The hoped-for year-end rally with new all-time highs for Bitcoin and Co. fell through. The very high expectations were disappointed. What the macroeconomic environment, technical adoption and the stock-to-flow model say about the Bitcoin price in 2022.
If you disregard the technical factors in the chart and concentrate only on the fundamental framework conditions, then the American Federal Reserve (Fed for short) is likely to be responsible for the weak Bitcoin prices. In response to the sharp rise in inflation, it is now forced to initiate a trend reversal. The result is less liquidity for the markets and higher interest rates and thus a clear disadvantage for risk assets.
Even if not everyone sees it that way, Bitcoin is classified as a high-risk asset by the general market. As a result of the more restrictive central bank policy, it comes under the wheels as well as unprofitable tech stocks.
Inflation as a threat to Bitcoin
As paradoxical as it sounds to many: The greatest danger for the anti-inflation asset Bitcoin is the current high inflation. In the long term, BTC may benefit from high inflation and the resulting conversion of many investors from fiat to crypto. In the short to medium term, however, the opposite is true. If the US dollar appreciates and interest rates rise, then this is traditionally bad for gold and ultimately also for Bitcoin, which in terms of its market characteristics oscillates between the physical precious metal and tech stocks.
If the attractiveness of government bonds or monetary values increases, then this harms assets such as gold and Bitcoin without cash flow. At the same time, the financing costs for companies will increase in perspective. The companies that do not generate any profits suffer from this in particular. Among other things, this can be cited as a reason why the companies that can be found in Cathie Wood’s great-sounding Ark Innovations ETFs are performing badly.
Bitcoin’s Biggest Trial Coming?
With the first consumer price inflation that we have seen in Europe and the US since Bitcoin’s birth, the digital asset is facing a major test. Can BTC survive in an inflationary market environment that is not constantly being pushed by higher liquidity announcements from the Fed, ECB and Co.? After all, it is precisely in these phases – higher inflation or even stagflation with a simultaneous reduction in expansionary monetary policy – that it becomes clear which assets are fundamentally strong and which are only flushed up with the bulk of them.
Since Bitcoin has no empirical values for this new monetary policy market environment, it is very exciting to see how BTC will fare in the next few months. To appease it, however, it should be noted that the turnaround of the central banks is being carried out only with extreme caution. After all, not only Bitcoin, but the entire equity sector depends on the drip from the major central banks. At the ECB in particular, the tightening of monetary policy is therefore more likely to take place in homeopathic doses.
Looking away from macro-correlation
Even if Bitcoin cannot escape macro events, it would be too simple to just look at the general macro and monetary policy environment. In the long term, the question of how mass adoption will develop is more important than the US dollar interest rate level. In short: how many people in this world hold and use Bitcoin. It would be a disaster if the numbers of Bitcoin addresses, especially active BTC addresses, were permanently in decline. But that is precisely what is not the case. Despite the market turmoil and the crypto ban in China in spring 2021, the number of Bitcoin users is increasing inexorably, like the numbers of Glass node or Statista occupy.
This network effect, accompanied by an increasing number of nodes and a robust hashrate, are the fundamentally most important factors for long-term Bitcoin price development. This mass adaptation is flanked or supported by an increase in established companies and banks that are starting to support Bitcoin.
Bitcoin: Between Sparkassen and Adidas NFT collections
On the one hand, Bitcoin as a crypto reserve currency also benefits indirectly from it, for example when blockchain applications through NFTs, Gaming, Metaverse, DeFi etc. are in greater demand and companies such as Adidas are now issuing NFT collections.
On the other hand, Bitcoin benefits when established financial institutions such as savings banks and Volksbanken “give BTC their blessings” and plan to integrate them into their business models, as is currently being discussed. The latter in particular would massively lower the hurdles for less digitally savvy and conservative investors.
What about the BTC cycle?
In addition to the macroeconomic framework and crypto adoption, experience shows that the Bitcoin cycle plays a major role. This is mainly represented by the often used stock-to-flow model. At the moment things are not looking so good in this regard. According to the model and the time lag to the next BTC halving, Bitcoin should actually be on the last legs of its final rally – and be quoted over 100,000 US dollars. But instead of new all-time highs, December brought a major correction.
How relevant one assesses the Bitcoin cycle, everyone has to decide for themselves. Just because it has worked well historically does not necessarily mean that it will continue to do so in the future. Especially when the majority of market participants are extremely self-confident and everyone is expecting a year-end rally, as was the case with BTC and also in the equity sector, things often turn out differently. The markets then do not look for the most direct path, but rather the path of greatest pain. This is how the investment guru Raoul Pal likes to describe it, who sees the end of the current Bitcoin cycle only in the middle of next year.
Whichever forecast may come true, whoever sees himself as a Hodler and is not looking for short-term speculation, can lean back and relax and see the price development from the rear-view mirror.
With this in mind, to a successful and exciting crypto year 2022!