As advocates of innovation and disruptive technology, Ark Invest and CEO Cathie Wood are natural fans of Bitcoin (CRYPTO: BTC). To shed more light on the world's first cryptocurrency, Wood and her team publish a monthly report on the state of Bitcoin, recent trends in on-chain activity, and other macroeconomic developments impacting its price.
With another month passing by, Ark recently published their report for May. Here's what they had to say.
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Record low volatility and declining volume
Since the beginning of 2023, Bitcoin has experienced historical levels of minimized volatility, and this trend progressed further in May. Ark surmised that low volatility caused Bitcoin to trade sideways in the past month, and that could have been amplified as key participants chose to exit the market.
In early May, major market makers like Jane Street and Jump Capital decided to scale back their crypto operations in the U.S. and abroad. Market makers play a crucial role in crypto, ensuring smooth trading by providing liquidity, fielding buy and sell orders, and pricing assets accurately based on demand. Without them, billions of daily capital-market transactions would not be possible.
As high-profile market makers, their decision resulted in a significant decrease in trading volume. With less trading volume, Bitcoin's volatility subsequently continued to decline.
Bitcoin remains stable
Despite the downward trend in volume and volatility, Bitcoin remained supported by its 200 Weekly Moving Average (WMA), a metric closely monitored by Ark Invest to assess Bitcoin's overall health. Even in the wake of recent lawsuits against Binance and Coinbase, which led to a broad sell-off across the market, Bitcoin managed to hold its 200 WMA and swiftly regain its position.
While Ark views this support as a sign Bitcoin's overall health remains stable, what has been capturing Ark's attention lately is the introduction of a new type of asset on Bitcoin and one that could change the course of its future.
A new way to use Bitcoin
Similar to non-fungible tokens (NFTs), a new protocol was developed this year that allows for the attachment of data like audio, text, and images to individual satoshis, the smallest denomination of one bitcoin (0.00000001 BTC). Known as Ordinals, this innovation sparked record levels of activity on the Bitcoin network as interest in Bitcoin-based NFTs skyrocketed.
Ordinals have opened up a whole new realm of possibilities for Bitcoin, expanding its role beyond being a mere store of value. This groundbreaking technology not only supports the creation of NFTs but also enables the development of tokens commonly used in decentralized finance applications on other blockchains.
Soaring demand for Ordinals has had a profound impact on Bitcoin transactions, catapulting them to all-time highs. Ark Invest quantifies this surge with a ratio that measures transactions relative to active addresses, reaching its highest value since 2013 at 0.78.
Bitcoin and the economy
Contrary to the belief among Bitcoin advocates that it trades independently from the stock market and broader economy, evidence suggests Bitcoin is not immune to the influence of macroeconomic factors that affect the prices of other assets. Recognition of this reality has led Ark and its team to hold reservations about Bitcoin in the near term.
Dampening their enthusiasm for Bitcoin, Ark Invest foresees a potential liquidity crunch and the looming possibility of a recession. Their concerns stem from the recent actions of the U.S. Federal Reserve, which has been raising interest rates at an unprecedented rate. While there was a temporary pause on rate hikes recently, current economic data and statements from the Fed indicate the likelihood of two more interest rate increases as part of their efforts to quell inflation.
In addition to rising interest rates, Ark's report highlighted a recent survey conducted by Bank of America as further evidence of a looming recession. The survey quantifies the willingness of banks to provide commercial and industrial real estate loans and uses this as a proxy to measure the likelihood of an economic downturn. Results show that willingness of banks to lend is as low as it was before the Great Recession and at levels that preceded the last three recessions.
If additional economic uncertainty arises, it could potentially hinder Bitcoin's price appreciation as it is viewed as a risk-on asset and typically benefits from periods of economic expansion rather than contraction.
Despite prevailing short-term instability, Ark Invest maintains a positive outlook on Bitcoin's long-term prospects. In a recent Bloomberg interview, Cathie Wood repeated her previous assertion that Bitcoin has the potential to reach a price tag of $1 million by 2030. Citing escalating worldwide economic uncertainty as a driving force behind her conviction, Wood believes Bitcoin's future is bright as more individuals seek alternatives to traditional financial assets.
