More than a decade has passed since its launch in 2009. That’s how long it took to convince people that a virtual asset can have a value that isn’t backed by a physical asset, government, or central bank.
This conviction period is reflected in the total market capitalization of the cryptocurrency contrary. Bitcoin is and was the sun of the crypto solar system around which all other digital assets revolve.
market capitalization the cryptocurrency
At one point in November 2021, the total cryptocurrency market cap was nearly $3 trillion.
As shown in the chart above, the tipping point happened in 2018. Each new technology tends to follow a similar pattern. The first wave of early adopters keep the interest alive, which is then picked up by corporations and later by institutional investors.
When the latter happens, they amplify the buy-in signal, effectively legitimizing untested technology for those still unsure about taking the plunge.
This is exactly what happened to Bitcoin when it was the Blockchaintechnology popularized. Initially, BTC was very difficult to access. Today, however, a number of different bitcoinWallet-Styles available that make accessing the technology easier and more convenient. In a similar evolutionary light, venture capital (VC) funds have started to flow into blockchain projects on a large scale.
Overall, VCs have invested in the crypto space in 2021. In the first quarter of 2022, that number reached $10 billion.
In turn, such activities created a feedback loop between retail and institutional investors. The past two years have been particularly active as people used crypto volatility to land on the upside. U.S. monetary policy has continued to fuel exploration of new crypto frontiers as fears mount that pumping trillions into the economy will not end well.
Fast forward to 2022 and we have predictable results. A massive increase in the money supply triggered a 40-year high CPI inflation rate of 8.3%.
Equally predictably, the Federal Reserve is attempting to reverse the damage with monetary tightening. Specifically, the Fed is attempting to cool down an overheated economy by shrinking its balance sheet.
This is bad news for the stock market, which has recently become comfortable with cheap liquidity through borrowing. However, it turns out that this is bad news for the crypto market as well.
Relationship between Bitcoin and the stock market
It is safe to say that Bitcoin has evolved from its original vision into another project. The pseudonym Satoshi Nakamoto created Bitcoin as a “peer-to-peer electronic cash system” primarily to counter the central bank. He made this clear by embedding the following message in Bitcoin’s Genesis block:
“The Times 03/Jan/2009 Chancellor on brink of second bank bailout.”
But as more money poured into Bitcoin from Wall Street and Wall Street-related sources, that transformed Bitcoin into another animal. Instead of an electronic cash system or even a hedge against inflation Bitcoin has evolved into a risky, stock-like asset.
BTC – SPY correlation chart
The closer the value is to 1, the tighter the correlation.
Consequently, as the Fed’s tightening policy affects the stock market’s access to cheap credit, Bitcoin is also taking a hit from the central bank.
Additionally, with a market cap of $38.3 trillion representing the richest companies with the deepest pockets, the S&P 500 has a much larger psychological cushion than novelty bitcoin, which currently has a market cap of around $600 billion at the time of writing this article. As a result, the decline for bitcoin is much steeper.
One-month bitcoin price action versus the S&P 500 Index
Bitcoin is down 56% from its all-time high in November. This happened during a period of accelerating inflation. That said, the world saw the USD devaluation in real time, no doubt about it.
However, the Fed’s tightening policy prevailed against this perception. What does that mean for Bitcoin and the crypto market in the future? Has bitcoin really failed as an inflation hedge as it seems?
From Decentralized P2P Money to Equity-Like Asset: Can Bitcoin Redeem Itself?
You may have noticed that people tend to speak of assets as self-contained entities. Only in the title above is the question “Can Bitcoin redeem itself”. As elegant as this concise presentation may be, it obscures reality.
Bitcoin is not a thing in itself, but a signal-receiving platform. Institutional investors flooded them with their signals. The Fed, in turn, also sent out signals of its own. Likewise, retail investors absorbed their signals into a panic sell-off and exited the crypto market at a loss.
p dir=”ltr”>Those investors who are more resilient to signals will remain and reset bitcoin as an asset held by long-term holders while short-term holders exit the market. This is particularly evident among bitcoin miners, as their accumulation activity tends to increase when the price of BTC falls.
Bitcoin: Miner In-house Flow (Total) – All miners
This has also been noted by Glassnode, whose data suggests that short-term holders have been mostly down since the summer of 2021 BTC have sold while long-term holders have consistently bought BTC.
Additionally, long-term holders make up a notable percentage of BTC holders, as 66% of Bitcoin’s total supply hasn’t moved in the last year.
It’s still so early for Bitcoin. Although it was initially envisioned as a new form of digital cash and touted as an inflation hedge for digital gold, its correlation with the S&P 500 suggests investors currently view it as a tech stock.
However, on-chain data suggests that long-term holders see otherwise.
Source: Crypto News Deutsch