March 27, 2024
Bitcoin Skyrockets 150% in 2023, Outshines S&P 500 and Gold
Bitcoin News

Bitcoin’s Remarkable Surge Raises Overvaluation Concerns Amid Anchored Investor Sentiments

Bitcoin (BTC), the foremost cryptocurrency by market value, has soared by over 150% this year, outperforming conventional assets like the S&P 500, gold, and the U.S. dollar by a significant margin. For some investors, especially those unfamiliar with prior crypto bull runs and still affected by the harsh bear market of 2022, there’s an intuitive sense that the cryptocurrency might be overvalued. This anticipation of a price downturn stems from a cognitive bias known as anchoring, where recent or initial data heavily influences future judgments.

Investors in traditional finance seeking exposure to Bitcoin might fall prey to this anchoring bias, instinctively waiting for lower entry points. The expectation for assets to double in value within a year, a rarity in conventional markets, also plays a role. Furthermore, there’s a common tendency among investors to avoid losses, which leads them to exit winning trades early while holding onto losing ones for longer periods.

However, relying solely on these cognitive biases might prove costly. Three key indicators—Bitcoin blockchain activity, miner flows, and the 200-day moving average—suggest that the cryptocurrency still has significant potential for growth.

Let’s delve into these indicators:

1. The Puell Multiple measures measure the U.S. dollar value of daily bitcoin issuance relative to the 365-day moving average of that issuance. This indicates the current supply of new coins entering the network. Higher readings suggest increased miner profitability, potentially leading to quicker liquidation and bearish pressure in the market. Conversely, lower readings indicate otherwise.

Presently, the Puell Multiple stands at 1.53, far from the red zone above four, which historically signified market peaks. The indicator could retreat to the accumulation zone (below 0.5) post the upcoming bitcoin mining reward halving, where the per-block issuance will reduce from 6.5 BTC to 3.25 BTC.

2. The Z-score of Bitcoin’s market value-to-realized value (MVRV) ratio measures the deviation of the asset’s market capitalization from its fair value. A Z-score of 1.6 indicates that the cryptocurrency is not overvalued, suggesting the possibility of a further rally in the coming year.

3. The Mayer Multiple compares Bitcoin’s current market price with its 200-day simple moving average (SMA), indicating overbought or oversold conditions. At 1.404, indicating that bitcoin’s price at $42,937 is 1.4 times its 200-day SMA at $30,563, there’s still room for further upward movement before hitting overbought levels relative to the 200-day SMA.

In technical analysis, breaching above the 200-day SMA often signals a bull market, indicating a favorable long-term trend for the asset.

Image by pixabay

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