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The cryptocurrency market has been awash with negativity for a while now.
The collapse of the TerraUSD (UST) stablecoin was the causa proxima of the latest price drop in cryptocurrencies, but perhaps this is the time to be contrarian. Several analytics favour buying Bitcoin (and, by extension, the better-quality cryptocurrencies).
That’s not to say that Bitcoin doesn’t drop lower from these levels, but we are clearly reaching the lower limit of the current sell-off. When Bitcoin turns, as it will, it will drag the rest of the cryptocurrencies with it.
Fear and Greed are at ‘extreme fear’ – a rare event
Analysis by Jarvis Labs looks at the Cryptocurrency Fear and Greed Index as a trading signal. Simply put, buying the index when it drops to an ‘extreme fear’ level below 10 has shown to be a successful investment strategy.
There have been only a few occasions in the last decade when the Fear and Greed Index was this low.
The index is made up of several inputs, as shown below:
Bitcoin is trading close to its costs of production – historically, a good time to buy
Cointelegraph notes that Bitcoin is currently trading about $1 000 above its cost of production ($27,644). Important to note is that the Bitcoin price seldom drops far below production costs, and when it does, it is followed by a rebound.
Bitcoin price vs costs of production
“Further analysis shows that in past instances where the market price of Bitcoin fell below the average mining cost, it tended to stay within 10% of the cost to mine and generally managed to regain parity within a couple of months,” says Cointelegraph.
Bitcoin mining difficulty also recently hit a new all-time high, and the market continues to see an uptrend as more industrial-sized mining operations come online. This means it’s unlikely that the average cost to mine will see a significant decline anytime soon.
Institutional interest is going mainstream
It used to be that the large banks avoided any discussion of cryptocurrencies. That has changed – dramatically – in the last two years. Most banks now have blockchain teams exploring how they can integrate this new technology with their legacy banking systems.
JP Morgan last week came out with a positive call on Bitcoin, which it sees rebounding back above $30,000. Bitcoin evangelist Michael Saylor recently pointed out that his company, software services provider MicroStrategy, invests all its spare cash into Bitcoin and has in effect become the first spot exchange-traded fund for Bitcoin. In other words, his Bitcoin buying spree (he’s invested more than $4 billion so far) is far from over.
The Grayscale Bitcoin Trust (GBTC), one of the few ways institutions can gain exposure to Bitcoin, is currently trading at about a 20% discount to the spot price of Bitcoin. This is unprecedented. As the chart below shows, it traditionally trades at a premium to the Bitcoin spot price. The discount is due to the unique structure of the Trust, where investors acquire shares (rather than Bitcoin) and are locked in for six months. GBTC has applied to convert to an exchange-traded fund (ETF), similar to those already on offer in Canada and Switzerland, which will unlock value and eliminate the discount.
Another positive sign is the accumulation of Bitcoin by whales (those owning 100-1,000 Bitcoin). Despite recent price drops, the whales are remaining steadfast, with the number of whales holding large Bitcoin deposits now at about 20,000.
If the institutions and whales are accumulating, perhaps it’s time to understand why.
That’s why we may be at the start of a generational shift in the Bitcoin story, where the smart money sees this as a buying opportunity, not a time to be sitting on the side-lines.
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