Bitcoin Takes Back $20,000; Coin Model Says This About Crypto Inflation Link| Investor’s Business Daily

Bitcoin plunged below $20,000 after Fed Chairman Jerome Powell warned of more pain for the economy on Friday. It gave up the $21,000 level it had held through much of last week and broke below it as it extended losses over the weekend. It pares some of its loss today while hovering around the key level.

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The second largest coin, ETH, saw a steeper drop of 4% and changed hands at $1,497.41. Other altcoins – Solana, Cardano, Litecoin, Dogecoin and others – fell with the leading coins.

Coins fell with a broader market with the Nasdaq plunging nearly 4% on Friday, while the S&P 500 fell more than 3%.

Coins did not always move in the same direction as the stock market. But now they are.

The strong correlation is a recent trend, according to several studies. From 2017 to early 2020, crypto moved both with and against stock market trends.

Bitcoin did not mirror stocks before the pandemic bull market, when cryptos rose with the market indices.

Two old crypto narratives: Inflation protection, diversification

Before 2020, Bitcoin did not move in any particular direction with the market. It provided strong arguments for two theories:

The first is that cryptos, and Bitcoin in particular, are great diversification tools. When stock momentum does not affect another asset class, there is usually a good reason to use that asset class to diversify your holdings.

The second theory is that Bitcoin is an inflation hedge that will store value when inflation drives stock prices up and currencies down.

Bitcoin’s Deflation Algorithm

The world’s most famous cryptocurrency was set up to face exactly the kind of pressure that rising asset prices and falling currencies are causing – thanks to the mining cap. The total amount of Bitcoins is limited to 21 million.

As an example, while the money supply increased as the Fed bought bonds during the pandemic, growth in the supply of new Bitcoins has slowed. That’s because fewer and fewer new Bitcoins are available to miners as the cryptographic puzzles become harder and harder to crack. Around 19 million, or 90% of total Bitcoins, are in circulation in the 12 years since the first bitcoin was mined. But it will be 2140, or over a century, before the remaining 10% is in circulation.

So why is Bitcoin unable to be the store of value it was set up to be?

Crypto analysis firm Chainalysis suggests that a maturing crypto market is the cause. Increasing adoption has made Bitcoin more volatile and inflationary, and therefore less of a store of value.

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In a sign of wider acceptance, the US Office of the Comptroller of the Currency (OCC) in July allowed banks to offer custody of customers’ crypto. Bitcoin is also seeing institutional interest from fund managers. Recent research shows that global crypto adoption has grown.

Estimates from Singapore-based Triple A suggest that 320 million users use crypto worldwide, based on several reports and surveys. According to Chainalysis’s crypto maturity model, banks have started offering custody for crypto. But crypto lending is still not widespread. Fidelity is one of the few that allows institutional clients to use bitcoins as collateral for loans.

Will Bitcoin Retry $17,000?

Investors should look to see if the current strong correlation with the stock market is waning. A low correlation results in price discovery for assets such as Bitcoin. Also, wait for Bitcoin to make a strong move back above the 50-day moving average and new and lower buy points.

The coin tested levels below $20,000 in July. Leading exchange Coinbase’s order book shows a return to $20,000, but look for a plunge to June’s low below $18,000. That could take the coin to its December 2020 low of $17,589 before Bitcoin builds a base again.

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