Reasons Why Bitcoin May Have/Have Not Bottomed - Part 1
Happy 2023 my friends. I hope all is well. Let’s start 2023( my third calendar year doing this newsletter) by trying to figure out if Bitcoin has bottomed. Better yet, we know we won’t be able to figure it out ( no one can ) but let’s try and spell out both sides of the story to see what our gut instinct tell us. When in doubt, go with the gut.
Reasons we think BTC has bottomed…
Economic data could be pointing to a slow down in Federal Reserve interest rate hikes. The Fed will not be cutting rates anytime soon, however they could step down from 50 bps point raises to 25bps. This alone could be a catalyst for a small rally to the upside. Importantly, today we got data that unemployment dropped. Interestingly, in this environment, unemployment going down could be bad news because the Fed could raise higher until the labor market relaxes. However, today we also saw “average hourly earnings for private-sector employers rose 4.6%..” year-over-year. Although wages still increased at 4.6% YoY, this rate is falling. I.E the rate that wages are increasing is slowing down. Wage inflation is one of the stickiest parts of inflation and therefore the more irksome to get rid of. The fact that hourly earnings is increasing at a slowing rate means the rate hikes may be working (they are). This provides further room for the Fed to slow down their pace of interest rate hikes as stated above because their fight against inflation appears to be working.
Related to point number 1…the possibility the Fed manages a soft landing. A recession is largely the consensus across the speculators board. This is for good reason. However, the rate hikes seem to be having the intended effect and yet the labor market remains strong. Unemployment hasn’t spiked which would be the catalyst for serious economic pain. However, goods prices are coming down. So far, we must give the Fed credit for quickly getting interest rates to a sufficiently restrictive level without too many unintended consequences. If the Fed does lower to 25 bps hikes and the economy manages to stay on its two feet, this could lead to a change in narrative and a repricing of assets to a level more congruent with an economy simply “tapping the brakes” rather than sliding into a recession.
The Russian/Ukrainian war has to come to an end at some point. I do not know how the war will end. And to be honest I haven’t been paying much attention because I refuse to watch the news. But the possibility is always there that the war ends peacefully and things trend towards a more normal environment globally. This is entirely speculation but worth mentioning.
China claims to be reopening. China appears to be relaxing its strict zero Covid policy. The metro traffic so far in China has not seen a spike as would be expected but if you take their word for it, a reopening of China would lead to increased demand for goods. This in turn would boost the stock market and thus Bitcoin would likely head higher as well. Crypto and the stock market have largely been moving in the same directions, albeit with different magnitudes of price change.
The absolute utter devastation we have seen with Luna, 3AC, Celsius,, Gemini, FTX, Alameda etc. all collapsing has led to a historical amount of forced Bitcoin selling. The insane price drops we saw earlier in the year is from forced deleveraging of the system. All these huge names in the industry have been wiped clean. To start a new bull market you need a bear market that completely resets the system. We saw this in 2018. Bitcoin was all the rage at Thanksgiving dinner but a year later retail was gone with no one left in sight. It was a total reset of narrative, speculation, and price. I knew we needed that reset again, I just wasn’t sure how it was going to happen. The answer was Sam Bankman-Fried. Between him and Luna/3AC, the ball of yarn has unraveled. Centralized institutions across the board were destroyed ( except for Coinbase and Binance….so far…). Now, we get to start anew. And as stated above, when this ball of yarn unraveled, all of these institutions caused a massive wave of both forced selling and panic. This led to the drop in price from the insane volume we saw. Take a guess which days on this chart saw the most destruction.
When you have such a huge amount of selling at once you get price devastation. But another way to look at it is “it took this massive amount of selling to drive us to 15.5k. What catalyst could possibly drive us lower than that?” Well, I can name a few but I’ll save that for part 2. Long story short, we got through huge mountains of selling. It could take quite a bit of panic to set new lows.
These are just a few reasons that could lead us to believe Bitcoin has bottomed. Other more notable names like Bob Loukas also suggest it is possible BTC has started a new cycle and set the lows. I suggest watching his video here:
This post will be followed up with Part 2 - Reasons Why Bitcoin Can Set New Lows in the coming days. There are plenty of reasons why Bitcoin can continue lower. However I still believe in Bitcoin. I have started to Dollar-Cost-Average into BTC at these price levels. On a multi-year timeframe I am confident in buying here. Even if new lows wait ahead.