The price of Bitcoin appears to have achieved some stability over $35K–but its next moves will be crucial.
Since the price of BTC dropped below $40K in mid-May, the price of the asset has meandered throughout the $32K-$38K range, never quite managing to build enough support to recapture $40K.
Analysts believe that if support about $35K continues to build, there could be a meaningful and sustained movement toward and above $40K–one that isn’t so pumped on leverage. If not, however, BTC could enter a new period of price discovery on the lower end. What’s next for BTC?
“Volatility is expected in crypto or for any new emerging technology or asset class.”
Wouter Witvoet, CEO and founder of DeFi Technologies, believes that BTC’s price doldrums are nothing more than a phase: “I do believe the price of Bitcoin will recover and then exceed previous all-time highs,” he told Finance Magnates.
“Volatility is expected in crypto or for any new emerging technology or asset class,” he continued. “Pay attention to the adoption rate of the networks. If the participants in the network keep growing over time, the value of the network rises.”
By this metric, “Bitcoin [and cryptocurrencies in general] have the fastest growing adoption rate of any technology in human history.” Indeed, the rate of Bitcoin adoption has been comparatively higher than the rate of adoption of the internet.
Similarly, Sebastian Quinn-Watson, Founder at Yieldly Finance, told Finance Magnates that “In a world where Bitcoin’s current price is still 10x the price from its 2020 lows, we don’t see this dip as a particular concern.”
“As Ray Dalio has often mentioned, BTC is a natural hedge against a never before seen expansion of USD money supply. We know institutions are buying it at rates never before seen. This is a tailwind that speaks to a long term bullishness on BTC,” he said.
“Big drops will no longer be possible when the capitalization of Bitcoin is so large that retail sales will not affect the exchange rate.”
In the meantime, a little (or a lot) of price volatility may just be par for the course. Oleg Kurchenko, Founder of European digital asset exchange Binaryx, told Finance Magnates “If there are no periods of sharp drops of 20-50 percent over several days, there can be no periods of rapid growth of 100-200 percent over a short time as well.”
“Sharp movements make crypto assets attractive for retail investors, who tend to take high risks in pursuit of high profits,” he said.
“If you remove the risk, then cryptocurrencies will become as boring assets as metals or other traditional assets trading on the world’s largest exchanges,” he added.
However, Bitcoin won’t always be capable of such extreme volatility: “Big drops will no longer be possible when the capitalization of Bitcoin is so large that retail sales will not affect the exchange rate,” he told Finance Magnates.
Bitcoin over the next five years
In other words, Bitcoin would need to reach a point where its market cap is almost entirely comprised of non-leveraged long-term institutional and retail hodlers–and a lot of them.
But when could Bitcoin reach that point?
Shidan Gouran, founder of Canadian merchant bank Gulf Pearl, believes that it could happen sooner rather than later: “Just in the past year, Bitcoin has gone up more than four times, and actually even went up more than eight times before its current tumble,” he said.
“Given its past performance, it’s very realistic and reasonable to assume that one Bitcoin can reach $1MM USD at some point in the near future; I would give it five years at maximum,” he said. “This is only a 20x increase from its all-time high, and we have seen Bitcoin achieve this level of growth multiple times in a time span of a few weeks.”
After all, BTC’s performance in the bigger picture is still quite impressive: Charlie Silver, chief executive of Permission.io, told Finance Magnates that, yes, “In the last 60-90 days, there has not been a lot of positive action in the market.”
However, “If you go back a year, bitcoin was at about $6-7K.” Compared to that price point, BTC is up more than 600%. Therefore, Silver believes that “We’re still solidly in a bull market.”
“It may still bounce around between support and resistance–it may hit $30K again for a day or two and then rally back up towards $60K…This is normal market action for any kind of tradable item whether it’s a stock, bond, real estate, gold, or another kind of commodity.”
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Conflicting beliefs about how BTC derives its value
However, Shidan–and many others in the world of traditional finance–have serious questions about the way that Bitcoin is deriving its value over the long term.
“Having said this, I am very much against the thought of people investing in Bitcoin,” Shidan continued.
Why is this? While many analysts believe that Bitcoin gains its primary value by acting as a hedge against fiat currency inflation, Shidan believes that Bitcoin’s “main support comes from either being a quasi-religious movement promulgated by so-called ‘Bitcoin Maximalists’ who feel disenfranchised and, on the other hand, a ‘greater fools’-driven greed by the remaining investor base.”
“At the same time, Bitcoin’s importance as a technological innovation should not be underestimated,” he said.
“It’s the first prototype for systems of Internet-connected decentralized databases that can be written to and read from by anyone, on a global scale, while ensuring that no one can spoof others or change their transaction history. Digital assets and cryptographic tokens will remain a central requirement and feature of these systems.”
“I believe that after reaching its all-time high, Bitcoin will pop like no other market has,” he said “It will always find some support with a marginal community, but will remain a speculative asset on the periphery of society. There is no demand beyond being a form of gambling or symbolizing a political identity.”
David Russell, VP of Market Intelligence at TradeStation Group, also pointed out that “Bitcoin could be a victim of its own success.”
“Just as Yahoo and AOL put the Internet on the map, Bitcoin made crypto a mainstream business,” Russell told Finance Magnates. “But that doesn’t mean it will remain the go-to asset.”
A shift away from BTC and toward other decentralized assets?
Beyond concerns about the ways in which BTC derives its value, Bitcoin is also currently undergoing something of an environmental reckoning.
“Concerns about Bitcoin’s electricity usage have become a sudden, and somewhat, unforeseen, problem,” said David Russell, VP of Market Intelligence at TradeStation Group, to Finance Magnates.
“While the issue has been known forever, the market’s recent attention has definitely hurt sentiment. Institutions are increasingly concerned about ESG issues and Bitcoin’s proof-of-work model might not be the best suited for that priority.”
Instead, Russell believes that the Bitcoin dip could signal the beginnings of a long-term shift in attention toward other cryptocurrency assets.
“Right now the activity is shifting toward the Ethereum ecosystem,” he said. “Ethereum could be stealing a lot of Bitcoin’s thunder here. The upcoming switch to proof-of-stake, combined with fee burning in July, give Ethereum some apparent positives that Bitcoin doesn’t seem to enjoy now. Their valuation gap is closing quickly.”
Will we see a ‘DeFi Summer’ in 2021?
As focus continues to shift toward Ethereum, there is also quite a bit of attention on the decentralized finance (DeFi) ecosystem that sits on top of it.
Still, both ETH and DeFi assets across the board are heavily dependent on the price of Bitcoin. “Currently, there is an inescapable correlation to BTC price and the wider Altcoin and DeFi market,”Yieldly Finance’s Sebastian Quinn-Watson said. However, “it is one that we expect to weaken over time.”
“The DeFi market will become immune to the downward fluctuations of BTC, as more and more DeFi projects mature and gain wider adoption,” he continued, adding that “With this recent BTC low, we noticed that the top DeFi coins were actually far less impacted by the dip, such as $ALGO and $UNI.”
But will 2021 see a DeFi summer like the one in 2020? “We will have an endless summer of DeFi,” Quinn-Watson told Finance Magnates.
“DeFi is part of the generational change that is disrupting finance. It is the natural extension of what Fintech such as Revolut and Monzo have been doing with savings and credit. DeFi is doing this on a rapid scale across an increasingly larger number of fintech products.”
“The innovation to come for DeFi is going to be incredible, especially as there are massive incentives for developers and innovators to build and grow DeFi.”