- Bitcoin (BTC) is again at a pivotal price point but should move down this time.
- Adoption by the Central African Republic is noteworthy but won’t change its downward trajectory.
- Adoption isn’t forthcoming from corporate entities stateside either.
It wasn’t that long ago that Bitcoin (BTC-USD) was considered to be a hedge against inflation. These days though, that isn’t the case. Bitcoin is now considered a risk asset.
The problem is that risk assets are being dumped. That has led to Bitcoin losing a lot of value quite quickly. That is one explanation anyway, and BTC remains very volatile. This year, Bitcoin has undergone several cycles in which it dipped to $35,000 levels and then rose to near $50,000 levels.
Let’s look at some of the larger implications and see where the cryptocurrency may be headed.
The $40,000 level
$40,000 is an important price for Bitcoin. The crypto-currency has tested this resistance level several times in 2022. Each time that it has, it moves up or down. That means investors are currently wondering which way it will move this time.
Here’s one reason to believe it may move downward: the 10-year treasury yield. Throughout 2021, Bitcoin largely moved in lockstep with the 10-year treasury yield.
That was why BTC was considered to be digital gold. Basically, investors came to understand that Bitcoin could act like gold does as a hedge against inflation. But in 2022, that relationship hasn’t held. Bitcoin has now lost its correlation to the 10-year treasury yield.
Judging which direction BTC moves when it reaches the $40,000 level is a guessing game. But given that Bitcoin is no longer correlated with the 10-year treasury yield I would guess that it won’t bounce upward quickly.
Central African Republic Adoption
Back in September of 2021, El Salvador made headlines as the first country to adopt Bitcoin as legal tender. With that adoption, Bitcoin became an accepted means of exchange for goods and services within the small Central American Nation. The news sparked a lot of headlines suggesting that more countries could follow suit.
Now the Central African Republic is following suit. Bitcoin will now be correlated with the African nation’s CFA franc. The economy of the Central African Republic depends largely on mining.
The impetus behind the move is largely unknown. However, it does now give the nation the ability to move based on the cryptocurrency’s volatility. It does give the nation more options at least.
In the case of El Salvador, the move was preceded by a lack of monetary independence.
In 2001, El Salvador began to accept the US dollar as legal tender to combat runaway inflation end its currency, the Colon. That move worked but it meant that El Salvador had little control over its monetary policy.
By accepting Bitcoin as legal tender the nation ostensibly regains some of that control. Although the move probably won’t do much to move Bitcoin’s price, the Central African Republic now benefits similarly.
Does the news imply that other countries with larger economies may soon also adopt Bitcoin as legal tender? Probably not. When El Salvador announced that it was going to begin accepting Bitcoin as legal tender, a poll revealed that 27 % of Americans supported making the cryptocurrency legal tender in the US.
Although no new polling has come out subsequently, Bitcoin’s ensuing volatility doesn’t suggest that the percentage should have risen.
Adoption is paramount for Bitcoin whether it be on the national level or within firms. that’s why recent news from Amazon (NASDAQ:AMZN) also hurts the crypto-currency.
A job announcement on Amazon connected to crypto caused the price of BTC to momentarily spike. Pundits have long speculated that Amazon will adopt Bitcoin for purchases at some point.
However, Amazon spokesman quickly denied the idea that BTC will be adopted as a payment option by Amazon this year. That likely isn’t the news that Bitcoin investors want to hear. It’s exactly the kind of headline that serves to keep BTC prices lower.
What to Do
None of the factors above indicate that Bitcoin should move upward anytime soon. Bitcoin remains very volatile and it is a guessing game like most cryptocurrencies.
But given those factors that I’ve just recounted, I wouldn’t assume the BTC is going to bounce back immediately.
On the date of publication, Alex Sirois did not have (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 InvestorPlace.com Publishing Guidelines.