Three Things The Media Isn’t Telling You About Bitcoin

Three Things The Media Isn’t Telling You About Bitcoin
Jonathan Hobbs

about 1 year ago4 mins

  • Financial news commentators are declaring bitcoin dead – again. They’ve done it many times in the past, but bitcoin is still breathing.

  • Blockchain data suggests that long-term holders have conviction in bitcoin: they aren’t selling their coins, but are pulling them off exchanges and stashing them in their own private wallets

  • Bitcoin derivatives data suggests that a lot of over-leveraged speculators have been flushed out of the market. Leverage levels are now close to where they were back in January and May of 2021.

Financial news commentators are declaring bitcoin dead – again. They’ve done it many times in the past, but bitcoin is still breathing.

Blockchain data suggests that long-term holders have conviction in bitcoin: they aren’t selling their coins, but are pulling them off exchanges and stashing them in their own private wallets

Bitcoin derivatives data suggests that a lot of over-leveraged speculators have been flushed out of the market. Leverage levels are now close to where they were back in January and May of 2021.

It’s been a grim year for bitcoin investors, and as you’d expect, there’s been no shortage of “bitcoin is dead” headlines. But if you take a step back and focus on the cold-hard data, things aren’t quite as dire as those articles might suggest. Here are three things the financial news media isn’t telling you about bitcoin right now.

1. Long-term investors aren’t selling.

Despite the drop in price, blockchain data from Glassnode shows that more investors than ever are holding bitcoin for the long run. Two-thirds of all the coins in existence (blue line) haven’t switched wallets in a year or longer – meaning they haven’t been sold. What’s interesting is that this number has been trending upward from its 57% reading at the start of this year – back when bitcoin’s price was almost three times higher than it is today. And even with all the FTX drama last month, bitcoin holders haven’t budged: their conviction in the asset has only grown stronger.

Source: Glassnode.
Source: Glassnode.

The holders’ behavior gets even more interesting when you look at the number of coins that have been moved off of centralized crypto exchanges (green line) and into private wallets. So not only are investors holding more coins, but they also seem to be locking them away for now – again, with no intention of selling.

Source: Glassnode.
Source: Glassnode.

Of course, that might also be because investors have become less trusting of centralized exchanges in general – considering how many have gone bust this year. And here’s another thing to keep in mind: institutional investors are starting to use digital asset custody solutions that allow them to trade bitcoin on an exchange – without those coins actually being on the exchange in the first place. Their custody providers have slick tech that plugs into exchanges to make that happen. In other words, the rise of institutional crypto funds could be partially responsible for more coins coming off exchanges. And that rise in institutional investors isn’t a bad thing for bitcoin, either.

2. The Bitcoin network keeps growing.

Two things suggest Bitcoin’s network is growing steadily. The first is its hash rate (orange line) – the total mining power needed to run the network – which keeps trending higher. The higher the hash rate, the more secure the network. Now, the hash rate has come down in the last month or so, but that’s what you’d expect to see with the price coming down so much. Miners earn profits in bitcoin, after all, so they’re more likely to switch off their machines if the juice isn’t worth the squeeze. But as the chart shows, these big drop-offs in hash rates are usually only temporary, and have generally provided good long-term entry points.

Source: Glassnode.
Source: Glassnode.

The second is the total number of wallet addresses with a bitcoin balance above zero (blue line), which keeps going up even though bitcoin’s price has been going down. That’s either because holders are splitting their coins into more wallets, or because there are just more new investors buying bitcoin. But since the percentage of bitcoin’s supply that hasn’t moved in at least a year is also at record highs, I’d say the latter scenario is more likely.

Source: Glassnode.
Source: Glassnode.

3. A lot of leverage has been flushed out of the system.

One of the main reasons bitcoin and crypto came crashing down this year was that there was simply too much leverage in the system. When traders buy a price dip on leverage – basically, money borrowed on margin from an exchange or broker – they’re betting that the price will rise. But if the price instead keeps dipping, they can be forced to sell, since they don’t have enough collateral to stay in their positions. That turns small selloffs into much bigger ones.

And it wasn’t just retail traders in this predicament: big funds like Three Arrows Capital and Alameda were in the same boat. When there’s too much leverage in a market, it needs to flush out that leverage to get healthy again.

The next chart shows the open interest on leveraged bitcoin derivatives contacts (purple line), along with bitcoin’s price (white line). This leverage level is now close to where it was in January and May of 2021, and while it could still go lower, it’s a sign that a lot of over-leveraged speculators have already been washed out of the market.

Source: CryptoQuant
Source: CryptoQuant

What’s the opportunity here?

Sure, bitcoin could easily go a bit lower from here, but the data suggests it’s trading at good value relative to other times in its history. That’s good from a risk-versus-reward standpoint. As with all investments, you don’t need to time the exact bottom to profit in the long run. So if you think bitcoin might be starting to turn a corner, dollar-cost-averaging – investing set amounts of money at set time intervals, rather than investing all at once – is a battle-tested strategy. It could help you take advantage of bitcoin’s lower price levels while reducing your risk, and could pay off nicely further down the line.

For the contrarian investor, it’s a tale as old as time: if you focus too much on the news, you might miss out on the real story.

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Disclaimer: These articles are provided for information purposes only. Occasionally, an opinion about whether to buy or sell a specific investment may be provided. The content is not intended to be a personal recommendation to buy or sell any financial instrument or product, or to adopt any investment strategy as it is not provided based on an assessment of your investing knowledge and experience, your financial situation or your investment objectives. The value of your investments, and the income derived from them, may go down as well as up. You may not get back all the money that you invest. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment advisor.

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