Compile | Wu Shuo Blockchain
NYDIG is an institution specializing in Bitcoin financial services, including savings accounts, trading brokers, 401(k) plans, and more. Its latest financing round has brought its valuation close to $7 billion.
Highlights at a glance
- Bitcoin prices have been relatively low since the second quarter, and this article reviews past cycles to understand what might happen next with Bitcoin.
- Regulatory activity has been a hot topic, but this does not involve Bitcoin, and the results of recent cases may take several years to become known.
- When looking for catalysts to drive future prices, past cycles have shown that issues such as unresolved pressures on the banking system need to calm down before the market stabilizes.
The Road Ahead
A lot has changed in the crypto asset space since the end of the first quarter. While Bitcoin received significant returns in the first quarter due to a loss of confidence in the US banking system, the situation reversed in the second quarter. The main reason for the poor market performance is the action taken by financial regulators on the crypto asset industry. Although Bitcoin has risen 53.6% from the beginning of the year to date, 2023 has been mixed so far. What has frustrated some Bitcoin investors is that unlike Bitcoin’s outstanding performance in the first quarter, Bitcoin’s performance in the second quarter has been inferior to other risk assets such as stocks. Against this background, we believe that reviewing past cycles and how they affect our views on Bitcoin’s future performance may be helpful. Past performance does not guarantee future results, but unlike other technological revolutions we have studied or experienced, this one seems to show a clearer repeating pattern.
Regulatory Shadow
There is no doubt that the most important event in the second quarter revolved around US financial regulators’ actions against some of the industry’s largest service providers. We believe that the SEC’s case against Coinbase and the CFTC and SEC’s case against Binance are the most important, although these cases do not involve Bitcoin and do not question its regulatory status. And these cases emphasize a fact: Bitcoin is the crypto asset with the greatest regulatory clarity, and the classification of many other crypto assets is still in doubt. These cases may take several years to resolve, and we will not know their impact on the industry unless there is new legislation. For example, Ripple’s lawsuit with the SEC has been going on for two and a half years and is still unresolved. While there may be some announcements about this case, appeals could continue to prolong the final definitive result. We do not know what actions regulators or law enforcement agencies may take, so our recommendation is to observe the market’s reaction to news to see which factors are already priced in. For example, after the news of the SEC’s lawsuit against Coinbase was released, the price of Bitcoin initially fell slightly, then recovered the entire decline and rose, which was a signal to us that investors’ positions had already taken this news into account. A very old market saying may be very applicable here: “Climbing the wall of worry.”
Shadows of 2019
The two-faced performance seen so far until 2023 is reminiscent of 2019. For those who have just entered the industry, the performance in 2018 was very similar to that of 2022, with a significant pullback after the bull market peak in 2017 and 2021. The price hit bottom in December 2018, at around $3,200, and then quickly rose in the first half of 2019, approaching $14,000 by the end of June. From the low point to the high point in June, Bitcoin rose 328%. At first, there was no fundamental reason for the rise in Bitcoin, but then there was a theory that revolved around the desire of Chinese investors to hedge through Bitcoin due to the depreciation of the renminbi. However, the situation in the second half of 2019 was completely different from that in the first half. Bitcoin fell by nearly 50%, to $7,100. Although Bitcoin still rose by 90.9% in 2019, the process of reaching this point was not smooth. However, the most important thing about 2019, and what we believe applies to Bitcoin today, is that it marked the first year of the new bull market that lasted until 2021.
Re-evaluating Bitcoin
After experiencing pullbacks in 2014 and 2018, cryptocurrency investors rallied around Bitcoin as the most market-friendly cryptocurrency. Ethereum did not yet exist in 2014, and was still hampered by the fallout from ICOs in 2018, while many other altcoins in 2014 and 2018 still had questionable practicality. As such, Bitcoin’s dominance, or its share of the overall industry market cap, increased during both the pullback period when altcoins fell further and the early and middle stages of the subsequent bull market cycle. It was only in the later stages of the bull market, or the most speculative part, that Bitcoin began to cede dominance to higher-beta altcoins. We see this phenomenon again in this cycle, but the situation may be different. Due to regulatory uncertainty facing many altcoins (which Bitcoin does not have), Bitcoin may occupy a greater share of the industry this time around.
Search and social media frontlines are quiet
The cryptocurrency community is a highly social group, with much of the conversation taking place on social media platforms such as Twitter. The number of mentions of the word “bitcoin” on these platforms is often an indicator of market sentiment, with mentions and prices being positively correlated. Google searches are also like this, with search volumes being positively correlated with prices. Google Trends, not an absolute measure of search volume, but an index where 100 represents the highest figure historically, currently shows a significant decline in “bitcoin” search volume. The volume has not fallen to the level of the previous cycle, which may mean that things may still need to calm down, or we may have reached a higher bottom than before. The peak in search volume has never reached the peak of the previous cycle, but this may simply mean that the public has more general awareness of this asset. In any case, if we are to develop a positive strategy based on this information, it would be to sell when bitcoin becomes a hot topic of discussion and search, and to buy when it is not being talked about or searched for.
Bank crisis postponed, but may not be over yet
It has been a month and a half since the major event of the last regional bank crisis, the closure of First Republic Bank and its assets being acquired by JPMorgan Chase, which occurred on May 1, just as the total amount of credit tools supported by the Federal Reserve System (Fed) decreased significantly, mainly through credit from the discount window and newly established bank term financing facility, but banks continued to increase their drawdown of support measures provided by the Fed. The discussion of the health of regional banks now seems to have temporarily subsided, but comments from Federal Reserve Chairman Powell this week indicate that we will still face future interest rate hikes, which have been the root cause of regional bank crises.
Final Thoughts
Before the market stabilizes, both regulation and social aspects may need to calm down. The bottom of the market is usually formed in indifference rather than hatred, and considering some of the indicators we emphasize, the market seems to be moving in that direction. The situation in 2023 is becoming very similar to that of 2019, which was the first year of a three-year bull market that peaked in 2021. Although the recent events of the cycle look very different from before, the shape and duration of the cycle continue to have striking similarities. Again, it is emphasized that this situation is not guaranteed to happen in the future.
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