It’s been about a year since the bitcoin price peaked at around $19,500, and the cryptocurrency has shifted lower and lower ever since. Some are now going so far as to say that bitcoin is essentially worthless, but not everyone is ready to give up on it yet, despite the fact that it continues to slump further underneath key support levels.
Putting the bitcoin selloff into perspective
The bitcoin price is now down by about 80% from its peak, but Canaccord Genuity analyst Michael Graham is putting the year-long selloff into perspective. In his “Bitcoin Monthly” report for December, Graham offered several reasons for the extended bitcoin selloff. Although he stops short of recommending the cryptocurrency or setting a price target for it, he thinks the bitcoin price is close to bottoming out.
In reference to the selloff, he noted that bitcoin has simply displayed characteristics common of assets in general. For example, whenever any asset surges as fast as the cryptocurrency did in 2017, a deep correction should come as no surprise, and that's what we have seen this year.
He also pointed out that bitcoin isn't the only asset which has sold off this year. The stock market has also been pressured as investors have increasingly sought less risky assets. Graham believes bitcoin should eventually become an uncorrelated counter to equities, but he said some investors now see it as risker.
Other problems with bitcoin
He also pointed to other current problems for the cryptocurrency. For example, he pointed out that use cases for bitcoin are currently lacking. The digital currency's only "workable use case" right now is as a "store-of-value" because transactions using it are currently slow and expensive, limiting its viability as a payment tool.
Additionally, regulators around the globe have been targeting the cryptocurrency market, especially issuers of initial coin offerings and fraudulent bitcoin-related products. As a result, potential buyers are remaining especially cautious, taking their cues from regulators.
Graham also believes institutional interest is delayed because it's taking some time for "custody solutions to become more widespread. He also noted that attempts to launch an exchange-traded fund for bitcoin continue to be delayed, adding that gold ETFs boosted the price of the yellow metal.
For now, regulators have refused to approve the more-than 10 applications for bitcoin ETFs, "citing the need for an underlying market free from fraud and manipulation," Graham explained.
Is bitcoin almost worthless?
One of the biggest issues for bitcoin lately has been its price compared to what it costs to mine new bitcoin. In fact, Graham pointed out that some "marginal miners" have begun to lose money on their efforts, so they may have been liquidating their bitcoin to cover their expenses in the short term, "perhaps waiting to either take capacity offline in a more rational move, or for bitcoin's difficulty adjustment that might bring costs down back to a more profitable point."
Many naysayers have been using this very point to suggest bitcoin is becoming defunct. For example, finance professor Atuyla Sarin argued in a recent post for MarketWatch that bitcoin is "close to becoming worthless" and currently in a "swift and painful drop to zero." He explained that the widely-estimated cost for mining bitcoin is about $5,000 per coin. Since the bitcoin price has fallen below this and shows no sign of rebounding, mining it has become quite unattractive.
He also pointed out that it makes no sense to mine bitcoin at costs greater than what the digital coins can be sold in the futures market. Even enthusiasts who expect the bitcoin price to rally eventually have no incentive to mine the cryptocurrency because they can buy the coins for less in the futures market.
Additionally, he said bitcoin faces a real problem if mining activities stop because "bitcoin can have no value absent the mining activity that maintains the ledger of who owns it.
"Absent the mining activity, bitcoin is just a set of encrypted numbers with no value," he stated.
This isn't the first bitcoin price correction
Nonetheless, Graham of Canaccord pointed out that this isn't the first major pullback in the bitcoin price. He said the closest comparison to the latest bitcoin selloff was in 2013 to 2015. Between December 2013 and May 2014, the bitcoin price was sliced more than in half from a little more than $1,100 to about $500. By January 2015, the bitcoin price plunged below $200, marking a selloff of about 73% in a little more than six months.
Sarin said in his MarketWatch post that the latest bitcoin selloff differs from past corrections. For example, he said the magnitude of the latest selloff "dwarfs the magnitudes of past declines." This point may be a bit difficult to support though, based on Graham's estimates. As he explained, it took about six months for the bitcoin price to correct by about 73% in 2013-2015, and right now we're sitting at a roughly 80% selloff in about a year.
Sarin also said the losers in the latest bitcoin selloff are probably newer investors who will retreat until use cases for the cryptocurrency become clear. Additionally, he noted that the futures market has made it easier for bitcoin miners to estimate their losses and profits ahead of time, so they will probably hold back until futures prices increase—if they ever do.
The bitcoin price should depend on supply and demand
Graham also pushed back against Sarin's and others' argument that mining costs should serve as a floor for the bitcoin price. He sees this way of thinking of wrong because he believes mining costs and the bitcoin price should serve as a balance between supply and demand. He noted that there are two different bitcoin supply levels. One is the total number of coins ever mined, while the other is the number of coins in circulation rather than being held in miner treasuries.
He also explained that miners adjust their capacity based on changes in the bitcoin price in a supply response he equated with what happens when oil drilling companies change their capacity in response to oil prices.
Positive signs in the bitcoin market
Graham also highlighted a few areas of promise for bitcoin. Contrary to what Sarin suggested about languishing mining activity, the Canaccord Genuity analyst offered actual numbers suggesting interest in the cryptocurrency remains strong. On one hand, the estimated transaction value on the bitcoin network has plunged this year and fell below $250 million in October.
However, Graham found that November brought the first month-over-month growth in estimated transaction value in four months. He said the estimated value rose to $831 million in November from $697 million in October.
Additionally, he said the number of confirmed transactions on the bitcoin network per day has been climbing steadily since March. November brought a 9% increase in the number of daily transactions from October, bringing the total to 268,000.
The average transaction size in U.S. dollars has also been trending higher most of this year, he added. Additionally, he said data from LocalBitcoins suggests emerging countries such as Venezuela and Argentina are becoming more and more interested in bitcoin as their own currencies have devalued.
As of today, the bitcoin price has fallen close to $3,800, confirming the long-term bearish trend. Technicians are now watching the psychological level of $4,000 to see whether the bitcoin selloff can reverse, carrying the digital currency back up to that level.
This article first appeared on ValueWalk Premium