement in traditional markets. In this case, the lengthening queue, in some cases as long as a month, to withdraw staked ether is a sign that crypto is equally, if not more, inefficient.

Will investors come calling for an unregulated token with a difficult withdrawal process and one that offers yields comparable to those for government securities? It is doubtful.

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