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In the Lord of the Rings, The Return of the King film, shortly before the battle of the Battle of the Pelennor Fields, Gandalf and Pippin were talking about the battle that was to come. Part of the title of this comes from Gandalf saying that moment of eerie silence was the, 'deep breath before the plunge' that would envelope Minas Tirith and threaten all of Middle Earth. This is a fairly common theme, as though a moment of calmness exists before chaos ensues. Another common phrase used outside of Tolkien's world is, 'the calm before the storm'.

This is the moment that I believe we are in when it comes to Bitcoin (BTC-USD). Those who follow my work closely know that I am incredibly bearish on cryptocurrency in general, but especially on Bitcoin. This is not to say that I don't believe it can't appreciate in price in the near term. It could double, triple, quadruple, or even more. But at some point, it deserves to fall spectacularly because, at the end of the day, Bitcoin has no significant value to it. This may seem to be a ridiculous claim given how it has taken the world by storm. But when you start looking at important data points, it does seem as though some of the delusion about the cryptocurrency's prospects is already coming undone.

The first data point that I would like to look at involving cryptocurrency relates to just how much trading activity it has experienced over the past few years. I understand that there was a surge several years ago and that we would expect some degree of normalization that would cause trading activity to drop before, if adoption is to grow in the long run, rise at a more reasonable rate. But that is not what we have seen. Take the time frame from the beginning of 2018 through September of this year. As you can see in the chart below, monthly trading activity for Bitcoin specifically has been falling on a year over year basis for at least five years now.

Author - Bitcoin City

In September of this year, for instance, trading activity for Bitcoin was 68.6% lower than it was the same month last year. Over the past two years, it is down a more modest 54.8%. But compared to three years ago, it has dropped 68.9% and, compared to five years ago, it is down a whopping 86.1%. The general trend here is clear. Trading activity is grinding to a halt. And no matter what you think of Bitcoin, it only gets its price because of the optimism of those trading it.

Author - Sifma

This is not the kind of trend that you see with a legitimate market. Take the US equities market as an example. While there have been ebbs and flows in the market from year to year the general trend has been higher. When it comes to the quantity of shares traded, 2022 saw an all-time high average daily trading volume of 11.87 billion shares. This represents an increase of 4.1% over the 2021 calendar year. It's also up 62.2% compared to 2018 and up 84.5% compared to what was seen in 2012. More recent data have shown a bit of weakness in the space. In September of this year, for instance, trading volume came in at 8.4% lower than it was the same time last year.

Author - Glassnode Studio

There are other data points besides trading activity that I can point to in order to make my argument. One valuable data point involves something called active addresses. An active address represents a user that has either sent or received cryptocurrency over a particular span of time. In the chart above, you can see monthly active addresses from 2020 through 2022, as well as for January of this year through August of this year. What we are seeing here is stagnation. This is not what you expect from a market that you would expect to continue growing. What this looks like to me is a pause where diehard adopters remain dedicated to cryptocurrency while the rest of the world refrains from engaging with it. So not only have we established that total trading volume has been on the decline, we have now established that the number of transactions occurring with cryptocurrency have essentially flatlined.

Another data point involves its popularity more generally. As you can see in the chart below, interest in Bitcoin specifically has plummeted in recent years. Globally, interest in it has been declining almost nonstop since peaking in May of 2021. Using this metric as a barometer, Bitcoin is 78% less popular than it was at its peak between January of 2018 and the present moment. While this data point on its own may not be material, when combined with the others that we have already discussed, we start to see a picture being painted that the dream of global Bitcoin adoption may never truly come.

Author - Google Trends

This marks a stark turn from a little over a year ago. Back in June of 2022, nearly 75% of retailers polled by Deloitte stated that they planned to accept either cryptocurrency or stablecoin payments within the next two years. In a separate survey conducted around that same time, it was discovered that 46% of merchants already accepted cryptocurrency as a form of payment and 85% of businesses that generated more than $1 billion in annual online sales already accepted cryptocurrency as well. While this data might very well be correct, you would expect the transaction volume of Bitcoin, as the leading cryptocurrency, to continue increasing as the number of cashless payments increased. However, that does not seem to be the case.

PricewaterhouseCoopers, or PwC for short, estimated that, in 2020, there were approximately 1.04 trillion cashless transactions across the globe. That number is expected to expand to 1.88 trillion by 2025 before climbing further to 3.03 trillion by 2030. This expected growth may make some believe that a return to growth in popularity for Bitcoin is inevitable. If we are expected to see cashless payments essentially triple in the span of a decade, you would expect to see the leading cryptocurrency also grow. But you have two challenges. For starters, you don't need cryptocurrency in order to engage in cashless payments. Traditional currencies work just as well and they lack the volatility that makes Bitcoin and, by extension, all cryptocurrencies other than stablecoins, bad mediums of exchange.

Perhaps more important than this, however, is the fact that central banks are becoming more interested by the day in launching their own digital currencies. At present, these are being referred to as Central Bank Digital Currencies (or CBDCs for short). The Federal Reserve has not committed to the idea of creating a CBDC, even going so far as to specify that such a maneuver would require Congressional approval. But there are plenty of other countries that have come out in favor of moving in the direction of digital currency. Back in May of 2020, 35 countries were reported to be considering the development of their own CBDC. Today, that number has grown to 130, representing approximately 98% of global GDP. Most of these are still in the early phases of due diligence or development. But it is clear the direction that we are heading. And unlike stablecoins, with no fewer than 23 having failed, a digital currency backed by a country like the US or other major countries would afford the kind of stability expected of a true currency.

At this point in time, things are not looking particularly pleasant for Bitcoin or cryptocurrency in general. I am bearish about both, but especially about Bitcoin. At the end of the day, I strongly believe that it will turn out to be worthless or very close to it. For now, volatility will persist. But when you look at the slate of challenges it has to contend with, the picture doesn't look pretty.

You would expect, in a world where cashless transactions are growing at a rapid clip, for either trading activity or active users to be growing. Neither of those are transpiring. Yes, you already have sizable adoption amongst online retailers. But that removes the argument that continued adoption on the side of accepting payments will lead to more individuals transacting in Bitcoin. Governments across the globe are either considering or have already launched programs to explore their own digital currencies. And because of the stability that they will be able to offer, any such currency that is launched will be vastly superior to something like Bitcoin.

When you add all of this together, it makes me feel as though we are at the point where Bitcoin no longer has enough support to it to continue appreciating materially. Before, the idea of the, 'greater fool' buying it, pushing up the price in doing so, was enough for many to justify putting money into it. After all, that was the only bullish case since there is little to no truly intrinsic value. But now that we are seeing these challenges emerge, even that argument is looking far less compelling. Though I do not expect it to occur overnight, and we may yet see significant volatility in its pricing, I would argue that an eventual plunge is inevitable. And as things stand, this might be the deep breath before it.

Go here to read the rest:
Bitcoin: The Deep Breath Before The Plunge (BTC-USD) - Seeking Alpha