![]() Given the importance of liquidity, an approach that accounts for changes in liquidity could yield better results. The failure of demand to follow price in recent months suggests the current move-up is relatively weak.įigure 2: Bitcoin Active Addresses (Created by author using data from )įigure 3: "Bitcoin" Search Interest (Created by author using data from Google Trends and ) Both of these approaches suggest that adoption has stagnated in recent years and that Bitcoin is overvalued at the moment.ĭemand also appears to be procyclical, with higher prices creating demand and lower prices destroying demand. ![]() ![]() Bitcoin's price has moved broadly in line with search interest and active addresses in the past. Given the extent to which Bitcoin exhibits momentum, it is possible that a small shift in the balance of supply and demand could trigger a price rise that investors begin to chase, resulting in a bubble.įigure 1: Bitcoin Supply Inflation (Created by author using data from )ĭemand is also likely an important driver of Bitcoin's price, although difficult to measure. This may be the case, but it is questionable whether a relatively small shift in the issuance of new Bitcoins could have such a large impact. Both of these approaches have widely recognized flaws, but are probably as good as any other approach, besides trying to gauge sentiment.īitcoin's price has increased significantly in the months following previous supply halvings, which some have assumed implies a cause and effect relationship. The stock-to-flow method values Bitcoin based on supply. Metcalfe's Law values Bitcoin based on the number of users, an indicator of demand. As an asset that does not produce any cash flows, Bitcoin's price is ultimately dependent on supply and demand. I have previously described supply and demand approaches to estimating a fair price for Bitcoin, and while these approaches are flawed, an indicator of relative value is needed. This is likely to put pressure on Bitcoin's price, which may negate any potential price impact from the halving, particularly if sentiment becomes sufficiently negative. Absent a financial crisis, liquidity is likely to continue declining, due to both fiscal and monetary policy. Investors should not underestimate the extent to which cryptocurrencies are a risk asset that behaves like a proxy for liquidity, though. With a halving approaching in the next 12 months, speculation will inevitably shift to the potential price impact, and investors may begin positioning themselves in anticipation of this. From a price perspective, Bitcoin ( BTC-USD) has performed quite well in 2023, particularly in light of persistent inflation and tight monetary policy.
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