Bitcoin in Agony
08 Jan 2022
7 min read
Bitcoin started the new year in a dwindling market. The political turmoil in Kazakhstan had an unforeseen impact on the leading cryptocurrency. The global sell-off in the stock market amplified the swing and propagated across the major altcoins. Could this temporary spike in volatility trigger a longer turbulent period?
Since Christmas, Bitcoin price fell near 41,000 USD losing almost 20% in less than two weeks. There are several factors behind this sudden dip, and institutional crypto-holders cut their positions, underlining that most investing is short term oriented.
Kazakhstan is the largest country in Central Asia and the second in the Eurasian Economic Union. With its rich energy resources and cheap electricity prices, Kazakhstan became one of the leading centres of Bitcoin mining. Kazakh mining farms cover almost 20% of Bitcoin's total mining capacity.
The Kazakh government cut internet and communication ties amid an unprecedented social turmoil that put the country on the brink of civil war. With less mining power available, Bitcoin prices lost significant value, emphasising its backbone's structural lack of stability.
Lower mining capacity was not the only bad news for Bitcoin. During its last December meeting, the Federal Reserve announced its plans to reduce its bonds holding along with the central bank raising interest rates. There is no clear timeline for Fed’s balance sheet reduction, but it is expected to start during the summer, while the hike in interest rates should occur sooner.
The Fed's overinflated balance sheet accounting for 8.3 trillion USD is one of the main drivers behind the all-time high stock market and low-interest rates. It is also one of the primary triggers of the hyperinflationary phenomenon recorded last year.
Fed’s announcement generated a sell-off in the equity market that propagated in the crypto-space, thereby amplifying the bear sentiment.
Overall bearish sentiment
The real issue is not the Bitcoin dip but the increasing dependency between traditional assets and crypto markets. Bitcoin aimed to be an alternative investment providing investors with diversification.
High correlations between different asset classes bring back memories from the credit crunch times. It signals an overall bearish sentiment.
Crash and depression are coming. Gold, silver, bitcoin, real estate will crash too. Ready to buy more gold, silver, bitcoin, real estate after crash has crashed. Time to get richer after fake inflation crashes. Rover Kiyosaki, American investors and entrepreneur
US unemployment drops in December to 3.9%, a level similar to the re-COVID era. Employers created 199,000 new jobs, but the new wave of Omicron infraction could reduce the job creation in early 2022. The low unemployment figures and the 10,000,000 workers that disappeared from the American workforce led to inflated salaries and put more pressure on companies to boost wages. Overall the dynamic of the job market is helping Fed’s narrative, which aims to start tapering as soon as they consider the economy recovered from the initial COVID impact.
We remember with a certain nostalgia the GameStop episode that took place
one year ago. GameStop became a meme investment officially. Recently,
GameStop decided to enter the crypto space and initiated a project to
develop a marketplace for nonfungible tokens. The company wants to diversify
from its core videogame business and get revenue in the cryptocurrency
Gamestop plans a strategic turnaround leveraging its current game developers and publishers base. Crypto is popular in the gaming industry, and NFTs based on virtual reality-enhanced video games can be the next big thing. GameStop hired a strong team to build a marketplace where gamers can buy and sell such NFTs.
Time will tell whether this strategic drift will boost its share price.
Lumber prices started to move north in April 2020 in the early days of the pandemic. The market remained volatile over the past year. The unprecedented increase in demand, workforce shortage and overwhelmed sawmills are the key factors that fueled this rally.
During the summer, lumber prices decreased considerably because sawmills increased their processing capacities. Nevertheless, the winter season in the Northern hemisphere affected productivity and logistics, thereby triggering a new rally. The demand for lumber stemming from the construction sector is steady and will most likely generate a supplemental increase in market prices.
The social unrest that erupted in Kazakhstan dwindled Bitcoin’s value and inflated uranium prices. Kazakhstan has the world’s biggest resources of uranium, representing around 40 per cent of global consumption for the material through mines operated by state-controlled Kazatomprom, a state control company that operates the Uranium mines directly or with various foreign contractors.
Currently, there are no formal exchanges for uranium as for other commodities. Uranium price signals are proposed through benchmark approaches by private companies such as UxC, LLC (UxC). UxC provides analyses of uranium market activities, including price estimates .
Uranium prices rallied in the last quarter, soaring by more than 30 per cent amid the global energy crisis triggered by the spike in gas and electricity prices. Speculators made a bet that nuclear energy will be critical for the fossil-exit strategy and the increasing use of electric vehicles.
The Dow Jones Index started a decline after the Fed's announcement concerning the contraction of its balance sheet. The new Omicron variant and the anticipated tapering of bond repurchase can trigger at any moment the beginning of a structural market decline.
Bitcoin ended the week near USD 41,000 amid lower mining capacity. While the market swings continue, technical selloffs could bring the leading cryptocurrency below USD 40,000.
The Gold ounce ended the week on a negative note, closing below USD 1,800. The foreseeable market contraction and the inflationary context are good arguments for a rally in gold prices.
The information and data published in this research were prepared by the market research department of Darqube Ltd. Publications and reports of our research department are provided for information purposes only. Market data and figures are indicative and Darqube Ltd does not trade any financial instrument or offer investment recommendations and decision of any type. The information and analysis contained in this report has been prepared from sources that our research department believes to be objective, transparent and robust.