The price of Bitcoin BTC is down 55.55% year-to-date and that has led to the speculation that it is dead and its price will never recover. In the past year, it has fluctuated between a high of $68,789 and a low of $17,708, supporting its extreme volatility and giving Bitcoin critics ample evidence to support their claim that Bitcoin is no longer viable.
A Uber Eats currier wearing a protective mask passes in front of a Bitcoin exchange shop in Krakow’s … [+]
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According to Bitcoin content website 99 Bitcoins, 17 credible news sources and celebrities have announced that Bitcoin is dead in 2022, with the latest article coming from American Left-based magazine Jacobin.
If the price of oil -another commodity- crashed by 55.55% in six months, would you say that oil is dead? Any reasonable stakeholder in the oil market would consider the fundamentals of the oil market, such as demand, supply, government policies, competing energy sources, and so on. If all of the factors turned out to be relatively positive, the price drop would begin to look like an opportunity. So, what are the most important Bitcoin fundamentals to keep in mind?
Bitcoin hash rate
This refers to the total amount of computing power used by the Bitcoin network. It assists Bitcoin stakeholders in estimating the network’s level of decentralization and security. According to digital assets company Blockchain.com, the Bitcoin hash rate has been in a bullish trend and it reached an all-time high on June 12, 2022.
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This indicates that the amount of computing power dedicated to supporting the Bitcoin network is trending close to its all-time high and that the Bitcoin network has never been more secure.
When Bitcoin’s price fell below $20,000 two weeks ago, some miners were mining Bitcoin at a loss, according to cryptocurrency ranking platform CryptoRank.io. That is, the cost of mining one Bitcoin was significantly higher than the price of Bitcoin. So, why would miners push the hash rate to an all-time high when the value of each Bitcoin mined was close to or less than the production cost?
Bitcoin Supply
Bitcoin’s supply is limited to 21 million coins. The total supply of Bitcoin, however, is slightly more than 19 million, with the remaining two million yet to be mined. Around one million bitcoins mined by Satoshi Nakamoto have never left their initial wallet and are assumed to be locked forever.
People have misplaced the private keys to their Bitcoin wallets over the years. If the keys are never recovered, the Bitcoin stored in those wallets may be lost forever. This means there are a lot more Bitcoins out of circulation. This makes Bitcoin the hardest asset to obtain because it is costly to produce more (read mining), and there is a hard market cap of 21 million.
Institutional adoption of Bitcoin is on the rise, and more institutions are looking to add some level of Bitcoin exposure to their balance sheets. This is an indication that supply is going to get tighter.
Bitcoin’s Lightning Network
This refers to a second layer built on the Bitcoin network that allows Bitcoin transactions to take place outside of the blockchain. It speeds up transactions and reduces transaction costs. The Lightning Network solved Bitcoin’s scalability issue. The world can use the Lightning Network to execute millions of Bitcoin transactions per second and make micropayments at extremely low transaction fees.
According to Arcane Research’s The State of Lightning Volume 2 report, the Lightning Layer is rapidly becoming the technology behind Bitcoin becoming the internet’s native currency, as the number of users grows exponentially and the number of lightning transactions approaches 4,000 Bitcoin.
Paco De La India, an Indian travelling to 40 countries in 400 days using only Bitcoin, is one of the best examples of the Lightning Network’s power. He is currently on day 282 and frequently uses Bitrefill to spend Bitcoin on the Lightning Network. Bitrefill is a fintech company that allows you to buy products and pay for services by taking your Bitcoin equivalent and paying the vendor in their native currency.
Digital assets regulation
Governments all over the world are softening their stance on digital assets and putting in place regulatory frameworks to capitalize on this technology. While some governments, such as El Salvador and the Central African Republic, are pursuing full-scale adoption, others are simply regulating cryptocurrency exchanges and taxing cryptocurrency gains.
The most notable regulations are Australia’s two spot Bitcoin ETFs (exchange traded funds), Binance’s Dubai license, The Purpose spot Bitcoin ETF in Canada, and the European Union’s current legislative package to govern digital assets.
A majority of corporations that are looking to add Bitcoin exposure to their balance sheet are not able to do so because of their respective government’s ban on Bitcoin transactions or lack of a regulatory framework.
As more jurisdictions lay down a regulatory framework for digital assets, more institutions and individuals will have the confidence and proper structures to adopt Bitcoin and other digital assets.
The above-mentioned factors haven’t reasonably changed negatively to support a massive price drop. There are other factors affecting Bitcoin such as the correlation with equities, that could be used to explain the massive price drop, but the fundamentals relating to the Bitcoin network and its uses seem to be improving over time. Clearly, the factors discussed above indicate that Bitcoin is not dead.
Cryptocurrency exchanges may also have contributed to the massive price drop by practicing rehypothecation and selling paper bitcoin to unsuspecting clients. The recent moves by major crypto exchanges limiting clients’ ability to withdraw their assets indicate that clients’ claims on exchanges are higher than the assets held by the exchanges.
Disclosure: I own bitcoin and other cryptocurrencies.
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