5 Signs Bitcoin May Have Hit the Bottom
Amidst the crypto winter of 2022, many investors and traders are asking, “has Bitcoin hit the bottom?” This is one of the most important questions to ask because when a bottom is identified the next price movement will inevitably rise again, if not rally. To get a better understanding we will examine five major factors.
Five signs Bitcoin has reached the bottom
While the first quarter of 2022 (Q1) saw a slow descent of Bitcoin’s price from an all-time high of $69,000 in November 2021, the second quarter of 2022 (Q2) saw the flagship cryptocurrency dip below $20,000. But economic indicators in late Q2 signal a bottom has been reached.
Macro conditions
Bitcoin price action is closely related to macroeconomic conditions. When the macro hits a bottom, Bitcoin has very likely hit a bottom as well.
The current monetary tightening by the Federal Reserve has decreased investor confidence in stock and commodity prices. When the Fed reverses course, it will signal to investors that market prices are rising.
On August 10, the CPI Inflation Report concluded that inflation has dropped to 8.5%. As of yet, the Fed has not stated if and when it will drop interest rates.
Marcus Sotiriou, a digital asset broker at GlobalBlock, has stated, “The point at which we see [the Fed decrease interest rates] may be when Bitcoin has made a significant move off of the lows.”
2. Correlation to U.S. equities
Bitcoin trades in a similar pattern to big tech stocks on the Nasdaq. Though $BTC is a very different asset, it should still be analyzed with tech equities in mind.
Closely correlating chart patterns between the S&P 500 and the S&P Bitcoin Index over the second quarter of 2022 factor in tech and other industry stocks. Bitcoin’s price action and the stock market are both subject to the same economic variables.
3. Mining difficulty has eased
A major pattern in Bitcoin charts is the correlation between mining difficulty and price. As the algorithm becomes less complex, the price finds a bottom.
Over the last five years, when the price of Bitcoin has converged with mining difficulty, we have seen a market correction. Glassnode has reported that four convergences have occurred since January 2019 – the last of which occurred in July 2022.
4. Effects of halving
Bitcoin halving is the cutting in half of the mining rewards (known as the coinbase) that miners receive for verifying transactions. Halving is a deflationary measure that creates more scarcity of blocks that can be mined. Halving occurs after every 210,000 blocks that are mined.
The first halvening took place in November 2012; at that time Bitcoin’s price was $12 but after the rewards were halved, the price surged to $1,200.
5. Institutional investment
With Blackrock’s recent partnership with Coinbase, it appears that institutional investors are taking Bitcoin more seriously. BlackRock will provide institutional customers with the option to purchase Bitcoin, signaling that Wall Street is less concerned about the digital currency’s volatility than they have been in the past.
Will Bitcoin go back up?
It is very likely Bitcoin will go back up. While there is never any guarantee, historical market performance does indicate a rise in $BTC by the end of this year.
It is important to remember that all of these factors are still subject to an ongoing economic recession, broader challenges in the global economy (i.e. the supply chain breakdown) and inflation in other countries.
As Mr. Sotiriou stated in April, “the Federal Reserve is king when it comes to risk assets like crypto, and the pain of quantitative tightening could drag on for many more months.”
