It’s the second week of 2023 and it’s off to the races for bitcoin

2022 Overview

2022 was an unprecedented year of demand and wealth destruction across financial asset classes. Bitcoin is down 75% from its all-time high. However, this is his fourth-worst landing, and he continues to make lower landings every lap.

Bitcoin price reduction ATH
Price reduction ATH: (Source: Glassnode)

For decades, a 60/40 stock and bond portfolio protected investors during the worst of times because treasuries were able to hedge against the downside volatility of stocks. However, treasuries performed worse than stocks, something that didn’t happen until the 60s.

Treasuries and Equity Declines: (Source: Bloomberg)

In addition, US stock and bond yields were as bad as they were in 1931 and 1969. Later, two years after both 1931 and 1969, came the confiscation of gold by Executive Order 6102 (which is the difficulty adjustment in terms of 2016 blocks) and in 1971 when the US went off the gold standard. So, by this nature, all eyes are on 2024.

For more information on this, please see our recent BitTalk episode

US stocks and bonds
US stocks and bonds: (Source: Bloomberg)

2% inflation target

Since 1977, the Federal Reserve has operated under a mandate from Congress.effectively promoting the objectives of maximum employment, stable prices, and medium-term interest rates” is now known as the dual mandate.

It is safe to say that interest rates have been in the low 0 range for over a decade. CPI inflation fell to 6.5% this week from 7.1%, with peak employment as a lagging indicator. However, significant layoffs have begun, particularly in the technology and banking sectors.

As a result, central banks around the world have tightened over the past year, some more aggressively than others, with the prospect of a repeat of the 1970s stagflation increasing. Stagflation is a combination of high inflation and economic stagnation, especially high unemployment that has not yet occurred.

Interest rates above CPI inflation in western economies with an exponential debt to GDP ratio of 120% in the US will destroy the economy, governments will choose the austerity route, but this is not the way citizens are advocating. for.

CPI, fed funds and debt to GDP ratio
CPI, fed funds and debt-to-GDP ratio: (Source: FRED)

The funny thing about this is that Bitcoin’s current inflation rate is less than 2%, 1.78% to be exact, below the central bank’s target during this period. The Bitcoin inflation rate is the percentage of new coins issued divided by the current supply. Bitcoin has a predictable money schedule, so approximately 6.25 bitcoins are mined every 10 minutes.

Bitcoin Bitcoin inflation rate
Bitcoin Inflation Rate: (Source: Wicked SB)

It wasn’t all doom and gloom for bitcoin in 2022

In 2022, the most bitcoin delisted from exchanges was over 20%, which is up from 10% previously in 2020.

There are currently 2.26 million Bitcoins on exchanges, which leaves about 11-12% of the Bitcoin supply on exchanges. Many events, such as the collapse of Luna and FTX, led to the exodus.

Bitcoin exchange balance: (Source: Glassnode)

As Bitcoin continues to leave exchanges in 2022, the number of addresses holding Bitcoin has increased. We are approaching 1,000,000 unique addresses with at least 1 Bitcoin.

A 19% increase in 2022 marked the largest annual increase since 2017.

Bitcoin, number of addresses with a balance of 1 or less: (Source: Glassnode)

Bitcoin has broken its short-term owner’s value base

The Realized Price represents the cumulative price of each coin when it was last spent on the chain.

Using the Short and Long-Term Holder cohorts, we can calculate a realized price to reflect the aggregate cost for each group.

The LTH-STH Cost Base ratio is then calculated as the ratio between LTH and STH realized price.

As STHs realize losses at a higher rate than LTHs, this is a typical example of bear market accumulation.

Bitcoin has 4 cycles STH, LTH and realized price date of 829 days. Currently on day 110 and the shortest of all 4 periods, we need to break $22.5k to break out of the cross.

Bitcoin Spending Major Cohorts
Cost-Based Groups: (Source: Glassnode)

In the depths of bear markets, Bitcoin only entered the region where the realized price, STH and LTH are below the realized price, and several times all happen in late-stage bear markets, so this cycle looks the same.

Bitcoin STH Cost basis versus market value basis
STH Cost Basis vs. Market Value Basis (Source: Glassnode)

Ruthless Miners

In early January, the hash rate reached a new high of over 300 TH/s, which is quite a feat in a bear market.

Miners are joining because of cheap debt in 2021, and companies that have filed for Chapter 11 bankruptcy have not separated machines, which may be the reason for the smaller hash rate declines in other bear markets.

The hashrate subsequently rose 20% in one day, one of the largest one-day % swings in recent years.

Bitcoin Hash Rate % Change
Hash Rate % Change: (Source: Glassnode)

As a result of the increasing hash rate, the completion of the hash tape inversion indicates the end of the miner submission. Bitcoin tends to bottom out when miners give up, because Bitcoin becomes too expensive to mine, the price tends to go up after miners give up, which is what we’re seeing again.

Bitcoin Hash Tape
Hash tape: (Source: Glassnode)

Finally, the difficulty regression model shows that we are on the periphery of Bitcoin mining and about to become profitable again.

The Difficulty Regression Model is an estimated comprehensive production cost for Bitcoin. Current estimated cost is based on difficulty and market value. In order for miners to make a profit on average, BTC needs to get above $19,000.

As you can see, during bear markets, Bitcoin becomes unprofitable as the price falls below the total cost of production, so the hash rate drops as miners need to disconnect from the power grid. As we mentioned above, this bear market is different from others.

Bitcoin Difficulty Regression Model
Difficulty Regression Model: (Source: Glassnode)

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