With the entire crypto sector crashing – I thought I should give you some thoughts on bitcoin this morning.
Needless to say, it’s not pretty.
At all.
Faith in crypto has been battered, in most cases, quite rightly
This time last year, bitcoin went on one its monster runs above $60,000. It then had one of its monster crashes.
I can’t remember if it was in Moneyweek or on Twitter, but somewhere I suggested that a reasonable target for the correction might be $20,000.
$20,000 was the old high from the 2017 boom and bust and an obvious pivotal price point.
But the correction stopped at $30,000, or just below.
The conclusion I drew – and on current evidence wrongly drew – was that, as bitcoin matured, its volatility was declining. The 90% corrections of previous bull markets were now 50-60% corrections.
Bitcoin had a second run above $60,000 in the autumn, followed by another of its humongous corrections, and lo and behold, $30,000 held again (actually just below, but I use round numbers as they are more readable).
As an asset, bitcoin has become highly correlated to the Nasdaq and tech stocks and, as we all know, tech stocks have been walloped. Peloton, for example, which we wrote about yesterday, is down over 90%.
So over the past fortnight, I was quite encouraged to see bitcoin holding up quite well relative to other tech stocks. $30,000 looked like it was a floor.
Then we got the collapse in the protocol Terra, and its so-called stablecoin UST, and the sector has been absolutely battered.
This is big, and it’s going to take some recovering from. The bubble of 2016 was verging-on the-fraudulent ICOs. Today it’s staking and stable coins. The yields on staking – over 20% in some cases – were unsustainable and so they have not been sustained. (If you’re baffled as to what I’m talking about here, don’t worry, you haven’t missed out and at this stage it’s very much for the best).
Hundreds of thousands of people have lost money, in some cases fortunes, and as someone who has lost big money in the past, I offer my deepest sympathy. You start blaming yourself for your greed and stupidity, you feel huge shame, worse you start thinking you have betrayed your family, you think you will never get your life back and you sink into a horrible depression. In some cases, people will feel suicidal. I’ve been there (although not the suicide bit) and it is not nice.
Yes, you made a poor judgment and it has cost you, but you haven’t betrayed your family. You were only trying to better your lot and thereby make all of your lives better. There is nothing wrong with that.
The reputational damage of this episode to crypto is considerable. All those who declared that “crypto is a fraud” are now looking wise, while those, myself to an extent included, who made the argument that bitcoin is a hedge against currency debasement are looking stupid, given that it is off some 65% from its highs.
Bitcoin will survive (again) but it’s likely to hit $20,000 and could go even lower
Of course, bitcoin and crypto are not one and the same. Bitcoin remains a product of technical and open-source genius, but forever in its wake, and surrounding it, are disasters, gaffes, frauds and scams.
Altcoins, NFTs, the Metaverse, Defi, staking, whatever the latest buzz thing is – all of it is puking value, and the bubble has well and truly burst. Again.
And there lies the keyword – again. This is not the first time this has happened, and it will not be the last. And, for all the junk that surrounds it, bitcoin keeps on keeping on.
The sector has lost some $1.7trn in value. That is a number similar to the subprime losses that triggered the Global Financial Crisis. But in crypto there are no bail outs.
As I write it sits at $27,500. I would have thought we will see a retest $20,000. All the better if not.
Oddly this episode might prove good for bitcoin in that it will produce a lot more bitcoin maximalists and hodlers.
We hope $20,000 holds, but these are horrible, horrible, horrible markets – and I’m not just talking about crypto. It was oil going bananas in 2008, rising to $150 a barrel, which triggered that collapse. It seems like something not too dissimilar is happening now, following oil’s spike to $130 last month.
There will be a lot of forced sellers out there – leveraged players across the board. So we are going to see a lot of liquidation. My advice, if you own quality assets, and you don’t have to sell, is not to.
Gold, bitcoin, good companies – whatever. Their price may go lower, but if you are not confident you can beat the market, then don’t sell. Because just as bubbles always burst, so does quality always come good. And bitcoin itself – I’m not talking about other crypto – bitcoin itself is a quality asset: the single-most resilient information technology system in the world, backed by the most powerful computer network ever created.
There’s even a chance it could go back to its corona-panic lows of March 2020. Heck, everything else seems to be going that way. That would take us to $3,000. I would have thought that unlikely, but never say never, especially in these markets.
There’s also a chance it goes up.
If you think you can beat the market, as I say, go for it. If you have a great trend-following system, great.
If not, HODL quality. Don’t trade it.
Remember the four phases of a bitcoin cycle:
There’s the Quiet Accumulation. Few outside of the bubble of ardent bitcoiners take notice, as it discreetly creeps up.
The Frenzy and Blow-Off Top. The price rises accelerate. There is a rush to buy. The media is all over it. Everyone on social media is crowing. There’s a huge row about whether bitcoin is in a bubble or not. I get invited onto the BBC to talk about it. You get a phonecall from your mate’s nan asking how to buy it. Dean from up the flats starts holding court in the cafe about irresponsible monetary policy at the Federal Reserve. Bitcoin has one of its blow-off tops. See 2013, 2016 and 2021 for more details.
The Monster Correction. Bitcoin loses over 50% of its value. Economists who missed the boat go on telly and declare they were right, ignoring the fact that the price to which bitcoin corrected to is several hundred percent above where the quiet accumulation phase began. Earlier in bitcoin’s evolution these corrections could be 90% or more. Now they have “scaled back” to more like 60%. Or have they?
The Frustrating Consolidation. Bitcoin goes into a period of range trading, consolidating the gains of the previous bull market. This is a period of relative quiet, at least by bitcoin standards. There are rallies that get many excited, but prove to be false dawns. Investors get frustrated by the grinding action. The media loses interest. Many forget about it, and so we gradually drift into another Quiet Accumulation phase.
I thought we were in phase 4. Turns out we are back in phase 3. Phases 4 and 1 are the time to buy - unless you want to try and catch falling knives.
But if you want to take the plunge and buy bitcoin, take a look at my guide.
How low will bitcoin go?