Decreasing Bitcoin Circulation Speed... A Sign of Stagnation?

[Image source=Reuters Yonhap News]

[Asia Economy Reporter Lee Jung-yoon] The circulation velocity of Bitcoin, the representative cryptocurrency, has been observed to decline since the beginning of this month. Previously, even during the Luna incident and inflation concerns, the circulation velocity did not show a noticeable downward trend. However, as the policy of raising the benchmark interest rate continues and prices remain sluggish, it is interpreted that this has had an impact.

According to cryptocurrency data firm CryptoQuant on the 28th, Bitcoin's circulation velocity reached 79.93 on the 9th of this month and then showed a clear downward trend, recording 77.45 as of the 26th. Circulation velocity refers to the total amount of coins moved over the past year divided by the total supply, indicating how quickly the cryptocurrency is circulating in the market.

Until now, circulation velocity had shown an upward trend even when Bitcoin prices fell. When the Luna incident occurred in May and Bitcoin prices plunged from the $39,000 range to the $30,000 range, circulation velocity rose from 68 to 71. Additionally, when the U.S. Consumer Price Index (CPI) for May, announced in June this year, hit a 41-year high and Bitcoin prices dropped by about $10,000, circulation velocity increased from 72 to 75. This suggests that institutions and whales holding large amounts of Bitcoin continued to trade despite price declines.

The circulation velocity, which had been on the rise, began to decline after the 9th of this month. This marks the first sustained decline in circulation velocity since August 2020. The reason for this downward trend is explained as a reduction in activity from institutions and whales who had been continuously trading Bitcoin despite price drops, due to the ongoing policy of raising the benchmark interest rate. Previously, the Federal Reserve (Fed) implemented a giant step by raising the benchmark interest rate by 0.75 percentage points at the Federal Open Market Committee (FOMC) meeting held on the 22nd of this month, marking the third consecutive giant step.

As Bitcoin circulation velocity and trading decrease and prices fail to recover amid concerns over interest rate hikes, investor sentiment has been subdued for nearly 10 days. According to cryptocurrency data provider Alternative, the Fear & Greed Index, which measures investor sentiment as an index, fell by 1 point to 20 (extreme fear) the day before. Since recording 21 points on the 19th of this month, it has registered extreme fear for nine consecutive days until the day before. Alternative’s Fear & Greed Index ranges from 0 points, indicating extreme fear and pessimism about investment, to 100 points, indicating optimism.