Crypto Long & Short: A Bear Market Doesn’t Spell Doom

In the second quarter, bitcoin hit an all-time high of $64,888.99 and ended the quarter down 46% from that mark at $35,046.22. The drop, among other factors, prompted our team to make the bold claim in a previous issue of Crypto Long & Short that cryptocurrencies are officially in a bear market.

Price declines invite the cynics in droves and once-pompous, paper-rich day traders are suddenly “in it for the tech,” but a bear market need not spell doom for the institutional investor. For investors who believe in the intrinsic value of bitcoin, ether and other cryptocurrencies, bear markets shine a spotlight on tools and metrics useful for gauging market sentiment and shaping a long-term investment strategy.

This column originally appeared in Crypto Long & Short, CoinDesk's weekly newsletter for professional investors.

One of those metrics, MVRV, or "market value to realized value," has yet to reach the highs it historically hits before profit-taking, which suggests there are still unrealized gains in the crypto markets traders can capitalize on. In addition, a second metric known as the "Puell Multiple," which is calculated by dividing the total dollar value of bitcoin mined in a single day with its 365-day moving average, dipped to a one-year low recently, signaling undervaluation of BTC and a potential weakening of bearish market momentum.

For a deeper look at these metrics and how they are calculated, check out the full CoinDesk Quarterly Review 2021 Q2 on the Research Hub.

A brief point I should mention before moving on from price discussion is the fact that ether’s price increased 20% in the second quarter, while bitcoin’s shed 40%. It’s only the fourth time since the inception of CoinDesk’s Ether Price Index (ETX) in 2016 that the two assets have recorded mixed quarters. Despite the divergence, 90-day correlations of daily log returns for BTC and ETH remained strong and unfazed, trending around 0.75 throughout the quarter.

China vs. Bitcoin

In other notable news from this past quarter, the Chinese government cracked down on bitcoin mining in the country. Again. This time feels different, though. There have been rumors of a potential “east-to-west” bitcoin mining migration for some time now, but this is the first indication that it’s actually happening.

Regulatory crackdowns between May and June in Qinghai, Inner Mongolia, Yunnan and Sichuan forced multiple Chinese mining pools to either shut down or scale back operations. Following each event, bitcoin’s hashrate – a measure of how much computational power miners are expending – was negatively affected. Hashrate touched 200 million terahashes per second in the second quarter and ended the period at just below 90 million.

Hashrate is likely to rise back up eventually as China-based miners relocate their operations. Therein lies the real takeaway. Where are these miners going? Are they airlifting their rigs to Maryland? Or are they moving operations to Kazakhstan? Are they holding out hope that the government’s current stance on bitcoin mining will be short-lived? We don’t know for certain now, but where these miners end up will have a meaningful impact on bitcoin mining’s energy mix and will be an important narrative to keep watching in the months ahead.

Bitcoin is not a ‘boomer coin’

Market volatility and regulatory crackdowns on bitcoin mining aside, Bitcoin proved itself as a technology worth iterating and innovating upon in the second quarter.

On June 12, miners signaled their support for a technological upgrade to Bitcoin known as Taproot. Taproot is a bundle of three upgrades that are aimed at improving network security, privacy and scalability. Taproot is the most significant upgrade to the Bitcoin network since the activation of the block capacity enhancement of Segregated Witness in 2017.

There are some corners of Twitter that characterize bitcoin as the “boomer coin” because it's an “old, hulking and slow technology.” It’s true that over the years bitcoin’s “digital gold” narrative has shifted more toward “gold” than “digital,” but with Taproot officially locked in for activation this November, bitcoin is a boomer coin no more. Bitcoin is now a fun and exciting technology!

Jokes aside, Bitcoin’s ability to change within the confines of broad, decentralized consensus is significant. Big changes to Bitcoin don’t happen often, and the few that do successfully make it past the network’s grueling and slow process of governance are worth taking the time to understand. (Read more about Taproot.)

For now, bitcoin maintains its status as digital gold while expanding its use cases beyond anything gold could ever even imagine. So goes the optimist.