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By Erik Norland, CME Group
IN THE BLINK OF AN EYE
Bitcoin price tends to follow its cost per transaction and transaction volume Ethereum prices have a strong correlation with bitcoin, but have experienced even higher volatility
The Bitcoin journey began in 2009, when it was initially valued at around one cent per coin. In 2010 it rose to $ 1 and has since hit $ 64,000 on a trip that has been remarkable. The meteoric rise in its price has been accompanied by extraordinary volatility. The surge in prices, which is so spectacular that it is best seen on logarithmic charts, was punctuated by three deep bear markets: down 93% in 2010 and 2011, 83% in 2013 and 2014, and 82%. % in 2018 and 2019. In 2021, bitcoin has fallen by about 50% from its highs.
Part of the reason for bitcoin’s volatility is its complete inelasticity of demand. No matter where the price moves, the supply of bitcoin is growing at roughly the same preset rate.
The supply of Bitcoin is perfectly inelastic, and increases in the supply slow down over time.
The last Bitcoin bear market started in late April, when prices peaked at around $ 64,000 per coin. Since then, prices have fallen to $ 30,000 on an intraday basis. Was there any prior indication of its recent decline?
Here are three time series that cryptocurrency investors might find useful.
1) Cost per trade: Bitcoin has had three previous bear markets in which it fell 93%, 83%, and 82%. Each of these bear markets came after a surge in the cost of bitcoin per transaction. The cost per transaction increased at the end of last year, according to blockchain.info, from around $ 25 per transaction to $ 250 or more before this year’s fix. The bull markets that followed past bear markets only started when transaction costs fell and stayed low for a while.
Are Bitcoin Bear Markets Foreshadowed By Rising Crypto Exchanges Transaction Costs?
2) Transactions per day: The relationship between transaction volumes and bitcoin prices is not always clear, but since 2013 an increasing number of transactions sometimes seemed to portend an increase in bitcoin prices, while stagnant volumes or decreases sometimes appeared before prices fell. The number of bitcoin transactions has declined in recent months.
Transactions often stagnated or declined before bitcoin prices fell.
3) Difficulty: This represents the number of calculations required for a computer to strike a new bitcoin. In 2010, a computer could do as little as 10 calculations to produce a part. Today, it requires an average of 25 trillion calculations. This means that with 18.7 million bitcoins in existence, producing the remaining 2.3 million coins will be computationally intensive and expensive. This may not increase the demand for bitcoin, but it will, by all appearances, limit a new supply.
Is the growing difficulty of bitcoin mining putting a floor below bitcoin prices?
What’s happening with bitcoin has implications for the wider universe of crypto assets, including Ether, the currency of the Ethereum smart contract network. Ether is both strongly correlated with bitcoin and more volatile than bitcoin. To borrow the jargon of the stock market, this makes ether a high beta version of bitcoin. When bitcoin prices rise, ether prices tend to rise more. When bitcoin prices go down, ether prices tend to go down even more.
Bitcoin and Ether are highly correlated, especially since 2018.
Ether tends to be even more volatile than bitcoin.
What is curious is that the supply of ether is not limited in the same way as the supply of bitcoin. With bitcoin, there will only be 21 million coins produced, of which around 18.7 million already exist. On the other hand, there is no limit to the total number of Ether Coins that can be created, but only 18 million Ether can be created in a 12 month period. One would have imagined that greater flexibility in the supply of ethers could mitigate its volatility, but the opposite seems to be the case.
The report of the annual creation of new ether to bitcoin appears to follow the ETHBTC exchange rate. When the prices of ether rise against bitcoin, as they did in 2017 and as they did recently, it seems to prompt the creation of additional ether coins over the pre-set number of new bitcoins. created. What this suggests is that the new ether supply does not raise the price of ether so much as it responds to the price of ether relative to bitcoin.
When ETHBTC rises, it tends to encourage the creation of additional ETH.
This suggests that bitcoin retains a substantial advantage as a first-mover and holder in the cryptocurrency world despite the fact that ether, as the currency of the Ethereum smart contract network, may have more practical applications than bitcoin, which is mainly used as a store of value. . For many investors, bitcoin remains the primary entry point into the cryptocurrency universe, and it retains an important role in uncovering the prices of ether and other crypto assets.
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