Reasons Bitcoin Has Not Bottomed - Part 2
Yesterday I posted a few reasons why BTC may have already set the bear market low. Today we will discuss a few reasons why this may not be the case and BTC well break ~15.5k and continue lower. The idea behind this is to put all the catalysts and analysis on the table that we can think of to try and gain some perspective…
The Fed will break something. This is the most obvious catalyst which could send BTC lower. The Fed is tightening monetary policy and will continue to do so. Even when they decide rates are sufficiently high, they will keep them there. The only way the Fed pivots back to rate cuts in 2023 is if something breaks. This is a very big deal. Since the Great Recession we have essentially lived in a cheap money world. Borrowing money was very cheap which led to companies expanding. This means more goods, more construction, more jobs etc. Furthermore, when interest rates are low investors need to find yield. And they find that yield in risk assets like stocks and/or cryptocurrency. This led to the greatest bull market in history and a speculative boom. Apps like Robinhood hit the scene with free stock trades and suddenly everyone was in the game. Bitcoin hit mainstream and the price went on a moon mission. But that all changes when interest rates move higher. Why would someone risk their hard earned money in speculative cryptocurrency when they can buy a U.S. government bond that pays 4% or more? To make matters worse, when you have cheap money, companies ( Peloton for example ) make a living by borrowing. That is no longer possible. Now, the economy has numerous multi-billion dollar companies that make no money and no longer have access to cheap debt. What happens to them? Some of them will go bankrupt, which means a lot of people getting fired and the stock going to zero. We have talked at length about the Fed so I will not ramble on any longer. But this is reason number one why BTC could head lower.
Silvergate seems to be going under. This is a very complex story and I am not knowledgeable enough to break it all down but I will do my best. Silvergate is the crypto bank that connects the crypto universe to the real world. FTX and many other crypto companies use Silvergate for their banking needs. When FTX collapsed people began questioning Silvergate and how the FTX debacle could have happened. The accusations include wire fraud and other serious allegations. This panic has led to a run on their bank. Essentially all of their clients are demanding to withdraw their money in very quick succession. The stock has crashed from a peak of $200 to $12. I think it is safe to say the Feds will be knocking on Silvergates doors (if they haven’t already) to take a sniff around their accounting department. If things are amiss expect further panic. I do not know who will be caught with their pants down but likely somebody will.
To read more about Silvergate check out this article.
DGC ( Digital Currency Group ) is in serious trouble.
DGC is another mammoth name in the industry and suddenly things appear to be on shaky ground over there as well. It looks that they were making transfers between their various business units including Genesis. The speculation is Genesis was in trouble so they lent money from their other units to prop it up. The feds are now probing the situation.
“Genesis is the biggest trading desk for professional investors in cryptocurrency markets.” “A digital asset prime brokerage – akin to Goldman Sachs in the traditional financial world – that offers its clients a full suite of services.”
Genesis and DCG underpin a lot of this industry.. If they go down it isn’t going to be pretty.
The 3AC/Luna debacle is still unraveling. Three Arrows Capital imploding has brought down many names including Luna, Celsius, Alameda, and FTX. FTX just collapsed a few weeks back and yet 3AC went under back in May. These types of events take many months to play out and it almost certainly is not done yet. I don’t know who ( my guess is Nexo at the very least ) is insolvent as a result of this situation, but logic tells me there will be more bankruptcy/insolvency announcements. If someone like Nexo goes under the damage will be limited. But what if Coinbase had exposure? Or USDC/Circle? Binance? My hope is that the remaining names have avoided damage but that remains to be seen. If any of these names show signs of trouble, it will be a serious issue.
Tether is the stinky mess that won’t go away. They are shady but we still have no evidence of any wrongdoing. Given the names and behavior we have witnessed recently, I have a hard time believing Tether has been operating 100% honestly. The good news is that USDC has gained a much larger market share than before. Although a Tether collapse would still be monumental it should be survivable. But this would be a worst case scenario. Given the choice of a Tether collapse or Silvergate + DCG collapse, I imagine a Tether blow-up would be far more painful. The bad news is it looks like Silvergate and DCG are almost certainly done for. If Tether were to start showing distress on top of that situation??…
These are five reasons BTC could head lower. To be totally fair, I think these reasons are more convincing than the reasons I spelled out here for why BTC may have already set the bottom. However, it should be noted that at the bottom of every bear market there are multiple reasons for worry. You never really know when the bottom is in until you have hindsight. I am buying BTC at these levels. If BTC goes lower I will buy there as well. I am dollar cost averaging with monthly purchases.
I think the macro markets have further pain ahead. I just don’t see how we can go from the greatest bull market in history, with the loosest monetary policy in history, to a fed funds rate of 4.5% without serious damage. My heart wants the bottom to be in, but when I think it through I have a hard time convincing myself that is the case. As always, protect yourself and your family first before you go buying Bitcoin. In the case we fall into a serious recession you should have emergency funds available to cover a few months without an income. When recessions hit, people lose jobs, and you have to prepare like it will be your job that gets axed. Long story short, play defensively. It is likely there is further pain ahead but we have to be open to a surprise to the upside as well.