Many Bitcoin proponents have preached that the asset could reach as much as $100,000 or more in 2021. Now that Bitcoin has dropped down as low as $30,000, a solid dose of fear has entered the market. Is a sustained bull market still realistic after the recent slump?
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Fear, Uncertainty and Doubt
The volatility in Bitcoin’s price from misguided news headlines and Elon Musk’s Twitter escapades shows how little most understand the space. Most recently, headlines read that the FBI found the private key of the Colonial Pipeline hackers, leading many to think that Bitcoin itself was hacked.
In reality, the FBI found the wallet because it was stored online or on an exchange. In other words, the wallet that had the Bitcoin from Colonial Pipeline used poor security or tried to sell it on a centralized exchange that requires KYC (know your customer), making it easy for the FBI to gain access.
In the case of Tesla and Elon Musk, a misunderstanding of Bitcoin mining energy use caused them to no longer accept Bitcoin for their vehicles. The price subsequently dropped by a significant amount. Many Bitcoin enthusiasts would say that no company or individual has the power to sway the price so heavily, but the correlation is too close to ignore.
What Musk and Tesla missed was that studies have shown that 76% of miners use some degree of renewable energy in their facilities and that 39% of all mining is done entirely with renewables. On top of that, renewables are becoming cheaper and more mainstream, meaning that these numbers will only increase with time.
While Tesla blamed Bitcoin’s energy use for its decision, there could have been an ulterior motive. Many have pointed out that Tesla gets massive amounts of its profit from clean energy credits. These credits must be applied for and then approved by the Environmental Protection Agency.
In the past, the EPA has clashed with New York state’s Department of Environmental Conservation over Bitcoin mining in the state, suggesting that the agency may not be too fond of the practice.
Most of the news in the last month has been primarily negative and also confused, creating fear in the market, leading some to sell.
What Do the Charts Say?
While Bitcoin’s price has dropped following confusion among the media and investors, simple supply and demand could still factor into Bitcoin’s price in the coming months.
One of the most popular, and so far accurate, ways to track Bitcoin’s price has been its stock-to-flow ratio. This means the currently available supply, or amount of Bitcoin currently in the market, divided by the supply being generated, or the amount of Bitcoin generated through mining.
The amount of Bitcoin rewarded to miners is reduced by half every four years, lowering the incoming supply and availability of Bitcoin on exchanges, making them harder to find. So far, Bitcoin’s price has reflected this increasing scarcity over time, but recent uncertainty from the news has caused a deviation from this path.
Bitcoin’s stock-to-flow ratio suggests that it should reach about $100,000 by around mid-August, but while the price generally follows this trend, it does not always follow its line exactly.
In the past, it has seen large deviations above and below the stock-to-flow ratio. Large deviations above the ratio have been the result of fear of missing out and market euphoria. Deviations below the line have been caused by uncertainty in the marketplace about regulation, centralization, security and now environmental concerns.
Now, the question is whether or not Bitcoin will realign itself with its stock-to-flow ratio. While it has corrected back to this trend in the past, it’s uncertain whether it will return and continue its march toward $100,000 territory or move towards a bear cycle.
Perhaps one of the more telling aspects of the healthiness of the market is how long-term holders are behaving. In the recent market slump, the balance in addresses that have been accumulating Bitcoin has increased as the price has dropped.
At the same time, the amount of addresses that are accumulating Bitcoin has seen an even more drastic increase, moving sharply up as the price fell sharply down, suggesting that these addresses are making use of the lower price point.
This information may also suggest that younger addresses, or newer investors, have exited the market from uncertain news and market conditions while older addresses have not only stayed in but have also accumulated more.
While all of this uncertainty is occurring, there has been a recent breath of fresh air flooding out of Latin America. It was announced at the Bitcoin 2021 conference that El Salvador would be adopting Bitcoin as legal tender. This means that residents of the nation would be able to transact Bitcoin without capital gains taxes and that the government will accept Bitcoin for USD and vice versa.
After this announcement, several leaders and politicians throughout Latin America called for similar action. First, a leader from Paraguay said the country needs to advance with the new generation. He then said, “The real one to the moon #BTC.”
In what felt like a cascade of falling dominoes, politicians from Panama, Brazil, Mexico, Argentina and more all began to come out in support of adopting Bitcoin as legal tender in their respective countries. The motivation of such a move was multifaceted — too much reliance on the U.S. dollar and inflation, large populations of unbanked citizens and as a way to bring in more entrepreneurs.
While only El Salvador has made the move of adopting Bitcoin as legal tender, any further adoption would be significant for Bitcoin. It would increase its user base among 2nd and 3rd world countries and potentially cause a butterfly effect among countries seeking financial inclusivity for its citizens.
What Happens Now?
While the news out of Latin America has certainly reinvigorated the market (up almost 9.5% at the time of writing), Bitcoin still has a substantial road ahead to the $100,000 mark that so many are calling for.
If the stock-to-flow model is still intact, the recent slump could delay the top of this cycle until later in the fall instead of mid-August, as the model suggests. This would not be too out of the ordinary as Bitcoin’s price has surpassed the model on several occasions. In fact, Bitcoin’s price was higher than its stock-to-flow ratio for about six months, from late December to mid-May of this year.
The unfortunate reality is that Bitcoin, as well as the crypto markets in general, seem extremely reactionary to news, even if the news doesn’t have much merit. With that in mind, it is hard to determine how Bitcoin will move going forward.
That said, last month’s negative news seems to have been reversed toward a positive narrative, one about banking the unbanked Latin American region of the world and providing financial inclusivity for its people. Should that positive trend continue in other countries, we could see a reflection in Bitcoin’s price in a big way.