Greetings from the CryptoHawk Team!
Understanding, tracking and trading cryptocurrency can be overwhelming. What drives price action? Why do certain coins outperform others? Where is crypto headed from here? In this series of articles, our team will present a variety of topics, current events, and sector deep-dives to aid you in your cryptocurrency education, research and investment decisions. In this inaugural edition, we’ll be discussing Bitcoin, the epicenter of the cryptocurrency universe. Let’s go!
Bitcoin & its Place in the World of Crypto
We begin our journey with the force that drives all things crypto: Bitcoin. What is Bitcoin? Bitcoin was the first and is the most dominant cryptocurrency to date, representing over 40% of the entire crypto market capitalization (over $2 trillion). Bitcoin was invented in 2009 by an anonymous individual under the pseudonym Satoshi Nakamoto. Fun Fact: A “Satoshi” or “Sat” now refers to 0.00000001 BTC.
Bitcoin was originally conceived as a digital currency operating freely without any central control or oversight from banks or governments. In essence, it was invented as a fiat alternative that could be used anywhere in the world without the need for currency exchanges or bank mediums. However, with the passage of time and global adoption, things have changed. While the underlying characteristics of Bitcoin remain constant, the landscape of its utilization, and regulations surrounding it have shifted.
Today, Bitcoin is widely perceived as a store-of-value rather than a means-of-payment. Can it still be used to transact? Of course! So… Why the change? Well, for starters, there are now over 14,000 other cryptocurrencies, several of which have also been designed as a means of payment. The emergence of Bitcoin and blockchain technology established a boundless foundation for the development and utilization of alternative currencies commonly referred to as alts or altcoins. For now, we’ll put a pin on that discussion and revisit it in a later article. What is important to understand now is that the entire cryptocurrency market fluctuates with Bitcoin.
Price Discussion: Intrinsics & Historic Drivers
Now that we’ve established that Bitcoin is the dominant cryptocurrency, let’s discuss what drives its price. Bitcoin has a fixed, maximum supply of 21M coins — there will never be a single satoshi more than 21M in existence. Given its fixed supply, Bitcoin is considered to be an inflationary asset with gradual price appreciation attributable to adoption, scarcity, utilization etc. Historically, Bitcoin’s price appreciation has also been influenced by mining rewards and the corresponding “reward halvings” occurring every 4 years. Bitcoin “miners” are powerful computers designed to solve linear algebraic equations as a collective, and receive “rewards” in the form of BTC for completion. Since computing power from miners is required to facilitate the network, and since Bitcoin has a fixed maximum supply, “reward halvings” are critical for the longevity of mining incentives. In cycles past, Bitcoin has seen new all-time-highs within 1–2 years after the latest scheduled halving.
Whether you’re new to crypto or an experienced investor, the following chart provides a great visualization of historic price movements and their correlations to reward halvings. Check it out!
Price Discussion: Current Themes
Beyond the aforementioned intrinsics, the price of Bitcoin is also influenced by global inflation, monetary policy, adoption (liquidity) and, most recently, shifting regulations. One of the most pervasive themes in the Bitcoin economy is that it is a hedge against inflation. Simply put, as the U.S. (and global) monetary supply increases, as does the price of Bitcoin, along with other commodities like oil, corn and soybeans. The difference is, we can grow more corn… We can’t grow more Bitcoin.
Now that we’ve examined several macro price themes, let’s talk about current events & regulations that have impacted short-term price movement:
Adoption: In August 2020, the U.S. Office of the Comptroller of the Currency (OCC) quietly legalized institutional custody of cryptocurrency assets. This is one of, if not the biggest regulatory changes impacting cryptocurrency to date. Now that banks, corporations and fiduciaries can legally hold and provide cryptocurrency assets to their respective clients, a scramble has begun to identify the safest and most efficient means of purchase, storage and transfer.
Regulation: In response to the OCC’s new policy, a multi-agency effort has ensued to provide specific guidelines for both institutions and individuals who are buying, trading, and selling cryptocurrency. The dust has by no means settled. If you’ve read articles about the IRS, SEC, Federal Reserve or White House working on defined laws and codes surrounding cryptocurrency, you’ve reached the forefront of current price action: billions in new institutional liquidity hang in the balance.
Past performance, intrinsics, and macro themes tell us Bitcoin’s price will perpetually increase, but current events and regulations seem to be holding this back for the time being. Many have dubbed 2022 as a year of “chop” as global equities markets & governing agencies attempt to combat hyperinflation while solidifying cryptocurrency regulations. In times of economic uncertainty, risk assets usually do not see parabolic increases — in many cases, they’re the first to be sold in the midst of “FUD” (fear, uncertainty, and doubt). However, finalization of new institutional guidelines and decreased volatility in global markets may provide an eventual launchpad for Bitcoin to reach new all-time highs, and beyond.
CryptoHawk’s Long-Short Vertical
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