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3 Things About Bitcoin The Media Won’t Tell You
2018 was a bleak year for bitcoin investors and, predictably, there was no shortage of headlines announcing the death of bitcoin. But if you step back and focus on the hard data, the situation isn’t as dire as these articles might suggest. Here are three things the financial media isn’t telling you about bitcoin right now.
1. Long-term investors don’t sell.
Despite the drop in price, blockchain data from Glassnode shows that more investors than ever are holding bitcoin for the long term. Two-thirds of all existing coins (blue line) have not changed wallets in a year or more, meaning they have not been sold. What’s interesting is that this figure is up from its level of 57% earlier this year, a time when the price of bitcoin was almost three times higher than it is today. And even with all the FTX Drama last month, bitcoin holders did not move: their conviction in the active has only grown stronger.
Source: Glassnode.
Holder behavior becomes even more interesting when we look at the number of coins that have been moved from centralized crypto exchanges (green line) to private wallets. So, not only are investors holding more coins, but they also seem to be locking them up for now, again, with no intention of selling them.
Of course, this could also be because investors have less and less trust in centralized exchanges in general, given the number of exchanges that have gone bankrupt this year. And here’s another thing to keep in mind: institutional investors are starting to go digital active 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 sophisticated technology that connects to exchanges to make this happen. In other words, the rise of institutional crypto funds could be partly responsible for the increase in the number of coins coming off exchanges. And this increase in institutional investors isn’t a bad thing for Bitcoin, either.
2. The Bitcoin network continues to grow.
Two things suggest BitcoinBitcoin’s network is growing steadily. The first is its hash rate (orange line) – the total mining power needed to run the network – which continues to grow. The higher the hash rate, the more secure the network. Now, the hash rate has been dropping over the last month or so, but that’s what you’d expect with the price dropping. Miners are winning profits In bitcoin, after all, they are more likely to turn off their machines if the game is not worth the effort. But as the chart shows, these sharp drops in hash rates are usually only temporary and have generally provided good long-term entry points.
The second is the total number of wallet addresses with a Bitcoin balance greater than zero (blue line), which continues to increase even though the price of Bitcoin has fallen. This is either because holders are splitting their coins into more wallets, or because there are simply more new investors buying Bitcoin. But with the percentage of Bitcoin supply that hasn’t moved in at least a year also reaching record levels, I’d say the latter scenario is more likely.
3. Many levers have been eliminated from the system.
One of the main reasons why bitcoin and cryptocurrencies crashed this year is that there was simply too much leverage in the system. When traders buy a price drop using leverage – basically, borrowed money margin from an exchange or broker – they bet that the price will go up. But if the price continues to fall, they may be forced to sell because they don’t have enough. collateral to stay in their positions. This turns small sales into much bigger sales.
And retail traders aren’t the only ones affected: large funds like Three Arrows Capital and Alameda are in the same situation. When a market is subject to too much leverage, it must disappear to regain its health.
The following graph shows the opening interest on leveraged Bitcoin derivatives contacts (purple line), as well as the price of Bitcoin (white line). This level of debt is now close to that of January and May 2021, and although it could fall further, it is a sign that many overindebted speculators have already been eliminated from the market.
What is the opportunity here?
Sure, bitcoin could easily go down a bit from here, but the data suggests it’s trading at a good value relative to other points in its history. That’s good from a risk-reward perspective. As with all investments, you don’t need to time the exact bottom to profit long term. So if you think Bitcoin might start to break through, dollar-cost averaging – investing set amounts of money at set time intervals, rather than investing all at once – is a proven strategy. It could help you take advantage of Bitcoin’s lower price levels while reducing your risk, and it could be very profitable in the long run.
For the contrarian investor, it’s an age-old story: If you focus too much on the news, you risk missing the real story.