Latest Market Crash Proved to be Narrative Breaker and Reality Check For Bitcoin: Report

Owing to the historic inflation, Q3 has been painful for Bitcoin. The largest cryptocurrency by market cap appears to have largely lost its inflation hedge and store-of-value narratives in the market. According to Messari’s new report, the demand for block space fell, resulting in a decline in Bitcoin’s transaction count and fees by roughly 3% and 23%, respectively. The average daily value settled also plunged 44% QoQ.

While Bitcoin’s hashrate reached a new milestone of 258 exahashes per second (EH/s), the steep increase in energy prices and falling bitcoin prices pushed miners to an increasingly difficult position.

Breaking Narratives

Bitcoin has not been immune to macroeconomic factors, and narratives like inflation hedge and store of value are at stake. According to the crypto market intelligence company’s latest edition of ‘State of Bitcoin,’ the crypto-asset made new cycle lows even as the CPI inflation in the US hit multi-decade highs rather than acting as a hedge with its fixed supply and hardened monetary policy.

Bitcoin price action has been swayed similarly to that of a high-beta US tech equity instead of serving as a “store of value.” Potential hints of an uptrend were also damaged as the Federal Reserve resorted to a more conservative regime with lower liquidity and higher rates. Amidst a risk-off macro environment, Bitcoin was down by over 70% since hitting a peak a year ago.

Since the liquidity-driven bull market came to a conclusion in late 2021, data suggested that Bitcoin returns have also been increasingly correlated with the US tech stocks. In the third quarter, the average correlation between the crypto-asset and NASDAQ 100 was 0.6 as inflation and rate hikes claimed the turf.

Interestingly, digital gold and physical gold are far less correlated, with the average correlation for the quarter between the two assets being 0.2.

Bitcoin Is Yet To Mature

Andrei Grachev, the managing partner at DWF Labs, had earlier stated that factors such as the Fed’s decision on interest rates last month have greatly affected market confidence, and market uncertainty forced investors to turn to low-risk assets. He went on to add,

“Unfortunately, bitcoin is still seen as a newer, volatile asset to be a hedge, but I think Bitcoin is still going to be a highly profitable asset for middle and long-term investors.”

Bitcoin also lost market cap dominance with the main factor being Ether’s outperformance as it progressed towards its transition to Proof-of-Stake (PoS) consensus mechanism. Furthermore, the capitulation from big wits, with Tesla being the most notable ones, also weakened the price trajectory. The company sold 75% of its Bitcoin purchases Q2 of 2022.

Adding more volatility was the capitulation from large lending platforms and funds further. Even as more institutions have forayed the space, Messari believes that Bitcoin is yet to “mature” to a lower risk spectrum.