Bitcoin to rally, but new highs unlikely; retailers see expansion
Bitcoin may be poised to move higher, but it won’t be a meteoric rise, and any increase will be well below the cryptocurrency’s all-time high. The world’s leading cryptocurrency by market cap has rallied and is trading in a tight range after falling as much as 50% from its record high last month.
However, bitcoin mining activity suggests a move above $40,000 is possible.
“Several on-chain and network indicators have shown a bullish bias during the week, although most are relatively neutral in the short and medium term,” Lennard Neo, a certified financial analyst and head of research at Stack Funds in Singapore, said in a research report.
Adam Smith’s invisible hand – a metaphor describing incentives to buy and sell – is at work in the market.
When the bitcoin price is high, bitcoin miners have the incentive to sell and take a quick profit. This can lead to a general downturn in the market as supply increases.
But with prices well below the last high, or even the drop from the peak, Bitcoin miners tend to sit on their new coins. This can lead to higher prices when demand is strong.
Bitcoin miners use high-performance computers to solve complex hexadecimal puzzles to extract new coins. The process is necessary to refresh the blockchain, the immutable record of bitcoin transactions.
Neo cited the Puell Multiple, a metric developed by Bitcoin analyst David Puell, as evidence of a price increase. The metric divides the daily value of bitcoin issuance by its one-year moving average, or more simply, mining revenue over its one-year average.
“A high Puell multiplier indicates high miner profitability, which has led to subsequent sell-offs,” Neo said. “Similarly, when the ratio is low, miners’ propensity to sell decreases, leading to a supply shortage and eventual price increase.”
The ratio is now around 1.40, a level at which miners have less incentive to sell. Earlier this year, the ratio was above 2.50 and peaked at about 3.53.
The elevated ratio may have helped the bitcoin market trade sideways – within a narrow range – before the downward pull.
“This means potential buying opportunities should the multiple fall below 1.0,” Neo said. “That being said, we prefer to be cautiously optimistic as further downside could emerge that. This is a brief summary.