After a tremendous run to over $106000 per coin, Bitcoin now finds itself in potential correction territory. Rising wedge patterns are forming, and the RSI's bearish divergence suggests that Bitcoin prices could be losing steam. In light of declining prices, it is worthwhile to also consider some fundamental concerns with regard to Bitcoin.
The Stance of the Federal Reserve
During the most recent FOMC meeting, Jerome Powell stated firmly that the central bank is not allowed and not looking to add Bitcoin to its balance sheet. This came as a surprise to many who expected the creation of a Bitcoin Reserve following the election of Donald Trump, who is known to be a huge supporter of cryptocurrencies. Nonetheless, the Fed remains cautious and does not intend to change its position of holding zero Bitcoin, or any cryptocurrencies for that matter. Apart from the clear regulatory concerns, the Fed has yet to be convinced that cryptocurrencies can coexist with the existing banking system. As such, proponents of the Bitcoin narrative will need to be patient with regard to the Fed's backing of such digital assets.
El Savador's Potentially Weakening Position
In a recent loan deal with the International Monetary Fund (IMF), which was worth $1.4b, the IMF strongly suggested a reduction in El Savador's Bitcoin exposure. El Savador's President Nayib Bukele made Bitcoin legal tender in 2021, and has been one of the strongest supporters of the "crypto revolution". However, the IMF remains wary of Bitcoin-related risks, and discourages excessive Bitcoin-related economic activity in the public sector. As a result, Bukele's National Bitcoin Office has revealed plans to wind down or completely remove Chivo — a cryptocurrency wallet created by Bukele himself. In addition, the public sector's participation in Bitcoin-related activity will be limited accordingly to a level deemed acceptable by the IMF. This recent development, while not disastrous, is still a hurdle to be overcome before we see full adoption of these digital assets (if it does happen).
Valuation Concerns
Amongst other things, another key concern with regard to Bitcoin is its fundamental valuation. Whether Bitcoin is considered cheap or expensive is largely explained by chart patterns and technical indicators, as opposed to tangible underlying factors. Buying a Bitcoin at $106000 right now could be a bargain, a rip-off, or just right — but nobody really knows. While intrinsic valuation of other traditional assets like stocks, bonds and real estate can be calculated fairly easily, this is not as straightforward for Bitcoin, or for any other cryptocurrency for that matter. Time will tell if the Bitcoin narrative plays out in the way that most Bitcoin supporters imagine — but till then, the fundamental valuation of Bitcoin remains largely speculative.
All in all, I'm not one to fear-monger the advent of cryptocurrencies — I own some myself! We've come a long way from the days when Bitcoin was first introduced. Blockchain technology has made tremendous progress in recent years, and cryptocurrencies are starting to find their place in the world of transactions. However, until their intended functions come into fruition, I would tread cautiously. That being said, trading of cryptocurrencies and their derivatives remains a profitable strategy when executed wisely.