I decided i’m going to write one of these every time Bitcoin has a significant correction. It’s also easier for me to type out a single, thoughtful, article rather than answering 20 individual messages. This week, Bitcoin and the crypto markets experienced a pretty significant flash crash. We’re currently sitting at $50,500, down 21% from the all time highs of $64,000. I’ve written about this multiple times but i’ll continue to write it… 30% price corrections are common in Bitcoin bull markets. The 2017 market cycle had 7 separate price corrections, and so far, we’ve had 4 this market cycle. The graph above shows the three cycles on top of each other and, as you can see, we’re right on schedule. Once again, i’ll use my trusted framework to digest the current market volatility.
FUD or Fact
My favorite part of doing research is always discerning between FUD and Fact. Bitcoin and the crypto markets are notorious for having negative narratives airing out in the media, driven by traditional investors. There’s nothing new here. Let’s see what type of nonsense they’re spreading out this week.
Bitcoin Banning: This one never fails to come up and at this point I don’t understand why anyone pays attention to it… The US is not going to ban Bitcoin. In fact, many government representatives are bitcoiners themselves and the industry has reached levels of adoption that are too large to ban at this point. If they really wanted to, they would’ve banned Bitcoin in 2013 or 2017. It annoys me to even discuss the potential of Bitcoin banning. This is FUD.
Turkey Banning crypto transactions: I wrote about this in my last post. The fact that Turkey is banning Bitcoin transactions is not going to have a negative effect on Bitcoin adoption. Instead, we’ve seen increased use of Bitcoin and cryptocurrencies every time a country has banned them. Nigeria is a a prime example. This is FUD
Doubling of Capital Gains Taxes: Yesterday, president Joe Biden, came out and proposed increasing the capital gains tax from 20% to 40%. This news came out later in the trading day and created significant volatility in the stock market and crypto markets as well. Bitcoin was holding flat at $55k and Ethereum was up to $2600 at it’s all time high before the news broke out. After the news, Bitcoin wen’t much lower to $49k and Ethereum retraced all it’s gains for the day. This is what I call the ultimate FUD. We can debate the policy itself another time but the fact is that the bill won’t pass. I do believe we’ll se an increase in taxes for the wealthy under this administration but a doubling is absurd. I believe the president did this as a negotiation tactic to later settle at a 30% tax rate or something to that effect. Again, this is ultimate FUD.
More Bitcoin ETF’s: Last time, I wrote about 3 separate Bitcoin ETF’s that were submitted to the SEC. Since then, we’ve had 6 additions and a total of 9 ETF applications. Also, the SEC released a statement yesterday in which it announced that it had commenced reviewing these applications. A Bitcoin ETF in the United States would result in the largest amount of inflows the asset has ever seen and soon we’ll have 9 to choose from. This is Fact.
Data
Once again, we need to look at the data to understand the price action in the markets. Bitcoin had been trading between $55-60k for approximately 9 weeks. In crypto timeframes, 9 weeks feels like forever so traders were expecting a breakout. Funnily enough, we had one. Bitcoin surged up to $64k and traders leveraged up their positions to maximize on the opportunity. This was their key mistake. Quick note: If you ever plan on using leverage, please don’t lever up at all time highs. If you’re really urged to use leverage, use it for buying dips and give yourself a margin of safety instead of a margin call. I definitely don’t recommend leverage for beginner investors.
Ok, now i’ll get a little technical. There’s this metric called the Spent Output Profit Ratio (SOPR) This is just financial jargon for “net profits in the market”. In the past, the SOPR resets and allows Bitcoin to move higher. Think of it like flushing out all the short term speculators (flushing out the trash) and long term investors hold on.
Another main piece of data I like to look at is miner behavior. Miners incur pretty hefty costs for mining Bitcoin so they must recover these costs by selling the Bitcoin they mine. However, in recent weeks, Bitcoin miners have actually been holding on to their Bitcoin instead of selling it. I feel like investors underestimate the importance of miner participation. They’re literally willing to operate at a loss because they believe Bitcoin prices should be much higher.
Ok, that’s enough for this one. I hope I was able to clear things up and show meaningful data that goes against the negative narratives in the market. Remember, large institutions want to buy your Bitcoin because they came later to the party. When you sell, you’re making these institutions very happy since they acquire Bitcoin at cheaper costs. Just don’t sell and keep buying more Bitcoin.