Markets can remain irrational for long periods of time, and this is doubly true for Bitcoin (BTC), an esoteric cryptocurrency that continues to divide the broader financial community over its usefulness and intrinsic value.
Whatever you think about Bitcoin, it is almost certain at this point that BTC’s bullish calculus has plummeted in the past few weeks as the world’s largest cryptocurrency plunged to its December 2020 price levels, aided by the complete internal collapse of Terra’s UST stablecoin.
Against this background, Bitcoin is about to undergo another test. For intelligence, the world’s number one cryptocurrency is now approaching a crucial support level against the price of gold. Keep in mind that many analysts appreciate Bitcoin’s relationship to gold, especially in light of the Store of Value’s narrative about both assets.
As can be seen from the BTCUSD/Gold chart above, Bitcoin is approaching multi-year support. If the cryptocurrency fails to maintain this level, its price is likely to undergo further correction. After all, the next major support area is at the 9-11 ratio level, which corresponds to the theoretical Bitcoin price of around $16,000, based on the lower end of this range and the current gold price around $1800.
Readers should note that bitcoin is typically down around 80 percent compared to an all-time high in bearish cycles. This relationship persisted during the last three bearish phases, and there is a high probability that the current phase of weakness may also involve similar losses, corresponding to the lows around $13,000.
Combining these two factors, we believe that Bitcoin could practically touch the $15,000 price level if it fails to maintain its nearby support in relation to gold.
Tailwinds: long-term contract holders and spot ETFs
Of course, Bitcoin also has a secular tailwind that can play an important role in stabilizing sentiment around the world’s largest cryptocurrency.
Interestingly (but not surprisingly) the 60% drop in Bitcoin did not deter HODLers. The number of bitcoins held for more than 10 years is stable at 13%. / 7 pic.twitter.com/ksibTyBOhT
– Joren Timmer (@TimmerFidelity) May 16 2022
For example, long-term Bitcoin holders – also called HODLers – are currently flat. The lack of any surrender among this hawkish group of investors is a major tailwind for the cryptocurrency.
Moreover, recent weeks have seen major developments around Bitcoin ETFs. Keep in mind that the SEC has only allowed futures-based BTC ETFs. However, these have a significant drawback – contango.
Contango is the standard in the futures market and refers to the situation in which the future price of a commodity increases as the expiry time of the contract increases. This results in an upward sloping forward curve. ETFs that invest in futures contracts are required to extend the first month’s contract as expiration approaches by buying one at the end of the contract. For example, consider a scenario in which the ETF maintains exposure for six consecutive monthly contracts. Also assume that the January contract is about to expire. Thus, the ETF will buy the July contract, with the February contract becoming the first month contract. However, due to contango, the ETF will buy the July contract at a much higher price than the spot price. Over time, if contango continues, this practice leads to higher costs and underperformance of the ETF relative to the spot price. Because of this phenomenon, futures-based bitcoin investment methods are not conducive to widespread institutional adoption.
However, Canada recently approved the Purpose Bitcoin ETF, which is now in circulation and currently has over 36,000 Bitcoins. In addition, Australia has also allowed the trading of two spot market ETFs: the 21 Stock Bitcoin ETF and the Cosmos Purpose Bitcoin Access ETF, which allows Australian investors to access the Canadian Bitcoin ETF from Purpose Investments.
These are major developments that could play an important role in facilitating greater funding around Bitcoin. However, as with almost all good things in life, there is a downside to it. As most of our readers know, we have been constantly highlighting Bitcoin’s increased correlation with US stocks in recent months, which we believe is indicative of greater institutional adoption. This correlation system prevented bitcoin from serving as a true store of value in light of the persistent inflationary impulse. However, financial trends never last, and we believe that the current high correlation regime will end once there is sufficient secular demand for Bitcoin.
This leads us to a growing headwind around the world’s leading cryptocurrency.
Bitcoin Headwinds: The Growing Role of China and the Chaos of the Stablecoin World
Our readers will remember that China unleashed a wave of crypto destabilization in 2021 when it completely banned mining of Bitcoin and other cryptocurrencies, which led to a mass exodus of mining activities to the United States and other parts of the world.
# bitcoin Mining in China is about 20% of the total hash rate
– And grow again!
Bitcoin Archive 🗄🚀🌔 (BTC_Archive) May 17 2022
Well, we have bad news for this account now. China’s role in bitcoin mining is gaining ground once again, having taken the second place in terms of hash rate in recent days.
Given Beijing’s tendency to drop the hammer on bitcoin any time the cryptocurrency begins to gain prominence in the Asian country, we believe bitcoin miners are preparing for another regulatory campaign under the auspices of the Chinese Communist Party.
On the other hand, the stablecoin world continues to grapple with the repercussions of the internal collapse of Terra’s algorithmically-modified terrestrial reservoirs. Brilliant, Fantom Stablecoin (DEI) recently became the latest stablecoin to lose its peg to the dollar. Moreover, the circulating supply of Tether (USDT) has fallen by $7 billion in recent days amid high recoveries. Stablecoins act as an engine oil in the cryptocurrency world, allowing liquidity to flow seamlessly from one corner of the market to another. Tether is the biggest player in the field. Although USDT is fully backed by reserves, there are pockets of investors and analysts who keep questioning whether Tether actually has enough reserves.
A stablecoin is a tokenized money market fund
There is no “secret sauce” in money market funds. They are the simplest investment funds
– Julian Klymochko.eth (@JulianKlymochko) May 15 2022
Under these circumstances, if Tether were to suffer a black swan event, the implications for Bitcoin and the broader crypto universe would be truly dire.