Bitcoin Struggles as Bullish Sentiment Dwindles

On Monday Bitcoin dropped to $65,487 driven by profit-taking by long term holders and ongoing net outflows from US Spot Bitcoin ETFs further muting the dwindling bullish sentiment.

Last week, Bitcoin briefly fell below $65,000 for the first time in a month as ETF net outflows surpassed $600 million and the Federal Reserve indicated just one interest rate cut for 2024. BTC has been testing the medium-term uptrend around the 50-day moving average at $66,000. Since June 5, BTC prices have dropped from $71,000 to just over $65,000, influenced by a strong dollar, a shift away from risk assets, and growth in traditional stock indices.

Long-term Bitcoin holders and miners have been the major sellers in the past two weeks, with little indication of renewed buying interest, according to a report by on-chain analysis firm CryptoQuant. Data from CryptoQuant indicates that whales, or large holders of Bitcoin, have sold over $1.2 billion worth of BTC in the past two weeks, likely through OTC brokers rather than on the open market. Analysts noted that traders are not increasing their Bitcoin holdings, and demand growth from large holders remains weak. Additionally, stablecoin liquidity has continued to slow, growing at its slowest pace since November 2023.

Source: CryptoQuant

This selling activity is reflected in the declining UTXO (unspent transaction output) age bands tracked by CryptoQuant. A decrease in UTXO age bands usually indicates increased Bitcoin activity and selling, while an increase suggests more holding. The current trend of declining UTXO age bands suggests a lack of demand. Market observers believe some miners are shifting their focus to the booming AI sector due to diminishing mining rewards post-halving. With AI firms demanding energy-intensive data centers, Bitcoin miners are generating revenue from sales to AI firms.

Microsoft is building large AI data centers in Arizona and Wisconsin, which require vast amounts of electricity, straining power grids. By 2026, AI is projected to consume 40 gigawatts (GW) of the 96 GW global power demand from data centers, up from 49 GW in 2023. There is an opportunity for Bitcoin miners to help stabilize power grids by adjusting energy consumption in real-time. This ability to balance grids is crucial as renewable energy production fluctuates. States like Oklahoma and regions like Texas, and Iceland benefit from Bitcoin mining to manage electricity supply and demand. Bitcoin miners provide consistent demand, improving the financial viability of renewable energy projects.

Hashrate Set to Drop?

The relentless growth of Bitcoin’s (BTC) hashrate over the last two years may finally be slowing down, offering miners some relief as extreme summer heatwaves force the curtailment of some operations in the US. Miners have faced squeezed profit margins in an overcrowded sector, especially after the halving cut their mining rewards by 50% while the hashrate continued to hit new all-time highs. This hashrate growth has been driven by previously purchased mining rigs coming online and miners upgrading their fleet with more efficient machines to stay profitable. For example, on May 25, the hashrate climbed to a record high of 658 exahash per second (EH/s), according to Luxor’s Hashrate Index data.

This growth is expected to slow as North America enters the summer heatwave season. Miners use powerful machines that generate a lot of heat, and managing this heat is a significant operational challenge. During summer, miners need more power to cool their machines or may need to shut down operations due to high energy demand from residential air conditioning use. Many miners have to curtail operations during summer months due to overheating and increased residential energy consumption, activating demand response clauses in their power purchase agreements.

This seasonal phenomenon has historically resulted in lower hashrate during the summer months, which reduces the difficulty of mining Bitcoin. “As we enter the summer months in the United States, we’re keen to see if hot weather will force miners to curtail and thus suppress hashrate growth as we saw in 2022 and 2023,” said Colin Harper, head of content and research at Luxor Hashrate Index.

The hashrate has already started to decline since reaching an all-time high in March, dropping by 10% to 589 EH/s as of June 17, according to Hashrate Index data. With most miners located in the U.S., particularly in hot states like Texas, shutdowns in North America will likely impact hashrate growth. Roughly 36% of all Bitcoin mining takes place in the United States.

Make Bitcoin Great Again

President Trump aims to increase North America’s Bitcoin footprint. In a speech to libertarians this month, Trump garnered applause by promising to “stop Joe Biden’s crusade to crush crypto. I will ensure that the future of crypto and Bitcoin will be made in the USA, not driven overseas. I will support the right to self-custody for the nation’s 50 million crypto holders,” he declared. “With your vote, I will keep Elizabeth Warren and her goons away from your Bitcoin. And I will never allow the creation of a central bank digital currency.”

Trump framed crypto as a national and energy security issue, emphasizing its importance for the fossil fuel industry, which he has vowed to protect. His campaign also announced that it would become the first major presidential campaign in history to accept donations in cryptocurrency, pledging to “build a crypto army to drive the campaign to victory on November 5th.”

As well as a stalling hashrate, the Bitcoin network has experienced a notable decline in average block size and transaction rates, coinciding with the drop in price. The reduction in block size, which measures the amount of transaction data included in each block, indicates a sharp decrease in Bitcoin (BTC) blockchain activity, reaching a yearly low on June 7. The network’s transaction per second (TPS) rate also declined in June, indicating reduced activity and miner profitability due to decreased post-halving BTC block rewards.

The halving in April reduced block rewards for miners by 50%, decreasing their profits and incentives to contribute to blockchain activity. TPS fluctuated from highs around 28 TPS to lows below 4.5 TPS in June, with an average of 9.12 TPS at the time of writing.

Bernstein Remain Bullish

Bitcoin and crypto-linked stocks are underrated and poised for institutional adoption, according to a report by Bernstein. Bernstein acknowledges that crypto skeptics argue the spot Bitcoin exchange-traded fund (ETF) trade is over, with early allocations mainly from retail investors and most institutional demand focused on the “basis cash and carry trade” rather than new net long positions. However, analysts Gautam Chhugani and Maihka Sapra see Bitcoin ETFs on the verge of approvals at major wirehouses and large private bank platforms in Q3/Q4. Spot Bitcoin ETFs were first approved in the U.S. in January, significantly increasing access to the world’s largest cryptocurrency.

The institutional basis trade is seen as the “Trojan horse for adoption,” with investors now considering net long positions as they grow more comfortable with improving ETF liquidity. The basis trade involves buying the spot Bitcoin ETF and selling the Bitcoin futures contract simultaneously, waiting for the prices to converge. Bitcoin ETF inflows are expected to accelerate in the third and fourth quarters. The next phase of adoption will be driven by large advisers approving ETFs and increasing allocation headroom from existing portfolios. Bernstein projects bitcoin to reach a cycle high of around $200,000 by 2025, $500,000 by 2029, and $1 million by 2033.