Category Archives: Bitcoin
This is what dedollarization would do to Bitcoin – FXStreet
Dedollarization is a concept that has been around for a long time now but has only begun taking shape over the last few years. While Crypto was built to be a global currency, independent from other currencies, the devaluation of the US Dollar (USD) might play in its favor, making its aim a reality.
Dedollarization is the devaluation faced by the USD due to other currencies taking its place as the worlds reserve currency used for trading Oil and other commodities. The eroding trust in banks and the Federal Reserve is driving countries away from the US Dollar, pushing them to use their own currencies instead. This discussion is heating up more at the moment due to the recent macroeconomic developments.
USD is becoming weaker by the day as rising inflation and declining geopolitical relations have sent people looking into other options. Many countries, for the same reason, have pulled away from using the Dollar for bilateral trades and have shifted towards their own currencies. China is the biggest country when it comes to using its national currency for trade, as it already has agreements with Australia, Russia, Japan, Brazil, and Iran.
Recently BRICS member Russias Deputy Chairman of the State Duma Alexander Babakov also stated that the member countries could create their own currency backed not by gold but land and rare earth metals. Adding to the possibility, Babakov said,
Most likely, this will be doneNeither the Euro nor the Dollar is backed by anything, and our countries can do what was destroyed by the Bretton Woods system.
This could result in USD losing its presence from a major chunk of the global economic activity, further weakening its strength as the use of the likes of the Chinese Yuan could see an increase in settling transactions between countries.
However, apart from the Yuan, the weakening of the USD could also act as a boost for cryptocurrencies.
At the moment, the USD is the worlds major currency and dedollarization would lead to a reduced circulation of the currency, resulting in lower liquidity. Consequently, the stock market could note a bearish period which usually also impacts the crypto market.
This is because following the Covid-19 crash, Bitcoin and Cryptos correlation with the stock market increased. The Nasdaq100 and S&P 500 dictated the digital assets path, which took away BTCs inflation hedge status until the recent banking crisis.
With the Silicon Valley Bank, Silvergate bank and Signature bank failing, Bitcoin decoupled itself from the stock markets and rallied to its current trading price of $28,200. With faith in banks decreasing and the Federal Reserve suggesting higher interest rate hikes going forward the TradFi market could see some bearish effects.
Additionally, Bitcoins rising correlation with Gold is also rising by the day reaching 0.92 on April 3. Throughout 2022 this correlation stood far lower due to the volatility, but the current conditions strengthen the assets safe-haven status, which could drive hyperbitcoinization.
Hyperbitcoinization is known as the transition of Bitcoin into the worlds most dominant form of currency, which many predict is not too far. One of Bitcoins biggest supporters, former Coinbase Chief Technical Officer (CTO) Balaji Srinivasan, even went on to make a $1 million bet with pseudonymous Twitter speaker James Medlock on March 17 that BTC would be worth $1 million within the next 90 days.
Explaining this bet, Srinivasan noted that this million-Dollar bet was not about winning or rallying Bitcoin price but about settling the ideological discussion surrounding USD inflation. He explained his statement by saying,
I believe Medlock will agree that this is an ideological bet, like the Simon-Ehrlich bet, which resolved a famous difference of opinion between libertarians and progressives.
While many consider this to be just a publicity stunt, Balaji himself stated that his declining faith in banks and belief in Bitcoin is what drove him to make the bet in the first place.
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This is what dedollarization would do to Bitcoin - FXStreet
Senator Warren says banks have done really bad jobs, advocates for CBDCs instead of Bitcoin – CryptoSlate
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Senator Warren says banks have done really bad jobs, advocates for CBDCs instead of Bitcoin - CryptoSlate
Bitcoin Addresses With At Least 1 BTC Nears A Million, BTC Steadies Above $28,000 – NewsBTC
The number of unique Bitcoin addresses holding at least 1 BTC, currently worth $28,181 as of writing on April 3, stands at 992,243.
According to Look Into Bitcoin data, the number of holders with at least 1 BTC has steadily increased. This could suggest that despite price volatility, the coin has been finding traction and being adopted by supporters, including entities and governments.
Paralleldata from BitInfoCharts reveals that of all the circulating supply, individuals with more than 1 BTC comprise less than 3% of all addresses. As an illustration, addresses holding between 100 and 1,000 BTC stood at 14,004, representing 0.03%. Only four addresses held between 100,000 and 1 million BTC. The tracker revealed that most BTC addresses had between 0.0001 and 0.001 BTC.
Bitcoin whales were mostly exchanges, with one wallet associated with Binance, a cryptocurrency exchange holding 248,597 BTC. Another by Bitfinex, one of the earliest crypto exchanges, held 178,010 BTC.
In late October 2010, less than 60,000 unique addresses held 1 BTC. However, this has increased by almost 15X in the last 12 years, signaling acceptance. A noteworthy observation, in this case, is that the number of holders with at least 1 BTC has been steadily rising despite a sharp increment in price.
Throughout 2020 and 2021, BTC holders kept accumulating, unfazed by rapidly increasing prices following governments intervention to mitigate the risks of the COVID-19 pandemic.
In 2022, dropping prices catalyzed demand and accumulation for proponents during the last crypto winter. There was a noticeable increase in BTC addresses last year when prices tanked to as low as $15,000 in Q4 2022, triggered by the collapse of several CeFi platforms, like Voyager and Three Arrow Capital (3AC).
The bankruptcy of crypto exchange FTX broke Bitcoin, forcing it to a 2022 low of around $15,000. Since that time, the cryptocurrency has bounced to its current levels.
Bitcoin is a public network enabling users to move value, even across borders, without needing a third party. All BTC transactions are bundled into a block, confirmed, and sent to a different address at any time.
In this way, users can send funds fir a low fee without the intervention of a third party, such as a bank or money transfer agency. The Bitcoin network remains one of the most resilient, with an uptime close to 100%. The network has been continuously operating since launching in early 2009.
El Salvador became the first country to make BTC legal tender. Other countries, including the Central African Republic, also support the coin. The United States Securities and Exchange Commission (SEC), led by Gary Gensler, also recognizes Bitcoin as a commodity.
Feature Image From Canva, Chart From TradingView
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Bitcoin Addresses With At Least 1 BTC Nears A Million, BTC Steadies Above $28,000 - NewsBTC
Bitcoin SOPR Plunges, Why This Could Be Bullish – NewsBTC
On-chain data shows the Bitcoin Spent Output Profit Ratio (SOPR) has plunged recently; heres why this may be bullish for the price.
As an analyst in a CryptoQuant post pointed out, many investors have sold at a loss recently. The SOPR is an indicator that tells us whether investors are currently selling at a loss or a profit.
This metric looks at the on-chain history of each coin being sold or moved to see the price at which it was previously transferred. If this last selling price for any coin was less than the price its being sold, then the investor realizes a profit with the sale. Similarly, the coins being sold at a loss in the opposite scenario.
When the value of this indicator is greater than 1, it means the number of profits being realized is greater than the losses right now. This suggests that the average investor is moving coins at a profit.
On the other hand, the metric having a value below this threshold implies loss realization is more dominant in the market. Naturally, the SOPR being equal to 1 suggests the holders break even on their selling.
Now, here is a chart that shows the trend in the Bitcoin SOPR over the last few years:
As displayed in the above graph, the Bitcoin SOPR has been above 1 for much of the year 2023 so far. This means that the average investor has been selling at a profit during this period.
This trend makes sense, as the assets price has observed some strong bullish momentum in the last few months. Rallies like these naturally entice investors to harvest their gains, hence why profit selling spikes during such price surges.
However, the indicator saw a sharp plunge a couple of days back, and its value dipped below the 1 level. This suggests that some holders have just realized a large number of losses.
In the chart, the quant has marked the points where similar downward spikes in the metric were observed during the last few years. Interestingly, whenever the indicator has sharply plummeted, the price has bottomed out and followed up with a rise.
Such spikes in the Bitcoin SOPR are usually a sign of capitulation from the loss holders. When these investors finally sell, coins move toward holders with stronger convictions, and the selling pressure starts getting exhausted. This is likely why the price bottoms out close to such capitulation events.
Earlier in the current rally, when BTC had also plunged below the $20,000 mark, the SOPR saw such a spike. The latest stretch in the rally, which has taken the price above $28,000, followed it.
If this same pattern that has been seen time and time again repeats for the latest SOPR plunge as well, then Bitcoin could feel a bullish effect from it. However, something different about the recent loss selling is that it has come while the price has already been at a relatively high levels of $28,000.
All the previous instances of this trend came when the price had been facing a bearish wind overall. It remains to be seen whether this difference may lead to a different outcome for the price this time.
At the time of writing, Bitcoin is trading around $28,100, up 4% in the last week.
Featured image from Michael Frtsch on Unsplash.com, charts from TradingView.com, CryptoQuant.com
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Bitcoin SOPR Plunges, Why This Could Be Bullish - NewsBTC
Bitcoin’s correlation with stocks is at its lowest since 2021 as … – CNBC
Bitcoin has climbed steadily in March and is on pace to post its third positive month in a row , but its narrative has been on a wild ride over the past few weeks. The cryptocurrency has spent much of the past two years trading in lockstep with equities, but that trend has been coming apart since the beginning of 2023. The break became more noticeable in March, as investors rediscovered bitcoin's appeal as alternative banking system as the regional banking crisis unfolded. Bitcoin's correlation with the S & P 500 is now at its lowest since September 2021, after reaching its highest ever in 2022 , according to Coin Metrics. Meanwhile, bitcoin's correlation with gold, a traditionally "risk-off" asset, has risen. "Investors are beginning to view bitcoin as a hedge against the ongoing banking crisis and as a hard asset in this period of high inflation," said Sam Callahan, analyst at bitcoin services provider Swan Bitcoin. "Bitcoin's value proposition is fundamentally different in that it's driven by its network effect and its scarcity rather than, say, earnings growth with equities. This break in correlation is perhaps a sign more investors are waking up to this fact." Bitcoin became more of an institutional asset at the start of 2021 as big investors, short term traders and macro funds jumped into the market. Government stimulus, Fed monetary policy tightening and other economic concerns that drive the sentiment of these types of investors have also driven bitcoin prices up and down since then. The longer-term thesis never fully disappeared, however. "These correlation data show that, at least recently, bitcoin has indeed performed more like a safe-haven asset than a risk asset," Alex Thorn, head of firmwide research at Galaxy Digital, said in a recent note. "Given the nature of the current crisis in which the fractional reserve banking system's core limitations are tested bitcoin's fundamental characteristics genuinely distinguish it and, when custody or self-custody is done correctly, can offer a safe port in a storm." On top of that, bitcoin's price has remained sensitive to inflation and Federal Reserve rate hikes. This is despite bigger-than-usual knee-jerk reactions to regulatory crackdowns on the biggest crypto exchanges. The Securities and Exchange Commission took enforcement actions against Kraken and Coinbase , and the Commodity Futures Trading Commission announced a lawsuit against Binance . That could change, however, if the Fed's inflation-fighting rate hike campaign comes to an end, said Marc Arjoon, crypto research analyst at CoinShares. "As the Fed comes closer to the end of its hiking regime, the large macro factors affecting the variousasset classes bonds, stock, real estate and crypto will start to wane," he said. Traders are now expecting the Fed to hold its benchmark interest rate at current levels, with some forecasting lower rates as early as July, according to CME Group's FedWatch tool . Those cuts could total as much as a full percentage point by the end of the year, it shows. "As equities face risks of earnings and GDP recession, bitcoin won't have the same headwinds," Arjoon added. "This and the evident cracks in the financial system are why we've seen a divergence in returns over the last three months. If and when the Fed eventually pivots whether it comes later this year or next, this will be a boost for crypto more so as it would lead to a less risk-off environment."
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Bitcoin's correlation with stocks is at its lowest since 2021 as ... - CNBC
This Week in Coins: Investors Rehash Bitcoin’s ‘Safe-Haven’ Status as DeSantis Takes Aim at CBDCs – Decrypt
This week in coins. Illustration by Mitchell Preffer for Decrypt.
Last weeks crypto mega rally slowed this week. Still, many leading coins still posted double-digit gains over the last seven days.
The upward price action was escalated by the crisis hitting Credit Suisse, which last Wednesday needed a $54 billion loan from Swiss National Bank to shore up liquidity.
By Sunday, there was an announcement that domestic rival UBS agreed to buy the ailing bank in an emergency deal worth over $3 billion.
The banking news continued to drive investors towards risk-on banking alternatives, like crypto.
Bitcoin (BTC) soared amid the banking chaos, jumping from just over $20,000 on March 10 to trade at $27,537 at the time of writing. Ethereums growth was a similar story over the same period, rising from roughly $1,400 to today's price of $1,740, per CoinGecko.
Several prominent figures in the industry pointed to Credit Suisses collapse, alongside the collapses of crypto-friendly banks like Silvergate, Signature, and Silicon Valley Bankall of which happened this monthto publicly shill Bitcoin and rehash its potential role as a safe haven asset.
Another development on Bitcoin this week was the news that Solanas largest NFT marketplace, Magic Eden, added support for Ordinals, a protocol that enables crypto-savvy NFT fans to mint non-fungible assets on Bitcoin without the need for high-functionality smart contracts like those on Ethereum or Solana.
On Friday, the number of Bitcoin Ordinals surpassed 550,000 thanks to the proliferation of Bored Ape Yacht Club (BAYC) copies on the network.
Other notable positive price movements this week included XRP, which rallied 21% to $0.46 and Litecoin (LTC) jumped 6.4% to $91.
Only three top thirty cryptocurrencies posted significant losses this week: The OKB token dropped 16.1%, Cosmos Hub (ATOM) fell 16% to $11.18, and Toncoin (TON) sank 14% to $2.11.
In the U.S. this week, several prominent Republicans rebelled against the idea of a Central Bank Digital Currency (CBDC), essentially a dollar-pegged cryptocurrency that would be issued by the Federal Reserve.
Florida governor Ron DeSantis went first.
On Monday, he proposed an outright ban on CBDCs in his state. He announced the measure from a podium where the words Big Brothers Digital Dollar could be read in the background.
He justified the measure by saying: What [a] central bank digital currency is all about is surveilling Americans and controlling Americans. You're opening up a major can of worms, and you're handing a central bank huge, huge amounts of power, and they will use that power.
Warren Davidson, a Republican representative for Ohios 8th Congressional District, on Tuesday, tweeted that CBDCs were an Orwellian payments system and shared a letter he wrote to his colleagues urging them to reject a CBDC.
By Wednesday, Ted Cruz, the junior Senator from Texas, aped DeSantis and proposed his own legislative pushback against the idea of a Fed cryptocurrency.
That same day, the White House released this years Economic Report of the President.
In several places, the report conveyed Washingtons skeptical stance on crypto, calling it highly volatile and subject to fraud, and saying it frequently reflects an ignorance of basic economic principles that have been learned in economics and finance over centuries."
Finally, the United States Securities and Exchange Commissions (SEC) thinly veiled crypto crackdown continued apace on Wednesday when the agency hit Coinbase with a Wells Notice, alleging that the exchange's staking products constitute unregistered securities.
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This Week in Coins: Investors Rehash Bitcoin's 'Safe-Haven' Status as DeSantis Takes Aim at CBDCs - Decrypt
A Sudden Onset of Hyperinflation: What Will Happen to Bitcoin? – CoinDesk
I said I wouldn't write about it. I promised. I swore.
This article is excerpted from The Node, CoinDesk's daily roundup of the most pivotal stories in blockchain and crypto news. You can subscribe to get the full newsletter here.
The bet loosely works like this: In 90 days, Srinivasan will send Medlock $1 million U.S. dollars and Medlock will send Srinivasan 1 BTC.
It feels like a marketing ploy. It is a marketing ploy. Srinivasan himself has admitted that this is an ideological bet and not a money-making bet. Instead this marks a moment to ring the alarm about the horrors of money printing and impending hyperinflation.
Before all this, he raised the BitSignal, a promise to pay $1,000 in BTC to people with the best tweets about the state of American decay. Last weekend, Srinivasan and the Twitter faithful raised the alarm: Financial ruin is nigh.
And then U.S. financial markets opened flat on Monday morning. Balajis peers, venture capitalists such as Jason Calacanis, have had mixed reactions. Calacanis called the bet brilliant because the increased attention would likely drive up bitcoins price, but cautioned Balaji about starting a bank run.
In any event, I'll go on record: Bitcoin won't be worth $1 million on June 15, 2023, because of hyperinflation in the United States. This is not financial advice. But instead of focusing on the bet itself, Id rather focus on what a hyperinflated, $1 million bitcoin would even look like.
First and foremost, hyperinflation in the United States would be catastrophic for the global economy. Full stop. The fallout would be genuinely unfathomable. The U.S. is the beacon of stability for the rest of the world. Hyperinflation in the U.S. likely means hyperinflation everywhere.
But, at least we have bitcoin, right?
Right now you could get roughly $28,000 in exchange for a bitcoin. Under hyperinflation with $1 million bitcoin, you can get 35 times that amount for a bitcoin. If you have some bitcoin, that might excite you. But dont think of this as the dollar value of your bitcoin stack increasing 35 times. Instead, think about the price of bread, gas, rice, steak, cast iron pans, electricity, everything increasing 35-fold. It would be the same for your bitcoin.
And then theres the glaring problem: How will you even spend your bitcoin? If youre in a circular bitcoin economic ecosystem like Bitcoin Beach in El Salvador or Bitcoin Lake in Guatemala, youd probably be fine because they have the infrastructure to support a local economy. But even with the many millions of bitcoiners out there and the many thousands of businesses that accept bitcoin and the hundreds of exchanges that will give you dollars for your bitcoin, is that enough?
Bitcoin needs to service billions of bitcoiners and millions of businesses. And where will those who had no bitcoin before hyperinflation get their bitcoin? Will the exchanges even survive the sudden onset of hyperinflation? Maybe they will. Maybe people will broadly begin accepting bitcoin for payment for goods and services. Maybe some will sell their possessions for bitcoin. Who knows?
The point is that right now bitcoin wouldnt save us from sudden global hyperinflation. The ecosystem is simply not built out enough. We need more bitcoiners, more businesses that accept bitcoin, more bitcoin companies, more Lightning Network companies (to handle the increased transaction volumes) and more distributed mining.
How many more bitcoiners do we need? How many BTCPay Servers do we need to set up so companies can transact bitcoin? How many Lightning channels do we need to open? How many ASICs should be mining bitcoin? How many more developers?
More. We simply need more everything in bitcoin.
Hyperbitcoinization is the term used to describe a post-government-controlled-money world where bitcoin is the main global currency. Bitcoiners want hyperbitcoinization to improve money. "Fix the money, fix the world."
But if we are thrust into hyperbitcoinization before the ecosystem is ready then we might not be in a position to actually use bitcoin even if it could save us.
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A Sudden Onset of Hyperinflation: What Will Happen to Bitcoin? - CoinDesk
Massive ShockNew Bank Crisis And $300 Billion Fed Pump Has Primed Bitcoin After Huge Crypto And Ethereum Price Rally – Forbes
BitcoinBTC has found its feet this year after a rocky 2022 that saw a steep price crash and the emergence of serious regulatory concerns.
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The bitcoin price has climbed to around $28,000 per bitcoin, up from under $17,000 at the beginning of the year. The combined bitcoin, ethereum and crypto market has added over $300 billion amid rising expectations of a Federal Reserve u-turn and institutional financial giants quietly expanding into crypto.
Now, some of the biggest bitcoin, ethereum and crypto bulls are predicting the ongoing banking crisis that's spread to German giant Deutsche Bank could have primed bitcoin for a fresh break out.
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"The behavior of the [bitcoin] price through this crisis is going to attract more institutions," Ark Investment Managements Cathie Wood told Bloomberg this week, alongside bullish technical price analysis that shows bitcoin could be headed for around $35,000 per bitcoin.
"The fact that bitcoin moved in a very different way from the equity markets, in particular, was quite instructive," Wood, who's previously said she expects a huge bitcoin and ethereum price break out, added.
The banking crisis that began with the collapse of U.S. Silicon Valley Bank, Signature and Silvergate has spread to Europe, first engulfing Credit Suisse and now threatening Deutsche Bank. Deutsche Bank's share price fell sharply on Friday, adding to a crash that's wiped away a fifth of the bank's market capitalization so far this month.
"The banking crisis, which caused the market to price in rate cuts starting in the summer, has had little knock-on effect on crypto (so far)," Macro Hive analysts wrote in an emailed note.
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This week, the Federal Reserve opted for a 25 basis point interest rate hike despite earlier increasing its balance sheet by $300 billion to prop up the banking system.
Expectations have soared over the last few weeks that the Fed will be forced to flip dovish due to the banking crisissomething some think could trigger a return to a bitcoin, ethereum and crypto bull market.
I am a journalist with significant experience covering technology, finance, economics, and business around the world. As the founding editor of Verdict.co.uk I reported on how technology is changing business, political trends, and the latest culture and lifestyle. I have covered the rise of bitcoin and cryptocurrency since 2012 and have charted its emergence as a niche technology into the greatest threat to the established financial system the world has ever seen and the most important new technology since the internet itself. I have worked and written for CityAM, the Financial Times, and the New Statesman, amongst others. Follow me on Twitter @billybambrough or email me on billyATbillybambrough.com.Disclosure: I occasionally hold some small amount of bitcoin and other cryptocurrencies.
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Massive ShockNew Bank Crisis And $300 Billion Fed Pump Has Primed Bitcoin After Huge Crypto And Ethereum Price Rally - Forbes
Is Bitcoin the Future of Banking? – The Motley Fool
Many believe that the recent turmoil in the banking industry is the reason for Bitcoin's (BTC 0.33%) recent jump and why it moved past $28,000 for the first time in nine months. While it might come as a surprise, serving as an alternative to banks is one of the primary reasons Bitcoin was invented. Back in 2009, its pseudonymous creator Satoshi Nakamoto unveiled Bitcoin to the world as a response to the massive bailout banks received after the fallout of the Great Recession.
To Nakamoto, it likely comes as no surprise that Bitcoin benefits from the banking chaos in early 2023. Its sole purpose was to provide people with another option to store and send money that didn't rely on the highly opaque and, at times, shady operations of banks.
To fully understand why Bitcoin is benefiting and how it could become a more viable option in the future, we need to examine the characteristics that make it unique.
1. Decentralization
Because Bitcoin operates on a decentralized network, no single entity, such as a government or financial institution, can control it. This high level of decentralization provides users with more freedom, autonomy, and resistance to censorship or manipulation.
2. Financial inclusion
While citizens in developed economies have easy access to banking products, people in other parts of the world don't always have this luxury. With Bitcoin, all one needs is an internet connection, and one can send money, pay remittances, and store value without needing a bank.
3. Transparent security
Since Bitcoin operates on a blockchain, all transactions are public and immutable, so they can never be altered or removed. This combination of transparency and security makes transactions on the Bitcoin blockchain easy to verify and trace. As such, the risks of fraud and corruption become almost nonexistent.
4. Privacy
Although Bitcoin transactions are public, there's an added level of privacy because transactions aren't linked to any personal information. The only piece of information tied to transactions are public addresses that are in the form of a random, unique combination of letters and numbers. Theoretically, someone could trace all transactions coming from an address, but the likelihood of actually knowing who is behind them remains difficult.
5. Programmable money
Thanks to a 2021 update known as Taproot, Bitcoin became able to support smart contract functionality. With smart contracts, various financial processes can become automated and streamlined as they execute predefined actions when particular criteria are met. This inevitably leads to increased efficiency and new business models.
While we can only guess, it would be easy to assume that Bitcoin is doing exactly what Nakamoto intended it to. Banks aren't as safe as advertised and are often involved in corruption and malpractice. And when they do fail, they get bailed out while citizens bear the brunt of the fallout. When people begin to realize this, Bitcoin will likely continue garner attention from those looking for a way out of the status quo.
I'll be the first to admit that the premise of Bitcoin replacing banks remains slightly far-fetched at the moment. Critics of Bitcoin almost always point to the fact that it could never serve as an alternative to traditional banking while its volatility remains so high and deposits held in banks are insured up to $250,000 by the U.S. government.
However, these price fluctuations are likely a temporary phenomenon. Volatility is a characteristic of assets with a small market cap. As Bitcoin's overall value begins to grow, its volatility will likely come down.
But for the time being, it seems that Nakamoto's vision might be unfolding before our eyes, as more people are becoming aware that banks aren't completely free of risk and often use customer funds for speculative activities. Should more turbulence hit the banking sector, Bitcoin might just continue to climb.
RJ Fulton has positions in Bitcoin. The Motley Fool has positions in and recommends Bitcoin. The Motley Fool has a disclosure policy.
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Is Bitcoin the Future of Banking? - The Motley Fool
Bitcoin Liquidity Hits 10-Month Low Amid US Banking Crisis – Decrypt
While Bitcoins price has recovered since its March lows, topping out near $28,900, the crisis that caused the initial dip still poses concerns for the market.
The closure of Silvergates SEN and Signatures Signet network in early March has exposed the crypto market to low liquidity risks.
Liquidity is king, an adage in trading circles, is an apt way to describe its importance. It describes a market's ability to facilitate conversion between an asset to fiat currency.
Poor liquidity around an asset leads to market inefficiencies where traders lose money due to events like thin order books, slippage, and larger spreads. It can also cause serious volatility and deter sophisticated investors from placing trades.
Kaikos head of research Clara Medalie told Decrypt that the current situation is pretty dangerous and could manifest in massive price volatility in both directions.
"A drop in liquidity certainly helps traders to the upside, but there is always eventually a downside, said Medalie. The moment buy pressure subsides, anything can happen to price."
The liquidity crisis first manifested with a $200 million drop in 1% market depth after Silvergates SEN network was closed, as identified in Kaikos latest research note.
The 1% market depth is calculated by summing the bids and asks within 1% of the mid-price for the top 10 cryptocurrencies. If the market depth is sufficient and order books are crowded around the market price, it reduces the volatility in the market.
The market depth for Bitcoin and Ethereum is still down 16.12% and 17.64%, respectively, from their monthly opening levels. Kaiko analyst Conor Ryder wrote that we are currently at our lowest level of liquidity in BTC markets in 10 months, even lower than the aftermath of FTX.
BTC and ETH 1% market depth in March 2023. Source: Kaiko.
The liquidity crunch is also causing inefficiencies such as high slippage and larger spreads. Coinbases BTC-USD pair currently exhibits nearly three times higher slippage than at the start of March.
Slippage refers to the price at which an order is placed and the final price once that order is actually executed. In low liquidity environments, the difference between these two orders can be much larger than usual.
The most liquid pair in the crypto market, the BTC-USDT pair on Binance, also suffered a blow after the exchange ended its zero-free program.
As a result, the pairs liquidity depleted by 70% as market makers moved to greener pastures.
These conditions have deterred market makers and sophisticated day traders from placing trades because of the additional costs incurred due to market inefficiencies, worsening the low-liquidity environment.
The market share of fiat dollars and stablecoins has also drastically shifted, with stablecoin volumes on centralized exchanges rising from a 77% share of volumes to 95% in just over a year.
The trend accelerated swiftly after the closure of crypto banking networks.
Stablecoin market share (blue) in March 2023. Source: Kaiko.
While shifting to stablecoin trading pairs does not create an issue for medium to small-scale investors, it can become a problem for more sophisticated traders.
Medalie explained that USD networks are essential to traders, who are required to settle their traders daily.
"Stablecoins are not ideal from a risk management perspective, especially to settle at the end of the day or week, she said. But if banks close and don't process transactions, then stablecoins are the next best alternative."
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Bitcoin Liquidity Hits 10-Month Low Amid US Banking Crisis - Decrypt