Introduction
I wrote an article three weeks ago explaining why I was shorting the Bitcoin (BTC-USD) bubble. Many investors who followed my trade have made a nice profit during the last three weeks. Due to the reasons that I have repeatedly emphasized (Elon Musk's U-Turn, bearish momentum, regulatory attack, dilution), Bitcoin has collapsed 50% from the peak and is now trading under the $40K mark. At this point, it is unequivocal that the music has stopped, and the momentum is heading south. I can't think of a groundbreaking enough catalyst that can restore the broken technical trend at this point. As such, I believe it is wise for investors to liquidate Bitcoin and/or Bitcoin-related stock positions as soon as possible for the reasons that I will elaborate on in this report. Moreover, I will share a few key takeaways from the recent Bitcoin collapse and my predictions on the things that will happen during the next 12 months.
Where are we at?
As I mentioned in my previous article, Bitcoin has no intrinsic value, and therefore the traditional validation metrics (i.e., DCF, Comps) can't be used for valuation. As it is mostly driven by retail momentum and exotic catalysts, I believe investors could benchmark how market psychology played out during the previous stock market bubbles and use it as a guide to predict what Bitcoin may do in the future.
Stage 1: Euphoria Stage
Coinbase, NFT craze, and Musk's SNL appearance marked the top of the crypto bubble. These blow-up tops take place as the bubble runs out of exotic catalysts and fails to recruit more investors into the bubble narrative.
Stage 2: Complacency Stage
As soon as the Bitcoin community exhausted exotic catalysts, Bitcoin collapsed to the $50K-60K range and consolidated sideways, slowly losing momentum and suffering dilution to other cryptocurrencies such as Dogecoin or Ethereum. This was when average retail investors saw non-stop Bitcoin coverage in CNBC and mass media touting it every day. At this point, the market did not believe Bitcoin could fall under $50K, and many investors were complacent and over-levered themselves.
Stage 3: Anxiety Stage (Where we are at)
Musk's U-turn and China's strict crypto ban created unexpected volatility leading to unprecedented long liquidation and a massive collapse in Bitcoin price. Panic sell and capitulation were quickly bought and bounced back to $40K until US Treasury's new tax regulation, US Fed CBDC announcement, and China's mining crackdown soon hammered down its momentum.
What next? Long way to fall
The million-dollar question at this point would be, are we out of the woods? Or will things go more downhill? I believe Bitcoin has a long way to fall from here. I think it will slowly grind down the slope of hope with a periodic dead cat bounce. Bitcoin's technicals are severely damaged, it is better to be the first one to sell into the bubble before the whole ship sinks.
The Key Takeaway from the Recent Collapse of Bitcoin: Bitcoin is not a safe-haven asset
Inflation hedge?
Many data points are suggesting that rapid inflation is approaching. In April, CPI rose to 4.2%, which is the fastest rise since 2008. However, contrary to what the Bitcoin community has hoped, Bitcoin lost around 50% of its value during the last 2 months. This clearly shows that Bitcoin is not correlated with inflation. Price appreciation doesn't necessarily mean that it is an inflation hedge; in order to be an inflation hedge, the particular asset should appreciate at a similar rate to the inflation rate. For example, Tesla went up 700% in 2020, but that doesn't make Tesla an inflation hedge.
Bitcoin is not a hedge against a market correction
Recent price movements confirmed that Bitcoin is more correlated to high-risk momentum growth stocks like TSLA than to safe-haven assets such as gold or bonds. In fact, Tesla went down by 20%, but Bitcoin fell more than 30-50%.
The same trend was shown during the March 2020 COVID-19 sell-off. These two examples indicate that Bitcoin should not be considered as a hedge against broad market sell-off but as a risk speculative momentum trade.
Bitcoin's price action was significantly influenced by a single person
There is no doubt that Musk's unexpected U-turn was a major catalyst that led to Bitcoin collapse. Also, after Bitcoin fell to the $30K mark, Musk's tweet regarding Tesla's diamond hands caused a massive rebound to $40K.
I think the fact that a single person can manipulate an asset's price action by 10-20% with a simple emoji automatically disqualifies Bitcoin as a reliable asset class that investors can park their hard-earned savings into.
What caused the Bitcoin bubble to collapse?
There are three main reasons what caused Bitcoin to collapse more than 50% during the last two weeks.
First, lack of exotic catalysts and Musk's U-turn
As I pointed out during my previous article, Bitcoin price moves based on exotic catalysts. The main problem that plagued Bitcoin during last month was that Bitcoin has used up all of the major catalysts. In order for Bitcoin to maintain its momentum, catalysts that are more groundbreaking than the previous one should quickly emerge. For example, when MicroStrategy first purchased Bitcoin in 2020, it caused both Bitcoin and MicroStrategy stock to spike up. However, other companies that followed MicroStrategy, such as Square, Tesla, and Nexon that plugged Bitcoin into their balance sheet did not benefit from the Bitcoin pump as the catalyst wasn't exotic anymore. This means that corporates buying Bitcoin may not be an effective catalyst to drive up the price of Bitcoin anymore. Moreover, TSLA and MicroStrategy's collapsing share price have likely sent out a warning message to CEOs to not speculate with Bitcoin. A good example of this would be Jack Dorsey, the founder of Twitter and Square, throwing in the towel and assuring his shareholders that Square has 'no plans' to buy more Bitcoin after a massive $20 million loss.
Secondly, government regulation and criminal use cases of Bitcoin
As I pointed out in my last article, as Bitcoin price appreciates, governments around the world have set forth hostile regulations to stymie Bitcoin adoption. I emphasized that governments can cripple or damage Bitcoin without completely banning it. This is exactly what happened during the last two weeks where both the US government and the Chinese government dropped hostile policies in a row while Bitcoin was rapidly collapsing. I don't think that it is a coincidence, but a coordinated attack.
It was interesting to see the Chinese government reiterating the cryptocurrency ban that they already announced multiple times since 2018, this led to a massive collapse of 40K to 30K in less than an hour. However, Bitcoin rapidly rebounded back to 40K as Musk posted a Twitter post implying that Tesla still holds it. A day later, the Chinese government announced further plans to crack down on Bitcoin miners in China, which led to another 20% sell-off killing the rebound momentum.
I think governments around the world have many weapons to use in their toolbox, and they are waiting for the most opportunistic time to deploy them. This is a very strategic way for the governments to fend off their competition as they know that if they can kill Bitcoin, the general of the cryptocurrency rebellion, other altcoins, the foot soldiers, will collapse alongside it. This trend was repeatedly shown during the 2018 and 2021 Bitcoin bear markets.
Thirdly, excessive leverage and long position liquidation
Bitcoin and other cryptocurrencies have an extreme level of leverage involved, and any unexpected price movement downward can lead to rapid liquidations as many investors can't meet the margin requirement. Adding to that, it is no secret that Bitcoin whales profit from this excessive leverage by manipulating the market and causing unexpected volatility to liquidate retail investors' positions.
Why investors should short or sell their Bitcoin position
The only reason not to sell Bitcoin would be if investors expect Bitcoin to appreciate from this point. I do not think Bitcoin will rise from this point because of the following reasons.
Retail hype is gone, and Musk is now the enemy of the Bitcoin community
Source: TradingView - Bitcoin Market Dominance
As I mentioned in my previous article, Bitcoin dominance has waned to around 45% as of May 22nd. This trend of Bitcoin exodus took place while the crypto market cap was going up and also during the market sell-off. This trajectory of Bitcoin losing market dominance clearly indicates that Bitcoin is losing popularity/trust amongst crypto investors. One of the main drivers of this trend can be attributed to Musk's U-turn and his tweets attacking Bitcoin. I think altcoins such as Dogecoin are a better candidate for influencers like Elon Musk and David Portnoy to drive up the price. Bitcoin is already too mainstream. Bitcoin had a giant 1 trillion dollar market cap, and is not as trendy compared to other altcoins (i.e., Dogecoin). I think there is a probability that Musk is going to continuously drop negative tweets on Bitcoin as Bitcoin's loss is Dogecoin's gain. For example, since the Musk U-turn, he continuously mocked Michael Saylor, MicroStrategy's CEO, on Twitter by calling him "Saylor Moon."
Upward momentum is gone, and Bitcoin has a terrible technical
Bitcoin's chart pattern showed a textbook head and shoulders pattern during the last 2 months and continuously failed to go past its key moving averages. I think this is terribly bearish for Bitcoin moving forward. As Bitcoin has no fundamental driving its price, I think monitoring technical trend is imperative for Bitcoin investors.
Source: Head and shoulder
Source: TradingView
Negative ESG stigma and criminal use cases preventing institutional adoption
Musk clearly signaled the key drawbacks of Bitcoin that the Bitcoin community wasn't too keen to address.
- High energy consumption per transaction
- Unworkability as a currency due to its volatility
- Bitcoin's system is technically not "De-centralized" due to the oligarchy of miners located in China and dominance of major exchanges (i.e., Binance, Coinbase)
Musk did a phenomenal job on driving these points home as most of Musk's Tweets usually hit the news headline. The aforementioned points make it impossible for institutional investors to hold their noses and buy into the bubble. Especially many ESG investors would have a hard time getting anywhere close to Bitcoin. One good example would be Greenpeace announcing that they will no longer accept Bitcoin as soon as Musk publicized Bitcoin's problematic energy usage.
The Bitcoin community is actively trying to re-invent themselves as somehow "green" and "clean," however, I think the energy issue will continuously plague Bitcoin unless Bitcoin gets rid of the proof of work protocol. No matter how hard the Bitcoin community tries, I think it would be extremely hard to prove that Bitcoin is more energy efficient than centralized currencies (VISA, Ripple etc.).
US Colonial Pipeline Ransomware Attack
Another negative catalyst that happened was Bitcoin's enabling role in the US Colonial Pipeline ransomware attack. According to Forbes, many companies in the Bitcoin industry decided to form a lobbying organization to pay an ex-CIA director to write a report whitewashing the use of Bitcoin and other cryptocurrencies by criminal enterprises. As the US Colonial Pipeline case hit the front page, it further tainted Bitcoin's narrative. Furthermore, I believe governments around the world will use this case as an excuse to impose harsh KYC-AML regulations on many cryptocurrencies. This will lead to an increase in transaction costs and a decrease in transaction speed.
Broad market sell-off and markets are in a risk-off mode
It is evident that the market is moving into a risk-off mode; many investors are rotating from momentum growth stocks into value stocks and commodities. This rotation does not bode well for Bitcoin as Bitcoin is the poster boy of high-risk growth assets.
Rise of central bank digital currencies and regulatory attack from governments
Countries around the world have announced their plans on launching their own central bank digital currencies. The race started with the Chinese central bank launching their digital yuan. I was surprised to see US Fed quickly jumping into the race sooner than I thought and announcing their plans to launch a research paper this summer. This news coincided with Fed and treasury's harsh stance on regulating private cryptocurrencies. I predict harsher regulatory attacks on Bitcoin will be made as governments do not want any private competitors. A perfect example would be China reiterating a stricter plan to crack down on cryptocurrency trading and miners. This is contrary to what the Bitcoin community has hoped; I believe governments wouldn't allow competition private digital currencies to co-exist with their digital fiat (CBDCs). As I mentioned in my previous article, close to 70% of the Bitcoin miners are located in China, and if China does crack down on the miners, the whole Bitcoin infrastructure can collapse.
How to profit from it
For investors who want to milk the Bitcoin bubble as it collapses more, they can look into shorting Bitcoin directly through Bitcoin exchanges such as Binance. The other option is to use the inverse Bitcoin ETF (TSE: BITI). However, this is only available for Canadians, and non-Canadian brokerages may not allow investors to buy it.
Another option is to short Bitcoin-related stocks such as Coinbase (COIN), Marathon (MARA), Canaan (CAN), Riot (RIOT), and Ebang (EBON). When Bitcoin collapses, these Bitcoin-related stocks will also collapse as their margin structures are based on the price of Bitcoin or based on the number of cryptocurrency transactions that are made within the platform (i.e., Coinbase).
Especially, many Bitcoin miners could collapse 80-90% from the current price if Bitcoin falls back to $10-20K as Bitcoin mining will be no longer profitable for them, and they will be holding useless mining equipment while bleeding cash. This happened during the 2018 Bitcoin collapse, where both MARA and RIOT lost close to 80-90% of its value in less than a year.
Risks
Bitcoin is highly volatile, and investors should monitor the price momentum constantly. An unexpected catalyst can cause Bitcoin to rally 10-50% when nobody expects it; it is imperative for investors to size positions accordingly and have a stop-loss to prevent margin calls. However, at this point, I think Bitcoin has exhausted the majority of its exotic catalysts, and the reward of shorting Bitcoin significantly outweighs the potential risk.
Target Price
My plan would be to short until US$31K and liquidate 30-50% of the position to cover the cost base and continuously short with the house's money. The reason why I think $30-31K is going to be the key resistance is that this was the point where TSLA may have purchased Bitcoin. When Bitcoin price reaches the $31K mark, Musk may either liquidate TSLA's Bitcoin position or attempt to pump it up through his Twitter account. After the $31K resistance breaks down, the next key resistance would be around $19-20K, which was the 2017-2018 highs.
Conclusion
As I predicted in my last article, Bitcoin has collapsed ~50% due to the Chinese and US governments' regulatory attack, Musk's U-Turn, and loss in momentum. Adding insult to an injury, Bitcoin being used during US Colonial Pipeline ransomware attack and Musk's vitriolic criticism on Bitcoin's high energy usage has made irreparable damage to Bitcoin's reputation. A few institutions who bought into the Bitcoin speculation likely would have already exited with a painful loss and many of those investors may not come back to Bitcoin anytime soon. I believe Bitcoin has no fundamental value and it is driven by media hype and exotic catalysts. As such, bullish technicals and positive momentum are imperative for its success. I can't think of any positive catalyst that can restore Bitcoin's broken technicals and tainted reputation. At this point, I think Bitcoin will rapidly go down the slope of hope, and it may be wise for investors to sell as soon as possible. A more aggressive strategy would be to short Bitcoin or Bitcoin-related stocks.
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Analyst’s Disclosure: I am/we are short CAN, RIOT, MARA, GBTC, EBON, COIN. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
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