Marcello Minenna is the managing director of the quantitative analysis and fiscal innovation unit of measurement in Consob (Italian Companies and Exchange Commission), —Italian government'southward authority responsible for regulating the Italian securities marketplace — too as an adjunct professor of stochastic finance at the London Graduate Schoolhouse of Mathematical Finance and at Luigi Bocconi University of Milan. He is an economical and financial columnist featured on leading Italian and international publications.

The views and opinions expressed hither are solely those of the author and exercise non necessarily reverberate the views of Cointelegraph.com.

Sixteen months later from a peak value of $19,100, bitcoin is now hovering around $v,000. Despite its wide distance from the historical maximum, today'due south cost is good news for the market place, as the recent rise could be the stop of the collapse produced by the violent explosion of the digital currency bubble in 2022. From December 2022, the price of every digital asset has fallen, on boilerplate, 80%; for bitcoin, it has been the second collapse ever recorded, a violent fall even for an unconventional asset that has historically shown very marked blast-and-bust cycles. In 2022, the price declined past 93% — to $2 from a maximum of $39 — while in 2022, in just a few weeks, the price exploded to $1,151 to pass up after to $177 over a 12-month period.

It is not sure that, this fourth dimension, the lesser has been touched, despite the encouraging developments of the final weeks: Historically, the phase of rapid decline is followed by a stagnation of the price that can even last years, named in jargon every bit a "crypto winter."

In the context of a widespread speculative bubble that the so-chosen "altcoins" have turned out to be, apart from any technical evaluation, simple variants more volatile and less liquid than bitcoin, near perfectly correlated with each other. This feature made any attempt to diversify the take chances between different crypto-assets futile.

BTC and ETH Price Behavior

1-year Rolling Correlation

Among altcoins, a specific mention should become to Ethereum; this is the digital currency classified as second in terms of capitalization that has been exploited as a technical platform for the proliferation of the initial coin offerings (ICOs). These ICOs have been exploited to cover real public buy offers by collecting fiscal resources sheltered from regulators and by financing dubiously weak or shady projects. Most of these initiatives have invariably destroyed economic resources or turned out to exist real scams in which investors' defensive capabilities were substantially nullified.

Ex-post, the price pattern during the bitcoin bubble closely followed the asymmetric behavior of its historical cousins, starting with the Tulipan bubble of 1637, passing through that of the South Ocean Company up to the most contempo flare-up of the dot-com bubble of 1999-2000.

After a stage of moderate ascension, a very rapid manic phase of vertical price growth of about nine months followed, with a terminal buying hysteria in Dec 2022 — the month in which the price more than doubled, starting from an already very loftier base. The summit was touched with a classic "double peak" in January 2022, synchronized — not surprisingly — with the achievement of the maxima on global stock markets and with the meridian of liquidity released into the global economy by the primary central banks. Since so, the price of bitcoin has had an almost uninterrupted decline, with very rapid collapses, and shorter and less convincing recoveries, with descending relative maxima.

What is the flooring of this incredible descent?

On the discipline, we must consider that bitcoin, its clones and the rest of the digital currencies do not take their own intrinsic value. Prices are but adamant by the intersection of demand and supply on individual exchange markets; these are frequently highly illiquid prices, differing from each other by hundreds of euros without effective arbitrage between the various markets due to the structural limits of bitcoin and settlement platforms. Therefore, information technology is very difficult to think of determining what the off-white value could be.

Ofttimes for traders operating on these markets, the technical assay is the only tool for interpreting price movements. This paradoxically means that the toll dynamic, determined by the commonage actions of the traders, sometimes follows the forecasting patterns of the technical analysis.

Nether this overall flick, it is worth trying to isolate the primary drivers of the rise and fall of bitcoin and other altcoins. The role played by the stablecoin tether has been predominant in the stage of the rapid cost increase between March and December 2022.

A stablecoin is a digital currency anchored with a stock-still exchange rate to a fiat currency traded on the forex market, such every bit the dollar or the euro. Its being is justified by the fact that, at nowadays, the conversion between fiat and digital currencies is still dull and cumbersome, given that it requires a funds transfer from traditional banks to crypto exchanges via cross-border banks' payment systems, whose settlement may require several days.

The conversion between digital currencies is instead instantaneous and allows traders to protect themselves by using stablecoins from the very high volatility of bitcoin's and altcoins' prices. Of form, 1 tether is not equivalent to $i because it cannot be freely converted, although the visitor itself has always declared to concord a reserve of dollars respective to the quantity of tether issued and circulating on the exchanges. Still, for traders, tether performs the same function of the dollar, so it is irrelevant whether at that place is or is not total or partial convertibility.

In Apr 2022, there are at least eight different stablecoins on the market offering the same tether service, but in 2022, tether substantially managed a monopoly that heavily influenced the price trend on the various exchanges, every bit evidenced by a statistical analysis fabricated by the Academy of Austin, Texas. What'due south happened has a lot to exercise with the fact that the company that issued tether was de facto controlled past the largest crypto exchange in Asia, Bitfinex.

BTC Price and Techer Capitallization

Rolling Correlation : BTC Price/ USDR Capitalization

Past examining the data (run across figures in a higher place) we can detect how the price behavior of bitcoin (and of the other altcoins) in the "pump" stage of the bubble is perfectly correlated with the issuing of new tether on the exchanges. As the aforementioned inquiry shows, it is statistically probable that the Bitfinex exchange has artificially fueled the manic buying of digital currencies through the issuing of increasing amounts of tether. In a phase of exponential price rising, the issuing of tether without acceptable coverage in dollars is a assisting strategy. In fact, speculators could purchase digital currencies with newly minted tether, counting on existence able to resell them at a college price later and replenish the dollar reserves. The signal of potent price increases in increasingly accelerated times contributed to the growth of the media hype on digital currencies, which attracted retail investors with little experience in digital avails, often unaware of the enormous risks related to the terminal phase of a speculative bubble.

The long price wrinkle, peradventure not yet completed despite the contempo recovery in prices, was caused by two main factors operating in two singled-out time phases. Between January and April 2022, the decline was demand-driven and therefore determined by the flight of frightened speculative investors, highly exposed to losses due to the purchases made at very high prices. In this classic panic-selling, it can be noted that the support of a growing issue of tether was besides lacking on the exchanges. In fact, since Feb, the growth of tether in apportionment has slowed down and flattened out; this is indicative of the fact that, in a declining market, the strategy of issuing uncovered tether was no longer assisting.

In June 2022, the price plainly institute a floor at around $6,000, a level still over 10 times greater than the price that bitcoin had at the beginning of 2022. At this bespeak, the majority of speculative investors has already disappeared, and the volatility of digital currencies was drastically reduced as trades gradually became thinner (see figure beneath). Many analysts believed that, at this stage, $six,000 was the minimum level necessary to starting time the free energy costs of the miners that were digitally "coining" the new crypto assets. Until and so, the demand of a widening population of miners to take hold of cover ascent product costs was a force that supported the price growth of digital avails.

1 year Rolling Annualized Volatility of Some Digital Assets

However, this frail balance did not hold. In November 2022, the announcement of some other hard fork between digital currencies that aimed to coin a new bitcoin clone without substantial innovations caused a price earthquake that broke the fragile equilibrium achieved. In this deteriorating framework, the determining factor of the price decline seemed to exist offering-driven and related to the digital currencies mining community. In fact, a substantial share of miners abruptly shifted its computing power (or hash rate) from bitcoin toward clone-currencies in the promise to reap risk-complimentary profits from the blockchain fork, as already happened several times in the ascending stage of the bubble.

Just at the end of 2022, things were changing: The anomalous shift in computing power took away support for bitcoin and dragged the price of digital assets in a downward spiral, including the clone currencies on which the miners had heavily invested. Every bit a outcome, a part of the miners, which was already operating at a loss before this downturn, has been thrown out of the market, causing — for the first time ever — a turn down of the overall computing power of the bitcoin network, which collapsed by 50% in just a few weeks (see figure beneath). In this short menses of time, bitcoin and the altcoins went in a free-fall never experienced in the demand-driven phase of the bursting of the chimera, suffering losses in the order of lxx%.

Bitcoin Mining Computational Power

In 2022, the "Darwinian pick" of miners seems to have stopped, as testified by the recovery of the overall network hash charge per unit — albeit at a more moderate charge per unit. The bitcoin protocol provides an automatic machinery of autoregulation such that the cost of currency'south mining tends to fall in the face of a decline in the network calculating power. This periodic adjustment allows marginal operators to return to the marketplace at lower costs.

In the early months of the yr, cryptocurrencies slowly regained value, but the real surprise came on April 2, when, in just one hour, bitcoin spiked by almost $1,000, surpassing $five,000 — a new resistance that has basically held up over the weeks since.

Information technology is not clear what the reason for this jump was (perhaps an algorithmically generated lodge or a liquidity clasp connected to bitcoin derivatives followed past a forced purchase-in on market makers' quotes). After all, recently, various analysts had forecast a surge in the short term, and knowing the trigger effect matters little. The existent question is whether the market is heading back into bull manner. Multiple factors support an affirmative answer: the gradual recovery of the market capitalization of some stablecoins — tether commencement (come across figure below) — the wear of the resource available to the bears, the albeit moderate return of various central banks to an all-around monetary policy and the uncertainty linked to relevant phenomena on a global scale (the Libyan crisis, trade tensions, the Brexit puzzler and forthcoming European Union elections) that increases the appeal of digital currencies.

Bitcoin Price Versus Tether Capitalization

2019 could testify to exist a new starting point for digital currencies, given the slow recovery of investors' interest. Investments in technological innovation and infrastructure have never stopped, and the interests of institutional investors go beyond the short-term speculative frenzy. Regulators are also gradually intervening in the reorganization of these borderland markets. The crypto winter may exist less long than expected.