Has Bitcoin Bottomed? 2 challenges to consider

Bitcoin (BTC 7.95%) stands out in the cryptocurrency industry due to its strong brand and first-mover advantage. And with the price down 52% so far this year, many investors are wondering if now is the time to bet on a rebound. Let’s discuss two factors you should consider before clicking the buy button.

Bitcoin is not a safe haven against inflation

The experiences of 2021 and 2022 suggest that Bitcoin is not a reliable hedge against inflation. Despite a sky-high annual inflation rate, the asset has lost most of its gains from the pandemic. And the Federal Reserve’s monetary policy tightening may be behind this unexpected trend.

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The US inflation rate reached 9.1% in June – well above the Fed’s target of 2%. To cool things down, the central bank shrinks its balance sheet and raises interest rates — two moves that raise the cost of capital and reduce the amount of money circulating in the economy.

When capital is scarce, investors become less willing to risk it on speculative assets like Bitcoin. And with many economists expecting the Fed to continue raising interest rates until the end of 2023, this headwind should be on the minds of investors looking to bet on a crypto rebound. Before I call the bottom, I’d like to see inflation peak and start to fall, which would reduce the Fed’s incentive to continue tightening.

The dust has not settled yet

The cryptocurrency market cap has fallen over 50% (to around $1 trillion) in 2022 alone. This rapid decline has led to a shakeout of riskier projects with flawed business models.

This month, popular crypto lending platform Celsius filed for bankruptcy following liquidity challenges as a result of the fall in the market. The crisis follows the collapse of Terra/Lunaa $60 billion (at peak) stablecoin platform that fell to virtually zero after losing its peg to the dollar.

As an established cryptocurrency with a relatively simple use case (namely, a way to store and transfer value), Bitcoin is shielded from many of the volatility-related challenges faced by newer, more complex rivals. But its trust and stability can be a double-edged sword.

For example, the failed Terra/Luna project had reserves of Bitcoin to maintain its stablecoin peg. When the project collapsed, these assets were released into the market, putting selling pressure on Bitcoin. Given the risk of contagion from other assets, investors may want to wait until the dust settles before jumping back into the Bitcoin market.

Bitcoin remains a long-term winner

With its massive scale and strong brand, Bitcoin still looks like a long-term winner in the cryptocurrency industry – especially now that market depth has exposed the weaknesses of some of its newer rivals. That said, rising inflation and Fed tightening look like near-term challenges for the crypto market as a whole. And the panic in altcoins could put selling pressure on established cryptocurrencies like Bitcoin. Investors looking for the bottom of this bear market should be careful not to jump off.