Introduction
I wrote an article three weeks ago explaining why I was shorting the bitcoin (btc-usd) bubble. Many investors who followed my trade have made good profits over the last three weeks. Due to the reasons I have repeatedly emphasized (Elon Musk U-turn, Bearish Momentum, Regulatory Attack, Dilution), Bitcoin has tanked 50% since the peak and is now trading below the $40k mark. at this point, it is unmistakable that the music has stopped and the momentum is heading south. I can’t think of a sufficiently innovative catalyst that could restore the broken technical trend at this point. As such, I believe it is prudent for investors to liquidate bitcoin and/or bitcoin related stock positions as soon as possible for reasons I will discuss in this report. Additionally, I will share some key takeaways from the recent bitcoin crash and my predictions for things to happen over the next 12 months.
Where are we at?
As I mentioned in my previous article, bitcoin has no intrinsic value and therefore traditional validation metrics (ie dcf, comps) cannot be used for valuation. Since it is primarily driven by retail momentum and exotic catalysts, I think investors could compare how the market psychology played out during previous stock bubbles and use that as a guide to predict what bitcoin may do in the future.
Reading: Sell your bitcoin today and do not look back
stage 1: stage of euphoria
The emergence of musk’s coinbase, nft craze and snl marked the top of the crypto bubble. these explosive spikes occur when the bubble runs out of exotic catalysts and fails to attract more investors into the bubble narrative.
stage 2: complacency stage
As soon as the bitcoin community ran out of exotic catalysts, bitcoin crashed to the $50k-60k range and consolidated sideways, slowly losing momentum and suffering from dilution from other cryptocurrencies like dogecoin or ethereum. This was when average retail investors saw continual coverage of bitcoin on cnbc and the media hyping it up every day. At this point, the market did not believe bitcoin could drop below $50,000, and many investors became complacent and over-leveraged.
stage 3: anxiety stage (where are we)
musk’s U-turn and china’s strict cryptocurrency ban created unexpected volatility leading to an unprecedented long sell-off and a massive crash in bitcoin’s price. panic selling and capitulation quickly bought and rallied to $40k until new us treasury tax regulation. In the US, the US Fed’s CBDC announcement and China’s mining crackdown soon curtailed its momentum.
what’s next? long way to fall
The million dollar question at this point would be, are we out of danger? Or will things go further downhill? i think bitcoin has a long way to go from here. I think he will slowly slide down the slope of hope with a periodic dead-cat bounce. the technical aspects of bitcoin are badly damaged, it is better to be the first to sell in the bubble before the whole ship sinks.
the key takeaway from the recent bitcoin crash: bitcoin is not a safe asset
Inflation hedge?
Many data points suggest rapid inflation is on the way. in april, the cpi rose to 4.2%, which is the fastest increase since 2008. however, contrary to what the bitcoin community expected, bitcoin lost around 50% of its value over the last 2 months. this clearly shows that bitcoin is not correlated with inflation. price appreciation does not necessarily mean that it is a hedge against inflation; To be a hedge against inflation, the particular asset must appreciate at a rate similar to the rate of inflation. For example, Tesla is up 700% in 2020, but that doesn’t make Tesla an inflation hedge.
Bitcoin is not a hedge against a market correction
Recent price movements confirmed that bitcoin is more correlated with high risk momentum growth stocks like tsla than safe haven assets like gold or bonds. in fact tesla is down 20% but bitcoin is down more than 30-50%.
The same trend was shown during the March 2020 COVID-19 sell-off. These two examples indicate that Bitcoin should not be considered as a hedge against broad market sell-off but as a risk speculative momentum trade.
Bitcoin’s price action was significantly influenced by a single person
there is no doubt that musk’s unexpected U-turn was a major catalyst leading to bitcoin’s collapse. furthermore, after bitcoin fell to the $30,000 mark, musk’s tweet about diamond tesla hands sparked a massive rally to $40,000.
I think the fact that a single person can manipulate an asset’s price action by 10-20% with a simple emoji automatically disqualifies bitcoin as a trustworthy asset class that investors can put their savings into hard-earned.
what caused the bitcoin bubble to collapse?
There are three main reasons that caused bitcoin to crash more than 50% during the last two weeks.
first, the lack of exotic catalysts and musk’s U-turn
See also: List 20+ analysis iot crowdstrikeblog best
As I pointed out in my previous article, the price of bitcoin moves based on exotic catalysts. the main problem that affected bitcoin over the past month was that bitcoin has exhausted all major catalysts. For bitcoin to maintain its momentum, catalysts that are more innovative than the last should quickly emerge. For example, when microstrategy first bought bitcoin in 2020, it caused both bitcoin and microstrategy stock to surge. However, other companies that followed the microstrategy, such as square, tesla, and nexon, which listed bitcoin on their balance sheets, did not benefit from the bitcoin pump because the catalyst was no longer exotic. this means that companies that buy bitcoin may not be an effective catalyst to increase the price of bitcoin. Furthermore, the collapse of TSLA and MicroStrategy’s share price has likely sent a warning message to CEOs not to speculate on Bitcoin. a good example of this would be jack dorsey, the founder of twitter and square, throwing in the towel and assuring his shareholders that square has ‘no plans’ to buy more bitcoin after a massive $20 million loss.
Secondly, government regulation and cases of criminal use of bitcoin
As I noted in my last article, as the price of bitcoin rises, governments around the world have put in place hostile regulations to hinder bitcoin adoption. I stressed that governments can cripple or harm bitcoin without outright banning it. this is exactly what happened during the last two weeks, where both the us government. uu. as the Chinese government abandoned followed hostile policies while bitcoin rapidly collapsed. I don’t think it’s a coincidence, but a coordinated attack.
It was interesting to see the Chinese government reiterate the cryptocurrency ban they already announced several times since 2018, causing a massive crash from 40k to 30k in less than an hour. however, bitcoin quickly recovered to 40k when musk posted a post on twitter implying that tesla still has it. A day later, the Chinese government announced new plans to crack down on bitcoin miners in China, leading to another 20% selloff that ended the recovery momentum.
I believe that governments around the world have many weapons to use in their toolbox and are waiting for the most opportune moment to deploy them. this is a very strategic way for governments to defend themselves against their competition as they know that if they can kill bitcoin the general of the crypto rebellion, other altcoins the foot soldiers will collapse along with it. this trend was shown repeatedly during the bitcoin bear markets of 2018 and 2021.
third, excessive leverage and liquidation of long positions
Bitcoin and other cryptocurrencies have an extreme level of leverage, and any unexpected downward price movement can lead to quick liquidations as many investors are unable to meet the margin requirement. On top of that, it’s no secret that bitcoin whales benefit from this excessive leverage by manipulating the market and causing unexpected volatility to liquidate retail investor positions.
why investors should sell or sell their bitcoin position
The only reason not to sell bitcoin would be if investors expect bitcoin to appreciate from this point on. I don’t think bitcoin will go up from this point for the following reasons.
retail advertising is gone and musk is now the enemy of the bitcoin community
source: tradingview – bitcoin market dominance
As I mentioned in my previous article, bitcoin’s dominance is down to around 45% as of May 22nd. This bitcoin exodus trend took place while the crypto market cap was rising and also during the market sell-off. This trajectory of bitcoin losing market dominance clearly indicates that bitcoin is losing popularity/trust among crypto investors. One of the main drivers of this trend can be attributed to musk’s U-turn and his tweets attacking bitcoin. i think altcoins like dogecoin are better candidates for influencers like elon musk and david portnoy to push the price up. bitcoin is already too conventional. bitcoin had a giant market cap of $1 trillion, and it’s not that hot compared to other altcoins (i.e. dogecoin). i think there is a chance that musk will continually drop negative tweets about bitcoin, as bitcoin’s loss is dogecoin’s gain. For example, since Musk’s U-turn, he continually mocked Michael Saylor, CEO of MicroStrategy, on Twitter by calling him “Saylor Moon.”
bullish momentum is gone and bitcoin has terrible technique
Bitcoin’s chart pattern has exhibited a textbook head and shoulders pattern over the past 2 months and has continually failed to break above its key moving averages. i think this is terribly bearish for bitcoin to move forward. As bitcoin does not have a fundamental engine driving its price, I believe that monitoring the technical trend is imperative for bitcoin investors.
source: head and shoulders
See also: Bitcoin Bank Review 2022 – Scam or Legit?
source: business view
negative esg stigma and cases of criminal use that prevent institutional adoption
musk clearly pointed out the key drawbacks of bitcoin that the bitcoin community was not very interested in addressing.
- high energy consumption per transaction
- infunctionality as a currency due to its volatility
- technically, the bitcoin system is not “decentralized” due to the oligarchy of miners located in china and domain of major exchanges (ie binance, coinbase)
musk did a phenomenal job of driving these points home, as most of musk’s tweets tend to make news headlines. the aforementioned points make it impossible for institutional investors to hold their nose and buy the bubble. especially many esg investors would have a hard time approaching bitcoin. a good example would be greenpeace’s announcement that it will no longer accept bitcoin as soon as musk publishes problematic bitcoin power usage.
the bitcoin community is actively trying to reinvent itself as ‘green’ and ‘clean’ however i believe the energy issue will continually affect bitcoin unless bitcoin ditches the proof of worked. no matter how hard the bitcoin community tries, i think it would be extremely difficult to prove that bitcoin is more energy efficient than centralized currencies (visa, ripple, etc).
US Colonial Pipeline Ransomware Attack
Another negative catalyst that happened was bitcoin’s enabling role in the us colonial pipe ransomware attack. uu. According to Forbes, many companies in the bitcoin industry decided to form a lobbying organization to pay a former CIA director to write a report whitewashing the use of bitcoin and other cryptocurrencies by criminal enterprises. When the US colonial pipeline case came to the fore, it further tainted the bitcoin narrative. Furthermore, I believe that governments around the world will use this case as an excuse to impose strict KYC-AML regulations on many cryptocurrencies. this will lead to an increase in transaction costs and a decrease in transaction speed.
Large market sell-off and markets are in risk aversion mode
it is clear that the market is moving into a risk aversion mode; Many investors are moving from momentum growth stocks to value stocks and commodities. this rotation does not bode well for bitcoin as bitcoin is the poster boy for high-risk growth assets.
Rise of central bank digital currencies and regulatory attack by governments
Countries around the world have announced their plans to launch their own central bank digital currencies. the race began with the launch of the digital yuan by the Chinese central bank. I was surprised to see us fed by quickly jumping into the race sooner than I thought and announcing his plans to launch a research paper this summer. this news coincided with the fed and treasury’s tough stance on the regulation of private cryptocurrencies. i predict tougher regulatory attacks on bitcoin as governments don’t want private competitors. a perfect example would be China reiterating a tougher plan to crack down on cryptocurrency trading and miners. this is contrary to what the bitcoin community expected; i think governments would not allow competing private digital currencies to co-exist with their digital fiat (cbdcs). as i mentioned in my previous article, about 70% of bitcoin miners are in china, and if china cracks down on miners, the entire bitcoin infrastructure may collapse.
how to benefit from it
For investors who want to pop the bitcoin bubble as it collapses further, they can look to sell bitcoin directly through bitcoin exchanges like binance. the other option is to use the inverse bitcoin etf (tse:biti). however, this is only available to Canadians, and non-Canadian brokers may not allow investors to purchase it.
Another option is to short Bitcoin-related stocks such as Coinbase (COIN), Marathon (MARA), Canaan (CAN), Riot (RIOT), and Ebang (EBON). When Bitcoin collapses, these Bitcoin-related stocks will also collapse as their margin structures are based on the price of Bitcoin or based on the number of cryptocurrency transactions that are made within the platform (i.e., Coinbase).
Especially, many Bitcoin miners could collapse 80-90% from the current price if Bitcoin falls back to $10-20K as Bitcoin mining will be no longer profitable for them, and they will be holding useless mining equipment while bleeding cash. This happened during the 2018 Bitcoin collapse, where both MARA and RIOT lost close to 80-90% of its value in less than a year.
risks
Bitcoin is highly volatile and investors need to constantly monitor price momentum. an unexpected catalyst can cause bitcoin to rally 10-50% when no one expects it; it is imperative that investors size positions accordingly and have a stop-loss to avoid margin calls. however, at this point, I think bitcoin has used up most of its exotic catalysts, and the reward of shorting bitcoin significantly outweighs the potential risk.
target price
My plan would be to short up to $31k and liquidate 30-50% of the position to cover the cost base and continually short with house money. the reason i think $30-31k will be the key resistance is that this was the point at which tsla may have bought bitcoin. When the price of bitcoin hits the $31k mark, Musk can liquidate tsla’s bitcoin position or try to increase it via his twitter account. after the $31,000 resistance is broken, the next key resistance would be around $19-20,000, which was the 2017-2018 high.
conclusion
As I predicted in my last article, bitcoin has crashed ~50% due to regulatory attack from the Chinese and US governments, musk’s U-turn, and loss of momentum. To add insult to injury, the use of bitcoin during the US Colonial Pipeline ransomware attack. uu. and musk’s vitriolic criticism of bitcoin’s high energy usage has done irreparable damage to bitcoin’s reputation. Some institutions that bought into bitcoin speculation would have likely already walked away with a painful loss and many of those investors may not be returning to bitcoin any time soon. i think bitcoin has no fundamental value and is driven by media hype and exotic catalysts. as such, bullish technicals and positive momentum are imperative to its success. I can’t think of any positive catalyst that can restore bitcoin’s broken technicalities and tainted reputation. at this point i think bitcoin will quickly slide down the slope of hope, and it may be wise for investors to sell off as soon as possible. a more aggressive strategy would be to short bitcoin or bitcoin-related stocks.
See also: Gamers might benefit from the crypto crash as demand for GPUs falls | Fortune
