The unbearable stability of Bitcoin

Bitcoin is doing well, thanks for asking.

Amid a shaky few months for markets, the world's most popular cryptocurrency has been remarkably stable, trading in its narrowest range since the end of 2020:

You may see this differently depending on your history, e.g. B. whether you bought, when and how much. Perspectives can be:

It's also possible that you haven't been following Bitcoin's daily fluctuations closely because you're an adult who invests in solid assets like UK government bonds.

However you approach it, for a currency that has done this during the pandemic –

— The flatness of the last few months is a little...scary.

Volatility is also muted:

What's up? Morgan Stanley strategists Sheena Shah and Kinji Steinmetz took a look at a note published on Thursday.

Their key takeaway is that most of those involved with Bitcoin since the start of 2021 are currently holding the bag (or HODLers) – and that the tokens themselves aren't moving much:

Almost a year after the Bitcoin bear market began, most Bitcoin buyers are facing heavy losses in 2021 and appear to be waiting for rallies to close their position. A record number of Bitcoin units have not been used in any transaction in the last 6 months, currently at 78% of the total, and this number continues to rise (Figure 1).

If we oversimplify it a bit, this means that those who bought/received Bitcoin more than 6 months ago are holding on to their positions and some are probably waiting for a price recovery. For the remaining 22% of Bitcoin units held by the shorter-term investors who have traded Bitcoin in the last 6 months, the average breakeven price is estimated to be just over $22.3K (+7% from current value, but up to 20% for a few). days ago, see appendix 2)

(Shah and Steinmetz note that there are some important caveats here: the first is that each wallet is assumed to belong to a different entity, the second is that off-chain transactions cannot be taken into account.)

As might be expected, this lack of movement coincided with a drop in activity on most exchanges, with the exception of market leader Binance, which has cut fees to attract more business and now hosts about a fifth of all volume:

The elephant in the room, of course, is Ethereum, which saw a promotional boost last month when its blockchain survived an update. Nice! ETH now tracks stock markets more closely than Bitcoin, a dynamic that suggests it may be the more normalized risk asset of the two. Some in the market "may now begin to question... the trading dynamics" for Bitcoin as a result of ETH's move to a proof-of-stake model, Morgan Stanley says.

The analysts note that Bitcoin tends to find strong support just above $18,100, suggesting traders are buying dips below this level:

Reporting over the summer identified $20,000 as a key support level, below which forced liquidations of leveraged positions were required. We would speculate that recent momentum suggests $18,000 could be a similar pain point. (If you are a highly leveraged Bitcoin whale, please contact us.)

Public Bitcoin miners are now not mining as much, which should also provide some support. In fact, they are having a particularly hot year (even by crypto standards) amid rising energy prices. The stock prices of some of the largest publicly traded ones – Marathon Digital, Riot Blockchain and Core Scientific – have been terrible:

(Core Scientific announced it was filing for bankruptcy while this article was being written!)

These are circumstances where highly leveraged holders may want to underpin this type of stability with serious, long-term investors holding BTC. Shah and stonemason:

With declining trading volumes and fewer market participants, intraday traders and market markets have an increasing influence on prices. Their activities are more likely to be influenced by technical prices and momentum than, for example, longer-term asset managers.

Corporate-driven efforts to adopt Bitcoin continue, perhaps encouraged by the United Kingdom installing its first glaze-eyed prime minister. The MS team is a little skeptical about how important this all is:

In recent months, traditional financial firms have increasingly announced new crypto products to offer their customers access to the markets and opportunities to buy, sell and hold the underlying cryptos...

The companies say they launched the products based on customer demand, but given recent inflows and outflows of exchange-traded products and the trading volume trends described above, we continue to believe that unless there is significant upward price volatility it may be difficult to see real demand picking up significantly.

Stability looks good, at least compared to what's happening elsewhere. But thinning volumes in a market that has no utility beyond storing value, where the actions of its few active daily participants are driven by technical resistance and support levels, is not a symptom of robust health. While we're far too jaded to say that the best has passed for the mother of all cryptos, its leveling off after the collapse might mean nothing other than that it's now a life-sustaining asset class.