Cryptocurrencies are likely in a bear market, but it may be a short one.
According to Coindesk’s latest (June) quarterly review, we are more than 76 days into a bear market (defined as a drop of at least 20%, followed by at least 90 days in which the price does not return to its previous high or low).
Bitcoin ended the June quarter 46% down from its all-time high of $64 889, with many proclaiming the start of a new bear market.
One of the measures used to calibrate where we are in the crypto cycle is MVRV (market value to realised value), which measures unrealised crypto gains as a proportion of realised gains. This ratio has yet to reach the highs it historically hits before profit taking.
Cryptocurrencies are likely in a bear market
Unrealised gains show potential for a swift return of the bulls
Coindesk says there is another measure used to determine where we are in the bull or bear cycle, called the Puell Multiple. This is calculated by dividing the total dollar value of bitcoin (BTC) mined in a single day with its 365-day moving average. The multiple recently dipped to a one-year low, “signalling undervaluation of BTC and a potential weakening of bearish market momentum,” according to Coindesk.
Ether’s price increased 20% in Q2, while bitcoin shed 40%
In a clear break with tradition, ether (ETH, the coin of the Ethereum network), increased 20% in the second quarter of 2021, while BTC dropped 40%. Despite this, the 90-day correlation of BTC and ETH remained strong throughout the quarter.
The decentralised finance (DeFi) sector continues to propel transaction activity on the world’s second largest blockchain by market capitalisation, Ethereum. As a consequence of DeFi growth on Ethereum, miners are experiencing a surge in revenue.
What appears to be undergirding the ETH price is the total value of crypto locked up in DeFi applications where they are earning attractive interest rates, and are being used to lend or borrow. The total value of crypto tied up in DeFi applications is currently around $70 billion, down from a peak of more than $120 billion in May this year.
DeFi total value locked unfazed by crypto bear market
China crackdown slows bitcoin network
In Q2, a coal plant accident in Xinjiang and regulatory crackdowns in Qinghai, Inner Mongolia, Yunnan and Sichuan forced multiple Chinese mining pools to either shut down or scale back operations. Following each event, the BTC hash rate (the measure of the computational power per second used when mining BTC) was negatively affected, which also impacted network operations.
“The Bitcoin network recorded its slowest daily average block time on June 27, 2021 at 23 minutes,” says Coindesk. “Bitcoin also recorded a 25% drop in mining difficulty levels on July 3, 2021, the highest ever in the network’s 12-year history.
“These events highlight the high degree of miner concentration in China and the potential for greater decentralisation in light of recent disruptions to bitcoin mining operations in the country.”
BTC hash rate falls as BTC price dips
Bitcoin’s declining energy consumption
Bitcoin’s energy consumption was the subject of heated debate in mainstream media after Tesla CEO Elon Musk announced in May that his company would be suspending bitcoin payments over environmental concerns about the cryptocurrency.
While Bitcoin’s energy consumption as estimated by the Cambridge Centre for Alternative Finance is at its lowest since November 2020 – primarily due to falling hash rate levels – and Musk has since announced that payments in bitcoin are once again supported for Tesla products, concern from high profile investors over Bitcoin’s environmental footprint persists.
As the following graph shows, energy consumption used in bitcoin mining declined through the second quarter.
Bitcoin’s energy usage declines in Q2, 2021