The crash in prices was led by a crackdown in China on Bitcoin miners, the grease that keeps the machine running, and on cryptocurrency transactions that were using the country’s financial system. On top of that, the poster child of cryptocurrencies, Elon Musk, turned on Bitcoin by highlighting concerns related to the environmental impact from its mining.
It is important to note that while China has banned Bitcoin mining, it has not banned holding or transaction of Bitcoin. Its own central bank had earlier this year suggested that the cryptocurrency could emerge as a means for alternative investment.
Elon Musk’s Tesla also continues to hold on to its own Bitcoin assets after slightly trimming its position in the March quarter.
“We are in a bear market. That does not mean the end of Bitcoin is coming. Since important financial institutions have now made Bitcoin investments, my position is that Bitcoin will not fail,” George Kaloudis, a research analyst at CoinDesk, said in an email interview.
In India, too, buying and selling of cryptocurrencies has become cumbersome as traditional banks withdraw support to cryptocurrency exchanges. The RBI’s ‘concerns’ pertaining to cryptocurrencies and its behind-the-closed doors nudge to banks to avoid getting in the same pool with cryptocurrency exchanges has indirectly affected Indians’ ability to buy or sell cryptocurrencies.
While the hype around Bitcoin has certainly cooled compared with earlier this year, the cryptocurrency is still up over 200 per cent from the same time last year. Analysts say there are two important factors why the ongoing selloff in Bitcoin is more about clearing of the retail froth than a terminal decline in interest, as was seen after the 2017 rally.
An usual tell of prolonged weakness in the Bitcoin market is when the cryptocurrency’s market value-to-realised value metric rolls over from a peak. Currently, that ratio is nowhere close its historical high. Bitcoin has seen deeply entrenched bear markets in the past, says a report by CoinDesk Research.
Another metric that crypto analysts track to gauge the momentum in the Bitcoin market is the Puell Multiple, which is calculated by dividing total US dollar value of Bitcoins mined in a day by the 365-day moving average. The metric is critical in understanding market cycles in Bitcoin.
The Puell Multiple for Bitcoin recently dipped to its lowest level in one year, which analysts say is a sign of deep undervaluation of the asset and weak bear market sentiment.
While technical factors may suggest that the current bear market may run out of steam soon, sentiment among investors still remains muted given the crackdown on Bitcoin miners in China. Kaloudis expects the miners in China to come back online quickly, which should boost sentiment in the asset class.
“These miners are entrenched in the Bitcoin ecosystem and have clear economic incentives to continue mining. So, while these miners may not continue operating within the Chinese borders, they will move elsewhere since Bitcoin mining operations are highly mobile,” Kaloudis said.