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Bitcoin (BTC) Brushes off Inflation-fueled Losses but Faces an Uphill Task Breaching $22K

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Bitcoin has recouped mid-week losses registered from the slump witnessed ahead of June’s CPI data release. A significant chunk of investors anticipated mild downhill action from the event– a concern that spread across the market, weakening interest in the asset at the start of the week. Evident of this, the BTC/USD pair shed more than $1,500 between July 10 and July 13 to marginally above $19,100 at the peak of the erosion.

CPI data-fuelled losses

The US Department of Labor reported on July 13 that the consumer price index (CPI) in June rose to 9.1% on a yearly basis. The announcement renewed negative sentiment in the market as observers pounced on the opportunity to call into question Bitcoin’s qualities as a hedge against inflation.

By and large, periods associated with rising inflation are inherently inimical for high-risk asset classes like cryptocurrency as they wash away positive sentiment. Bitcoin, on its end, has performed contrary to expectations of an asset offering investors relief against inflation. Blockchain analytics platform Glassnode reported last month that Bitcoin registered three consecutive days with the largest USD-denominated realized BTC losses totaling $7.325 billion.

Recovery going into the weekend

Friday’s trading session saw the flagship crypto recover from the post-CPI data announcement bleed.

However, the BTC/USD pair struggled to sustain a run above $21,000 heading into the weekend and was spotted hovering around $20,600 at writing. The resistance and subsequent breather after failing to stay above $21k came as no surprise, bearing the current market climate. While Bitcoin has convincingly emerged unscathed from a week packed with macroeconomic determinants, most analysts still maintain its near-term outlook remains bleak.

Bitcoin mining cost continues charting lows

Elsewhere, Bitcoin mining hash rate and difficult traced interesting curves this week as the pain continued for miners. Mining entities dealing with Bitcoin have been facing hostile conditions in the past few months partly because of increasing energy prices and poor Bitcoin performance. The situation has become severe in July, evidenced by these companies resorting to extreme measures to stay afloat.

Bitinfocharts shows that Bitcoin mining profitability is currently at its lowest since October 2020. On the other hand, Bitcoin mining difficulty has been observed to decrease after a surge in the months leading to May.

The daily average mining difficulty peaked at 31.25T in May but slightly dropped in June and July. Though the current difficulty figure of 29.15 T and the next estimated figure of 28.06 T indicate a decline, they are still in the range of its all-time high.

Mining difficulty and profitability

In a July 13 note to investors, JPMorgan strategists penned that the average Bitcoin production cost has fallen to a ten-month low of $13,000.

The decline in mining cost, which has been chalked up to subsided electricity consumption, corroborates the correlation with market price – the latter being the determinant in the pair. Indeed, the average Bitcoin production cost rose in Q2 and Q3 2021, tracking Bitcoin’s rallying price then.

The estimated daily power demand for the Bitcoin network has been decreasing, especially in the past three months. Cambridge University’s Bitcoin energy consumption index as of July 15 was 9.23 Gigawatt, marking a 34% month-over-month drop from 13.99 Gigawatt on June 15.

Declining BTC production cost could benefit miners but hurt investors

The JP Morgan analysts additionally set forth that the decreasing difficulty and cost could be key in reversing the currently ailing profitability but poses a counterproductive impact on Bitcoin prices.

“While clearly helping miners’ profitability and potentially reducing pressures on miners to sell Bitcoin holdings to raise liquidity or for deleveraging, the decline in the production cost might be perceived as negative for the Bitcoin price outlook going forward.”

The JP Morgan team also submitted that several market analysts consider the Bitcoin production cost a benchmark for defining a BTC price bottom during bearish cycles. Analysts’ projections on a BTC bottom have lied between the $13,000 – $15,000 price range. This forecast is backed by the historical trend of the asset bouncing off a base, coming roughly 80% below the preceding bull cycle peaks.

ProShares’ Bitcoin (BTC) investment vehicles lead the crypto ETF market in the US

Elsewhere, ETP issuer ProShares now officially manages the two leading Bitcoin-linked investment vehicles in the US. The firm’s latest reverse Bitcoin ETF offering recently became the second-largest Bitcoin ETF following an upsurge in net short exposure.

The first-of-its-kind ETF product surpassed an equivalent net short exposure of 3,800 BTC earlier this month and now sits behind the Bitcoin Strategy ETF. The latter, still part of the ProShares family fund, is by far the largest approved Bitcoin ETF by this metric. Market data shows that the ProShares Bitcoin Strategy ETF had more than $679 million in assets under management (AUM), with a volume of 7,756,300 as of July 15. The reverse ETF had logged equivalent figures of $72.75 million and 426,800, respectively, at the time.

To learn more visit our Investing in Bitcoin guide.

Sam is a financial content specialist with a keen interest in the blockchain space. He has worked with several firms and media outlets in the Finance and Cybersecurity fields.

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