Bitcoin surge fails to materialise
Investors disappointed by modest price appreciation since latest ‘halving’
NEW YORK: Investors expecting a sudden surge in the price of bitcoin, after it underwent a technical adjustment three weeks ago that reduced the rate at which new coins are generated, may have to wait a few months, or perhaps a few years.
Bitcoin has been trading in a relatively narrow range since it went through a third “halving” on May 11, which cut the rewards given to those who mine bitcoin to 6.25 new coins from 12.5.
There were some expectations that bitcoin would soar, similar to what happened after the two previous adjustments as the halving effectively decreased its supply.
The virtual currency has gained 11% since the adjustment and while it briefly crossed US$10,000 this week, it was trading on Saturday at $9,608. But the cryptocurrency has had more down days than up days, and analysts say the technical momentum overall was negative.
In contrast to recent movements, bitcoin had soared more than 40% from January this year until the halving.
On Thursday, bitcoin was at $9,783. It breached $10,000 twice after the halving but retreated as it found tough resistance at that level.
“Bitcoin is on a see-saw, between bulls and bears,” said Nicholas Pelecanos, head of trading at NEM Ventures. “On one end, we have network data and technicals; the other, strong fundamentals and a correlation to US stock indices.”
He added that bitcoin’s network data is flashing more bearish than bullish signals, as he expects further short-term selling.
Beyond the short term, though, many investors expect a price surge.
The first halving, in November 2012, catalysed a rally for bitcoin from about $10 to $1,160 in 12 months. The second halving, in July 2016, saw the price jump more than 300%, from $650 to $2,800, within the same time span.
“It may take six to 12 months for investors to reap the rewards of post-halving price movements,” said Lennard Neo, head of research at Stack Funds.
“In reality, there is a significant time lag between the halving event and the establishment of renewed market equilibrium based on general supply and demand,” he added.
Since miners’ profits have contracted as block rewards decreased by 50%, the halving has affected the supply side of bitcoin and increased the time needed for miners to find their break-even point.
Once this is found, Stack’s Neo said, bitcoin is likely to realise its “halving-induced” price appreciation.
Investors are also banking on higher institutional demand to further propel the price of bitcoin. Fund flows into the biggest crypto asset managers have been robust in the midst of the coronavirus pandemic.
“When we look at institutional inflows for our products and that of another asset manager, what you’re seeing are purchases that have now outstripped, for the first time, new bitcoins being created by 150%,” said Danny Masters, chairman of CoinShares, with $1 billion in crypto assets.
Michael Sonnenshein, managing director at Grayscale with $4 billion in crypto assets under management, said that since April the firm’s bitcoin investment fund had ballooned to $3.5 billion as of June 2, from $2 billion at the end of the first quarter.
“There’s a lot of momentum and interest in investing in digital currencies particularly in the face of uncertainty, the pandemic, political tensions, and the amount of stimulus being pumped into the global economy,” said Sonnenshein.
James Wo, chairman of Digital Finance Group, a $500-million crypto and blockchain fund, likens bitcoin to digital gold, and as such, the digital currency has barely scratched the surface.
“Bitcoin has great potential to grow,” said Wo. “Gold has an $8-trillion valuation, while bitcoin has less than $200 billion in valuation. It just needs more time for mainstream adoption. People need enough time to fully understand and believe in it.”