Bitcoin Is in a Consolidation Phase Before a Fresh Breakout

Bitcoin - Bitcoin Is in a Consolidation Phase Before a Fresh Breakout

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Amidst volatility, Bitcoin (BTC-USD) has been largely sideways in the first few months of 2022. It seems that the cryptocurrency is testing investor patience. It might also be an indication that the market participants are uncertain. There are certainly reasons to worry. With rampant inflation, there are prospects of multiple rate hikes in 2022. In general, this results in the tightening of global liquidity and can impact risky asset classes. Does it imply that Bitcoin is headed for another round of selling? On the contrary, I believe that the cryptocurrency is likely to remain in a broad range before a fresh breakout. There are reasons to be bullish on Bitcoin.

Recently, the Central African Republic became the second country after El Salvador to accept Bitcoin as a legal tender. It also seems likely that more countries will regulate crypto and benefit from innovation than pursue a blanket ban. This will push crypto adoption to higher levels in the coming years.

Talking about adoption, there are two important points to note. First, global crypto holders increased to 295 million as of December 2021. It’s further expected that crypto holders will surge to more than one billion by the end of 2022. These might be optimistic estimates. However, even if crypto holders double on a year-over-year basis, Bitcoin is likely to benefit considering the limited supply factor. Furthermore, a study also indicates that 55% of Bitcoin investors began investing in the last year. This is a clear sign of new crypto adopters going for the top market capitalization digital assets.

Another important point is that long-term holders have been accumulating Bitcoin since April 2021. The total supply held by long-term investors is among the highest in the recent past. Besides creating a tight supply scenario, the long-term holders would wait for the next big rally. It seems that smart money is accumulating bitcoin.

Coming back to the rate hike and tightening of liquidity, I believe that money will still flow into risky asset classes. The reason is that inflation is above 8%. Even five to six rate hikes would still imply that real interest rates will remain negative. Investors will seek to invest in risky asset classes to generate returns that help maintain purchasing power.

Additionally, it should not be forgotten that Bitcoin halving is due in 2024. With limited supply and reduced mining rewards, the digital currency is likely to trend higher. That is, however, a long-term perspective. Overall, phases of consolidation and sideways movement in any asset class tends to shake-out weak hands. This might be the story that is unfolding for Bitcoin.

On the date of publication, Faisal Humayun did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the Publishing Guidelines.

Faisal Humayun is a senior research analyst with 12 years of industry experience in the field of credit research, equity research and financial modeling. Faisal has authored over 1,500 stock specific articles with focus on the technology, energy and commodities sector.

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