Bear markets in various assets, be they stocks, commodities and even digital currencies, have a way of bringing out investors looking for perceived value. The old lesson, however, is that there is value and there are value traps.
Mired in a bear market that has seen it lose more than half its value this year, bitcoin, according to some researchers, is still overvalued. The value of bitcoin, the largest cryptocurrency, is largely driven by the network of users. Researchers at ETH Zurich argue that the digital currency remains overvalued. At this writing, bitcoin was trading just over $7,000, well below its December peak of nearly $20,000.
“Drawing on a modified version of a model that assigns networks a value proportional to the square of the number of active users, and an equation that can capture how speculative bubbles evolve and grow, researchers at the Swiss university were able to observe how the cryptocurrency’s value rises with participation,” reports Bloomberg.
Assigning Value To Bitcoin
Currently, the combined market capitalization of all cryptocurrencies is $262.77 billion with bitcoin maintaining 45.4% market share. Based on those numbers, bitcoin’s market value is just over $119 billion, or about the size of downtrodden industrial conglomerate General Electric Co. (NYSE:GE).
While a market value of under $120 billion may not appear alarmingly high, particularly when considering Apple Inc. (NASDAQ:AAPL) is worth almost $858 billion, the ETH Zurich researchers argue that bitcoin’s valuation is still frothy.
“Their analysis ‘indicates current support levels for the Bitcoin market in the range of $22–$44 billion, at least four times less than the current level,’ the researchers said, according to a March 29 MIT Technology Review article,” reports Bloomberg.
Assuming the $44 billion valuation on bitcoin is accurate, that would mean the crypto, at least for now, is more valuable than eBay Inc. (NASDAQ:EBAY) and slightly smaller than the market capitalization on medical device maker Intuitive Surgical, Inc. (NASDAQ:ISRG).
A Fluid Situation
Market values are not static numbers, meaning the potential is there for bitcoin to revisit its glory days, particularly as adoption of and investment in digital currencies increase. For now, investment in cryptos among Americans is paltry compared to stocks, indicating there is a substantial runway for growth.
Still, over the near-term, investors may want to tread carefully with bitcoin because the ETH Zurich research cited in the Bloomberg article indicates that during past periods of substantial bitcoin overvaluation, large declines followed and then gave way to volatility and choppy trading.
Only 1.3 million Bitcoin are left in circulation on cryptocurrency exchanges!
Christmas is coming, and Bitcoin (BTC) scarcity is at historically low levels. CryptoRank announced in a recent tweet that just 6.3% of the overall Bitcoin supply, or 1.3 million BTC, are kept on cryptocurrency exchanges.
The decreasing amount is nothing new; it’s been steadily declining since the Bitcoin halving in 2020, when the BTC block reward was cut in half. The supply of BTC on exchanges has also decreased gradually over the past year, trending downward. On October 2020, exchange wallets made up 9.5% of the BTC supply, just before the all-time highs at Christmas time, and 7.3% in July 2019. In December 2021, the 6.3 percent figure is a record low.
However, the dominance of Coinbase’s BTC wallet is also falling. The American exchange used to store more bitcoin than all other exchanges combined. Over the past year, its domination has decreased from 50.52% to 40.65%.
Following a spate of good price statistics that tie into the rising price of Bitcoin, the announcement has sparked further excitement among investors. First and foremost, owing to the fact that BTC output is shifting from a “liquid” to an “illiquid” state, monthly BTC production has frozen at 100,000 BTC. In other words, more BTC is stored in cold storage than is being mined.
Additionally, it’s crucial to remember that many retail investors and several firms keep their BTC on exchanges, demonstrating that the “illiquid” BTC category may be even smaller. Instead of keeping their BTC in cold storage, some Bitcoin holders would entrust it to exchanges instead of leaving custody of their keys with them.
Surprisingly, Binance CEO and co-founder Changpeng Zhao has encouraged hot wallets, despite the best efforts of Bitcoiners like Andreas Antonopolous to the contrary: “Not your keys, not your bitcoin.” is part of everyday BTC mantra.
This may lead to the situation in which 1.3 million BTC is “stored” on exchanges, but they are not “circulating,” and they certainly do not contribute to the liquidity problem.
Despite calls for a “Santa Rally” on the back of strong analytics, the bears are not yet out of the woods. A tweet from BullRun Invest using Glassnode data showed that 24.6% of all BTC supply is sitting above $47,000.
According to the report, close to a fourth of the BTC purchased at those prices levels are now underwater. If BTC fails to make progress into the 50s, there may be fewer gifts under the tree tomorrow.
U.S. Takes Crypto Crime Seriously with Anti-Money Laundering Reforms
The United States passed into law its Anti-Money Laundering Act of 2020, which takes effect on January 1, 2021. This brings digital currency exchange companies and other digital-asset-related businesses under the scope of regulations of the Bank Secrecy Act (BSA), which requires financial institutions “to actively detect, monitor and report potential money laundering activity.”
“I’m pleased that our anti-money laundering legislation was included as a part of this year’s [National Defense Authorization Act]. This bipartisan legislation protects Americans by depriving criminals and terrorists of the tools they use to finance illicit activity. It is the first serious overhaul of our anti-money laundering system in decades, and it makes sense to include it in the biggest, most important national defense legislation Congress passes each year,” South Dakota Sen. Mike Rounds said in a press release.
The massive anti-money laundering reforms are targeting businesses dealing with digital currencies and assets by clearly specifying the definition of a “financial institution” to “‘a business engaged in the exchange of currency, funds, or value that substitutes for currency or funds” and “a licensed sender of money or any other person who engages as a business in the transmission of funds or value that substitutes for currency.”
The reforms further define a “money transmitting business” to include those who deal with “currency, funds, or value that substitutes for currency.” Now, there are no longer loopholes that digital asset companies can use when dealing with the Financial Crimes Enforcement Network (FinCEN), the agency that enforces the BSA.
Stricter Penalties Enforced
Aside from updating definitions to ensure that digital currency exchange firms and others dealing in digital assets are clearly within the scope of the AML Act of 2020 and the BSA, stricter penalties are now being enforced for crypto criminals.
Now, those who have been found guilty of violating the AML Act of 2020 and/or BSA are faced with fines amounting to profits earned while committing the violation and possible jail time. Those guilty of an “egregious” breach are also going to be banned from taking a board member position of any financial institution in the country for 10 years. Furthermore, employees of financial institutions who commit these crimes will be obligated to return to their employer all bonuses received during the time the act was committed.
FinCEN is being given additional resources, like increasing its manpower, to ensure the enforcement of these reforms. This will further safeguard investors against crypto crimes and nail down digital currency exchange firms and other digital-asset-related businesses that do not comply with BSA regulations.
Bitcoin (BTC) Crosses 55k And Is Heading Towards 60k Fast!
Less than two months into 2021, the price of bitcoin has risen 95.4%.
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