Notes 4/12: Bitcoin Price

Is bitcoin price getting ready for a bull run?

The cryptocurrency’s halving is a year away and analysts say its latest price run-up, up 80% this year, is a sign that it is gearing to take off in the coming year. As of this writing, bitcoin is changing hands at $29,897.08, down 1.7% from its price a day earlier.

It is difficult to predict prices with certainty for bitcoin. The cryptocurrency’s idiosyncratic price movements mostly puzzle analysts because they are not based on quantifiable metrics, either past or present.

An Absence of Data

There is little useful data in bitcoin’s price history that can be correlated or extrapolated to current conditions.

For example, the cryptocurrency mostly traded sideways, eking out meager gains of 19 percent during its 2020 halving. A contrast to this trajectory was the 2016 halving, when bitcoin price jumped by 142% during the year preceding this event.

CNBC reports that bitcoin price ballooned by 384% in the same period for the first ever halving event in 2012. The 2020 and 2016 halvings were succeeded by supercharged runs that culminated in price records for the cryptocurrency.

Will next year’s halving result in a repeat performance? It is difficult to tell.

A Repeat Performance?

With time and more investors, the cryptocurrency’s bull runs have disentangled themselves from crypto fundamentals and become increasingly aligned to factors in the mainstream economy. Thus, it was media chatter in 2017 that pushed its price to new heights. In 2021, the Federal Reserve’s easy money pandemic policy charged another run.

A correlation, even if it is inverse, with economic policy should be natural progression for an asset that touts itself as a hedge against inflation and economic churn. The problem is that it makes predictions about bitcoin’s future difficult. Previous halving events occurred in a low interest rate environment, when there was plenty of cash in the economy searching for a home.

An Economic Recession

Things are different now. In its report yesterday, the International Monetary Fund (IMF) predicted a credit crunch due to a decline in bank lending in the US economy. That development is complemented by a fall in the overall cash supply not seen since the 1930s.

An economic recession is likely for the second quarter of this year, according to some economists. The size of consumer wallets shrink, and investors retrench from risk during a recession, translating to fewer investments and less liquidity for bitcoin. Bitcoin is a global asset and that means other markets, notably those in Asia, can also pick up the slack. But conditions in China, the world’s second biggest economy, also don’t look too good.

An economic recession will be bitcoin’s first real test as an asset. If the cryptocurrency manages to survive, and thrive, during that test, then it will take off. If not, its short life will be bookended by two recessions.

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