It’s been eight months since I called a top in Bitcoin (BTC-USD) and warned investors to stay away. The market dropped over 70% from my article and has crushed dreams and exposed the false analysts and idols that pollute the industry. In this article, I’ll discuss my thoughts on BTC in the months ahead.
Bitcoin’s washout will not see a fast comeback
I actually called another Bitcoin top during the first move above $60k in May of 2021. On both occasions, Bitcoin had all of the requirements for a high, which included:
- Technical over-extension and set up for a correction.
- Huge speculative interest and promotion.
- Irrational delusion- Ridiculous bullish predictions and a surge in get-rich-quick investors.
The first downturn was a typical correction from a big bull trend.
Bitcoin surged through the $20k high and squeezed to new highs on speculation. The first pullback tested initial support and it was a quick recovery with the low coming in June/July.
The reason that markets retest the high is usually that there is a lag from the initial exuberance. Enough investors have cashed some out on the way up and can support the next rally. New investors that missed the first run are taken over by the”‘Fear of Missing Out.” The second drop has come with a changing landscape in the environment and in the regulatory outlook for BTC. Because it was a longer and deeper pullback, we can expect sideways movement in the months to come.
You can also see that the correction in BTC was a simple return to the previous headline highs of 2017. The markets never change but neither does human psychology. As we hit the latest lows, beware of those urging you to buy the latest dip. None of them caught either of these tops in Bitcoin- even the billionaires who circulate Bitcoin conferences to indulge in adulation and confirmation bias.
There were actually some new all-time highs for BTC this week, but only in Google searches for “Bitcoin is Dead” and “Bitcoin Dead”.
The decentralized dream has been exposed
I mentioned in the above paragraph that the most recent rally in Bitcoin was a simple retest of the highs before the market outlook changed. But what has changed in the recent downturn? The answer is everything.
- Bitcoin is under attack from governments and a green energy political push. I talked at length in my previous posts about the coming regulation but many couldn’t connect the dots.
- Stablecoins have been turned on their head. I also said that central banks had their eyes on stablecoins and they were a risk.
- Interest rates are surging and set to go higher. The cheap money environment and stock market bubble not only created the environment for a bull market in alternative and speculative assets; it also provided the funding.
- There is now less need for the high-interest rates of decentralized finance (DEFI) projects due to soaring rates on government paper. The market caps of DeFi projects have dropped over 80%, alongside their Total Value Locked (TVL) which is akin to a bank run and that money is not coming back soon after high-profile fallouts in Terra, Three Arrows Capital and Block-Fi.
- Institutional adoption was getting closer in 2021 but the brakes have been slammed on again.
The confidence factor is the big problem now and investors will be fearful to lock up their savings in crypto projects They have seen that the market caps and adoption are based on speculative flows.
The next big problem involves the cracks in the decentralized dream. Decentralization was meant to be the key selling point of cryptocurrency and Bitcoin but that idea is now a laughing stock.
Many of the new cryptocurrency believers are also investors who lost to the goldbug promoters and were anti-Federal Reserve and anti-Big banks. They saw their new technology and their ideology as superior to the current financial system but those dreams have been exposed.
In the last few months, we have seen accusations of money laundering, theft, and the seizing of blockchain accounts. Tell me how “The New Monetary System Inc.” is any different from the current? The answer is that the current system actually has regulation.
It was Reuters who accused the Binance exchange of being involved in the laundering of $2.35bn. The company refuted the allegations but it only adds to the skepticism towards the industry. The collapse of the LUNA project also led to an investigation by Seoul police over the embezzlement of funds.
Aside from the unregulated environment, I have also noted the lack of decentralization and encroachment from centralized third parties is something we were told did not exist in Bitcoin and the blockchain. The Canadian government blew a hole in that argument when it seized cryptocurrency accounts from the major exchanges. We also saw the Solana blockchain, where investors in a third-party app voted to grant emergency powers to seize a ‘whale’ account that threatened volatility. That was due to excess leverage which is also rampant in the unregulated sector. A third episode saw the Celsius project freeze all withdrawals on the platform as it became the latest DeFi threat. The accounts are still locked down with little help from the project and a TechStory article summed up the investment ideology of recent times:
“Almost every YouTube channel was recommending Celsius and that’s why I thought it was safe.”
Connect the dots and act accordingly
Investors should ignore the latest downturn in Bitcoin and look elsewhere. The project will rally and offer hope but it is likely to move sideways over the next few months and maybe even lower.
Warren Buffett said recently that if he was offered a 1% stake in all America’s farmland he would write a check there and then for $25bn. He would do the same for a 1% share of all America’s apartments, but not for Bitcoin. He actually said that he wouldn’t take the whole supply of BTC for $25.
“The apartments are going to produce rent and the farms are going to produce food,” he added. “If I’ve got all the bitcoin, I’m back wherever [Satoshi] was,” Buffett added.
I have tried to give investors a heads up on Bitcoin over the last year because it was easy to connect the dots. The government is happy to let investors get used to digital money but each collapse in BTC only inches us closer to digital money issued by the Federal Reserve, or the Treasury.
The latest market collapse has highlighted that the government doesn’t even have to seize Bitcoin. The market is exposing itself all on its own and leaving investors with a lack of faith and it is faith that backs money.
The founder of Terra, Do Kwon, who was at the center of the LUNA collapse controversy said of his Terra stablecoin:
“I still believe that decentralized economies deserve decentralized money – but it is clear that $UST in its current form will not be that money.”
As the dust settled on Mr Kwon’s dream, at least he had the foresight to understand that the project had lost investors’ trust and a shot at mass adoption. We can now say the same about many other crypto projects and I believe Bitcoin is no different.
The highs from the 2017 market surge marked an end to speculation and due to a lack of institutional appetite, it took BTC three years to penetrate the 2017 highs. With the collection of headwinds and damaged investor trust, it would not surprise me to see protracted sideways action in the coin for another year or so. That projection is probably a ball park for the continued rise in interest rates also.
Join the dots and act accordingly.
I’ve said over the last year that the regulatory environment was closing in on Bitcoin. Alongside a pushback from Green politicians, it has added some headwinds to Bitcoin. The bigger hit came from inflation and the resulting rise in interest rates and the disappearance of speculative flows. At the time I also warned that central banks had a keen distaste for stablecoins and the latest problems at some of the DeFi projects have done the regulators’ jobs for them. The first BTC bounce still had speculative flows in its sail. The second has been more protracted and will not rebound easily. The idea of decentralized finance has been exposed by the actions of the DeFi lenders and investors are losing the key fundamental for BTC, which is faith. Many big corporations were starting to consider BTC on their balance sheet in early-2021 but the latest collapse has shut down that strategy for now.