Bitcoin’s 2023 — What Do Traditional Markets and Miners Mean for a Potential Bottom?
Analyzing the relationship between crypto and traditional markets, plus the link between bitcoin mining and market bottoms
Are traditional markets and cryptocurrencies connected? Recent research suggests a strong correlation between the two, with the performance of Bitcoin and traditional markets closely tied in 2022. As the Federal Reserve continues to strive for a 2% inflation rate, this correlation is likely to persist. However, despite market volatility and correlation, belief in Bitcoin as a store of value remains strong among long-term holders. Join us as we explore the intricate connection between the traditional markets and the crypto industry, as well as the actions and perspectives of Bitcoin holders.
In this guide:
- The relationship between crypto and traditional markets
- Is bitcoin a high sentiment beta asset?
- Bitcoin’s role as a store of value
- The link between bitcoin mining and market bottoms
Crypto remains correlated with traditional markets
Bitcoin and other cryptocurrencies have demonstrated a high degree of correlation with traditional financial markets in recent years. This correlation has been particularly evident in 2022, as both traditional and crypto markets have struggled during the first half of the year. The Federal Reserve’s ongoing efforts to bring inflation back to 2% are likely to continue to drive this positive correlation between traditional and crypto markets.
According to research from IntoTheBlock’s Capital Markets Insights, during the past year, Bitcoin averaged the highest-ever positive correlation to traditional markets since its inception. The most significant decorrelation periods, as shown in the graph below, are directly tied to crypto-specific events. The crypto market suffered an internal crisis during the months of May, in which the Terra ecosystem collapsed, during June, Three Arrows Capital hedge fund blew up, and finally, during November, the FTX Exchange meltdown came.
Is Bitcoin a high sentiment beta asset?
Moreover, since the start of the Coronavirus pandemic, Bitcoin has developed a market behavior that resembles that of a high-sentiment beta asset. These are assets that move in tandem with large cap equities but with more accentuated movements during downturns or rallies.
This type of asset first came into study back in 2007 when a research paper that looked into the notion of market sentiment was published. In the, “Investor Sentiment in the Stock Market”, paper the idea of “high sentiment betas” is introduced to describe companies that haven’t achieved considerable market value and have future potential. These companies were pictured by Malcolm Baker and Jeffrey Wurgler as those that have specific characteristics like the following: “stocks of low capitalization, younger, unprofitable, high-volatility, non–dividend paying, growth companies … These ones are likely to be disproportionately sensitive to broad waves of investor sentiment.”
The research concluded that when market cycles are bullish and investors become optimistic about stocks in general, they tend to become even more optimistic about stocks that represent the above-listed characteristics. On the other hand, the same goes the other way around, when investors carry a negative point of view towards markets and a bearish cycle takes place valuations of smaller companies tend to get impacted disproportionately in a negative way.
Although in its origins the research was directed into traditional market sentiment, a similar trend of behavior appears to apply to crypto, especially during the recent times of macroeconomic turmoil. This can be perceived in Bitcoin’s market movements during times of great volatility, more recently, as portrayed in the graph above, Bitcoin as well as the Nasdaq 100 and S&P 500 have been heavily impacted in their price performance. While maintaining a high correlation to the indices, this decrease in price during 2022 was further exacerbated on Bitcoin. This shows a further indication of the forces that traditional markets carry over the nascent crypto industry.
Bitcoin’s role as a store of value
Despite crypto market volatility and its high correlation to traditional markets, its store of value characteristics appear to still be valid from an on-chain perspective. Bitcoin’s long-term holders have continued to accumulate coins throughout its price decrease, cementing their belief in its future potential and its use as a store of value. This is an important consideration, as it suggests that, even as the overall crypto market struggles, there remains a strong belief in the underlying technology and its potential use cases.
The graph above portrays coins that have been on addresses without movement for over a one-year period, when tokens reach this stage they are generally considered dormant. This indicates that these addresses belong to long-term holders and they are unlikely to be spent. In addition, the arrows on the graph point to the last times long-term holders have accumulated during periods of price decreases. It is also important to point out that they present a pattern for selling during periods of price increases. All in all, this is an important group to watch if you want to understand price action.
Hodlers represent the biggest category in terms of the balance of coins when compared to Cruisers (addresses that hold coins between 1 to 12 months) and Traders (addresses that hold coins for less than 1 month), currently holding almost 15 million bitcoin of the total 19.3 million circulating supply. Hodlers are generally considered the smart and most loyal money, the ones that are willing to buy during fearful market conditions. Their extensive support and belief in the currency provide further evidence that long-term holders still see the asset as a store of value, which is also supported by the link between the performance of the Bitcoin mining industry and market bottoms, a topic of ongoing research and analysis within the cryptocurrency industry.
The link between Bitcoin mining and market bottoms
The link between the performance of the Bitcoin mining industry and market bottoms is a topic of ongoing research and analysis within the cryptocurrency industry. It is widely believed that the current macroeconomic situation may indicate that the markets are nearing a capitulation phase. This can be further analyzed by examining trends within the Bitcoin mining industry.
Historically, during bear markets, miners have tended to decrease their hash rate as the market approaches a bottom. However, it is important to note that this trend has not yet been clearly observed in the current market.
Quick refresher — the hashrate is the aggregate power contributed by miners to secure a proof of work blockchain. This computing power is used to solve cryptographic algorithms (SHA-256 in Bitcoin’s case) to process transactions and reach consensus in proof-of-work blockchains. The greater it is, the stronger its security against controlling attacks becomes.
The mining industry has experienced tremendous growth over the past year and a half, leading to increased competition and a sustained increase in the total hash rate to levels not previously seen. However, as the mining hash rate increases, the profitability of the industry decreases as the reward for mining new blocks remains constant. Furthermore, the combination of increasing hash rate and decreasing Bitcoin prices puts further pressure on miner margins, limiting their ability to cover operational costs. This can be seen in the decreasing amount of Bitcoin held by miner addresses, currently at the lowest level since 2011.
As a result of these factors, several established mining companies, such as Core Scientific, have been forced to file for bankruptcy. The continued high competition in combination with low Bitcoin prices could potentially force more companies into this process, leading to the liquidation of their assets. This could have a significant impact on the market, as miner reserves currently stand at 1.92 million Bitcoin, worth roughly $32.3 billion and representing a significant portion of the market.
Final Thoughts
It is important to note that the cryptocurrency market is still a young and evolving industry, and its market behavior can change over time. As such, the correlation between the crypto market and traditional markets may become less pronounced over time. However, on-chain analysis shows that Bitcoin has a strong core of long-term investors who continue to believe in the asset’s potential as a store of value.
In regards to the mining industry, the decreasing Bitcoin prices in combination with high competition may have created a peak in the hash rate during this cycle. If competition remains intense, companies may need to continue selling their reserves to cover operational costs, or potentially face bankruptcy, which could lead to a decrease in the hash rate and miner reserves through the liquidation of assets. This could put further pressure on Bitcoin’s price. All in all, this analysis clearly shows bitcoin as a strong asset which is already seen by a large group of people as a store of value. Nonetheless, in the short term, miners and the macro environment could put pressure on the bitcoin price.
