Bitcoin: The Struggle for Power

Data suggests that Bitcoin has not yet matured, with several narratives at stake.

It is clear that Bitcoin's inflation hedge and store-of-value narratives have taken a hit in recent months, owing to the historic inflation in Q3. According to Messari's new report, the demand for block space fell sharply in this period, resulting in a decline in Bitcoin's transaction count and fees. The average daily value settled also plunged by 44% compared to the previous quarter. While this is undoubtedly a painful period for Bitcoin and its investors, it is important to remember that the cryptocurrency remains the largest by market cap and continues to be a major player in the digital economy.

It's no secret that Bitcoin mining is a notoriously energy-intensive process. However, despite the high cost of electricity, miners continue to push the limits, with the Bitcoin network's hashrate recently reaching a new all-time high of 258 exahashes per second (EH/s).

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Although Bitcoin has not been immune to macroeconomic factors, it has still managed to remain a strong store of value. However, according to the latest edition of 'State of Bitcoin', the crypto-asset made new cycle lows even as the CPI inflation in the US hit multi-decade highs. This suggests that Bitcoin may not be as effective as a hedge against inflation as it is often touted to be.

The recent price action of Bitcoin has been more similar to that of a high-beta US tech equity, rather than serving as a store of value. This potential uptrend was damaged when the Federal Reserve resorted to a more conservative regime, with lower liquidity and higher rates. In a risk-off macro environment, Bitcoin was down by over 70% since hitting a peak a year ago.

It is interesting to see that Bitcoin returns are increasingly correlated with US tech stocks. This may be due to the fact that both asset classes are driven by liquidity. In the third quarter, the average correlation between Bitcoin and NASDAQ 100 was 0.6. This suggests that as inflation and interest rates rise, Bitcoin may become a more attractive investment option.

Interestingly, digital gold and physical gold have had a very low correlation in the past quarter, with the average correlation being just 0.2. This could suggest that the two assets are becoming increasingly independent of each other, or that investors are seeing digital gold as a more viable alternative to physical gold.

Bitcoin Has A Long Way To Go

It is clear that the recent Fed interest rate decision has had a significant impact on market confidence. This increased uncertainty has caused many investors to seek out low-risk assets as a way to protect their portfolios. Andrei Grachev, managing partner at DWF Labs, correctly predicted this shift and has been able to help his clients navigate these choppy waters.

“Unfortunately, bitcoin is still seen as a newer, volatile asset to be a hedge, but I think Bitcoin is still going to be a highly profitable asset for middle and long-term investors.”

It is clear that Bitcoin is losing its grip on the market, with Ethereum's transition to Proof-of-Stake (PoS) looking like a major factor. This, combined with capitulation from big names like Tesla, is weakening the price trajectory. It is possible that we could see Bitcoin lose even more market share in the coming months.

As more and more institutions enter the Bitcoin space, it is becoming clear that the digital currency is still in its early stages of development. While this may add to the volatility of Bitcoin in the short term, it is ultimately a positive sign for the future of the currency. As it matures, Bitcoin will become more stable and offer investors a lower risk investment option.

The latest market crash has been a reality check for Bitcoin, proving that the digital currency is still in its early developmental stages. While some investors remain optimistic about the future of Bitcoin, others are now reconsidering their investment strategies. The market crash has also exposed some of the shortcomings of Bitcoin, such as its volatility and lack of regulation.