What does the Bitcoin Loss Inflation Hedge Narrative Mean for the Crypto Market?

With Bitcoin (BTC) down 72% from its all-time high, the global cryptocurrency market looked to be in a shambles in the third quarter; However, longer-term indicators point to a mature market.

As the third quarter of 2022 comes to an end, on-chain analysis for the top cryptocurrencies by market capitalization presented a gloomy picture. Bitcoin’s flag has often risen high in the volatile space due to its store of value and inflation hedgehog.

BTC’s gains of close to 50% in Q3 2021 attracted investors and traders to the network like honey from bees. However, the same cannot be said for the third quarter of this year.

A recent report by Messari described how the latest market crash was a “narrative breaker and reality check” for bitcoin.

Bitcoin’s Inflation Rescue Tale Dead?

At the time of writing, Bitcoin had a return on investment (ROI) versus USD -10% over the past three months, while its annualized ROI versus USD was 53.38%. The low short term and long term ROI presented that both short term and long term BTC HODLers were incurring net losses.

The BTC HODL wave and price chart shows that as of August 31, short-term holders (less than six months) were at a multi-year low and owned only 23% of the supply of bitcoin.

BTC HODL Wave | Source: Mesari

An increase in short-term holders is generally considered a macro-bullish signal and usually occurs around price gains. However, it was worth mentioning that BTC’s November 2021 ATH did not attract many new investors due to macro environmental factors.

Furthermore, BTC’s negative returns since June and price momentum in the $30,000 range negate its inflation hedge and store of value narrative.

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For many in the market, BTC’s negative returns mean its inflation hedgehog is dead, while for others like Microstrategy’s Michael Sayer, bitcoin’s lower price dip is another buying opportunity.

lose network vibrancy

After making an all-time high of $69,000, BTC price saw a decline of over 70% amid a risk-free macro environment.

A comparison of BTC and the Nasdaq 100 showed that the price of bitcoin is similar to that of a high-beta US tech equities, thus negating its store of value narrative.

Source: Mesari

During the quarter, the average correlation between BTC and the Nasdaq 100 was 0.6 as inflation and rate hikes dominated the narrative, while BTC had the least correlation to debt. Interestingly, however, digital gold (BTC) and physical gold were less correlated, with an average correlation of 0.2.

In addition, BTC funded addresses and active addresses saw significantly slower growth during the third quarter. Funded addresses only grew 1.1% compared to 2.5% in Q2 2022, while average daily active addresses were down 4% compared to Q2 2022.

Any further hope?

Despite negative returns and BTC nearly losing its inflation hedge, the coin’s true volatility turned downward as the price gradually corrected in the third quarter. Lower volatility for the top asset resulted in fewer liquidations for the larger crypto market.

futures open interest and daily liquidation | Source: Mesari

Average 30-day volatility in August was 60%, compared to over 80% in June. In contrast, total long liquidations in August were $5 billion, less than half of what was in June, while short liquidations were also significantly lower.

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Overall, while volatility was low for BTC in the third quarter, the asset still hasn’t “matured” for the low-risk spectrum. That said, BTC’s weak bullish narrative has also impacted the larger crypto market and bearish sentiment for the digital asset is leaning more.

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