Bitcoin: The Panic May Have Just Begun (BTC-USD)


Bitcoin (BTC-USD), the world’s most popular cryptocurrency, as well as cryptocurrencies in general, have seen negative news coverage at an increasing rate over the past couple of months. The cryptocurrency market has made people millions and billions of worth after it jumped from nearly a penny level to over $50,000 for Bitcoin at its peak a few quarters ago.

Since then, even though some tout it as a safer way to transact financially, an increasing number of hacking and fraud allegations have taken place and they shine in the news around the world. The problem with this, I think, is twofold:

The first is that while those who use Bitcoin, an estimated 106 million people, mostly (60%) trust the system, they represent only less than 2% of the global population. Only 17% of Bitcoin users trust world governments, showing that while it may be touted by some as a good alternative to global currencies and more and more companies are allowing you to use Bitcoin and pay in real time, it is still not being adapted by a significant population.

Chainalysis active Bitcoin accounts

Active Bitcoin accounts (chain analysis)

This means that there is still a problem with the hypothetical way forward for Bitcoin or cryptocurrencies in general, which is adaptability and use on a large scale, which may be the only way to make it stable enough to be considered. something like a long-term usable global currency. . This means, I believe, that we will continue to see volatility in the cryptocurrency system for years to come, which will further discourage new entrants to the system.

The second is that, in addition to not having a growing user base, current users also do not wholeheartedly support the alternative currency system, leading it to increasingly become a commodity with no support in people’s wallets. That means that, I believe, it will be one of the first things to sell if and when we get into any form of recession, which I believe we will soon.

With the (relative) mass layoffs in the tech sectors, where a sizable portion of Bitcoin holders come from, people who have invested and potentially made a lot of money will think about and eventually sell parts of those investments to fund their lives while looking for work.

These two factors mean that, I believe, there isn’t a lot of bottom in the cryptocurrency market where people will buy, and that there is a ceiling over a period of years where we would expect a recession or slowdown. But that is not all.

The other short-term problem

There is also a third group of holders of Bitcoin (and other NFT-style units): young people. This phenomenon has certainly paid off big time for some, but for the most part it hasn’t resulted in any significant changes in these people’s lives. But due to the fact that a large proportion of these young people investing all the money they have in these cryptocurrencies and NFTs due to influencers selling these various “investments” – they don’t necessarily have an alternative to these if they need the money.

Pew Research Center - Investing in cryptocurrencies

Cryptocurrency trading (Pew Research Center)

For those who have a cryptocurrency like Bitcoin in their portfolio, which can make up 1% to 50% of their holdings, they usually have stable jobs and other savings and cash flows to mitigate any serious inflows. But if Bitcoin and various non-fungible tokens crash further than they already have, they are likely to be panic-sold due to their much lower downside tolerance.

What can an accident mean

If, as I believe, the markets for Bitcoin and most cryptocurrencies are capped and the sell-off we have seen in recent months is going to scare away many retail investors who hold large amounts of Bitcoin and other cryptocurrencies, it is likely that only at the beginning of this recession.

The problem here is, given that the Bitcoin system is backed by nothing but the faith of one person buying from the other – the bottom here is most likely much lower than if we enter a bear market in the stock market” normal” . There will be some resistance in the cryptocurrency system, especially those that have Bitcoin as only a small fraction of their overall financial holdings, which could mean it will take longer for them to hear the news as it gets worse before selling.

This means that not only do I believe we will soon have a shock to the system, but also that the risk here is much greater than in the “normal” stock market as, in theory, there is no bottom compared to a company like, say , Apple (AAPL), which is still going to take a certain amount of revenue and make a certain amount of cash and have real value on the books, even in a deep recession.

And now?

While shorting something like Bitcoin is absolutely insane, even if there was an easy way to do it, the price, as it has before, can surge by hundreds of percentage points in a matter of days or over a weekend, leaving any position short deep, deep red.

But as someone who has had Bitcoin and other cryptocurrencies as a small part of their overall portfolio: I think it’s time to break it down further and avoid it for now. This is because it can become a slippery slope/snowball.

What I mean by that is that there are several million people out there with a significant portion of their money in Bitcoin, cryptocurrencies and other NFT-style things, that if the price of those assets eventually falls 50% to 90% they will see their equity of the value of their holdings decreases. This, I believe, can cause a real spending crisis if the value of those portfolios declines.

So this can become a snowball effect where people sell some of their Bitcoin after losing 50%, which drives the price down further, which prompts them to sell the rest, or all, at a loss, which will cause them financial difficulties and their spending will decrease. Which will then hurt the economy and make even more people try to sell their intangible assets, etc.

Given these factors, I have become very bearish on Bitcoin and the outlook for cryptocurrencies and NFTs in general and will avoid Bitcoin for a while.

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