(Bloomberg) — Bitcoin’s price has dropped nearly 50% from its peak in October. Many would say it’s the worst slide since the FTX disaster. Yet, interestingly, the support system that emerged for the cryptocurrency during its peak seems to be holding strong.
Most of the ETF funds haven’t changed much. Meanwhile, Wall Street continues to show some momentum. Although some short-term investors are looking to cash out, long-term holders are finding it tough to exit. This mismatch between market prices and overall stability is creating a somewhat contrarian bullish outlook, even as general selling persists.
If you’re leaning negative, there’s no shortage of ammunition. Even after a bump on Wednesday, Bitcoin is still hanging below $70,000, a stark contrast to its October peak over $126,000 and contributing to a total market drop of around $1 trillion. It’s estimated that almost 45% of all Bitcoin is now worth less than what was originally paid. Option traders are hedging against further downturns. The once-popular notion of institutional support cushioning drops no longer seems valid, and weeks of ETF outflows have led many to conclude that mainstream participation is faltering.
Nonetheless, some contrarians argue that this outflow narrative needs a broader perspective. Brett Munster from Blockforce Capital notes that since the Spot Bitcoin ETF launched in January 2024, it has seen tens of billions in net inflows. Only a small fraction of that has been affected recently.
He argues that this trend indicates a consolidation rather than a capitulation from investors, mentioning that 17 out of the top 25 Bitcoin ETF holders increased their positions in the last quarter.
Bitcoin showed a bit of a recovery on Wednesday, climbing by over 9% and nearing $70,000 as stock prices also made small gains and sentiments improved. The key question now is whether this uptick can be sustained or if it will fizzle out like so many times before.
To assess the situation, bulls are looking back at what transpired the last time Bitcoin suffered such a significant decline. In 2022, there were notable collapses, especially with FTX, Celsius, BlockFi, and Three Arrows Capital, which not only lost their assets but also affected key players in the market, rattling confidence throughout.
Today, however, no major failures have emerged. Exchanges are still operating, and even banks are stepping up their crypto offerings. Over half of the leading U.S. banks have either started or are planning to introduce crypto-related services, according to the financial services firm River.
“The current Bitcoin price movement is largely tied to a lack of confidence. There are no structural issues, and all signs point to the bear market being the least severe so far,” says Gautam Chughani, senior global digital assets analyst at Bernstein. He believes Bitcoin could reach $150,000 by 2026.
There are certainly counterpoints to the more optimistic viewpoints. A lot of what traditional banks are developing might focus more on blockchain technology than Bitcoin itself. For instance, JPMorgan Chase’s tokenized money market funds run on Ethereum, and stablecoin pushes from Circle Internet Group and others could gain traction even if Bitcoin doesn’t bounce back. This digital infrastructure could develop independently of Bitcoin’s price movements.
However, supporters of Bitcoin highlight that these trends can lead to unexpected benefits. Every bank that opens a crypto trading desk, every firm adding options to buy Bitcoin, and each advisor who can now recommend Bitcoin ETFs can potentially increase the number of people able to invest with ease.
Even though major financial firms tell advisors they can promote cryptocurrencies, the price of Bitcoin hasn’t reflected that yet. It’s a bit perplexing. But when sentiment shifts, the buying power could be significantly greater than in past rallies. Access to Bitcoin is improving, and recovery could leave the market in a better place.
Fidelity Digital Assets adds depth to this discussion. Currently, companies that are publicly listed and the spot ETFs together control nearly 12% of the circulating Bitcoin supply. This group has consistently increased its holdings over the past few years, despite facing challenges. The analysts at Fidelity argue that this forms a new baseline for demand, one that wasn’t present in earlier cycles. Long-term holding companies suggest a more stable supply.
University endowments like those at Harvard and Dartmouth have also maintained their investments in crypto ETFs recently. Meanwhile, Laurore Ltd., based in Hong Kong, has begun its significant entry into institutional crypto, adding 8 million shares of the BlackRock Bitcoin ETF to its portfolio.
On the supply side, things are becoming tighter. With Bitcoin’s next halving anticipated in April 2024, the rate of new Bitcoin generation will be cut in half. As more coins get locked away and less are mined, the freely traded supply is likely to shrink, even amidst price declines. Should this trend continue, a sharp recovery might surprise the market.
This doesn’t mean that we’re at the bottom yet. There’s a clash between optimism and a bearish market that’s gaining traction, and the negative narrative seems to have the upper hand right now. But the infrastructure that supports the market, which faced actual breakdowns last time, appears to be growing rather than faltering. The true test will be whether this underlying strength can outweigh price negatives or if declining prices will eventually take down the entire structure. It’s a somewhat solitary viewpoint right now, yet signs suggest this could change.
“The core reasons for Bitcoin’s rise over the past 15 years are still applicable,” said Matthew Hogan, chief investment officer at Bitwise Asset Management. “We’re more digital as a world, concerns over fiat currencies are rising, regulations are improving, and the new generation that grew up with Bitcoin is maturing and accumulating wealth.”
(Update price.)
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