Short-term price prediction for Bitcoin is an illusion...
A million traders liquidated 10 billion dollars to cause 20% crash. It was a classic leverage & liquidity-driven market accident. People with price targets are just trying to sell you products...
Last Saturday night (4/17), Bitcoin suddenly fell as much as 17% to $52,149—with half the decline occurring in about 20 minutes around midnight EST. The price then wobbled throughout last week. On Thursday (4/22) Bitcoin tumbled again down to as much as $48,500. As I’m writing this email Saturday morning (4/24), Bitcoin sits at ~$50k. This is a decline of of more than 23% from its record of $64,829 on April 14.
Here’s a funny, classic meme about Bitcoin that brilliantly characterizes the crash.
Amongst the volatility, I want to make a very simple point here: People who give you short-term price targets for Bitcoin most likely don’t know what they’re talking about. They’re there to either sell you financial products or prove they’re the next brilliant contrarian who called “the next big crash.” They’re not your friend, but ill-incentivized narratives and noises.
What happened? It was a classic leverage & liquidity-driven market accident
I don’t really think we know exactly what happened with the crash. There are a few theories.
WSJ reported that it might be due to a rumor on Twitter that the Treasury Department was preparing to charge several financial institutions for allegedly using cryptocurrencies to launder money. But then some say that’s not true:
And then another theory is a drop in hash rate because some mining farms temporarily shut down:
Regardless of what triggered the initial price decline, I do believe that the crash is fundamentally because the Bitcoin system was too levered. On big crypto trading platforms like Binance, people trade derivatives to Bitcoins. You can buy & sell call/put options just like you do for stocks, and you’re allowed to lever up to 125x – meaning you can post $1 as collateral and borrow $125 to trade.
If Bitcoin price goes up, you make significantly more money with leverage than you could’ve with just your initial deposit.
That also means a small decline in Bitcoin price could result in dramatic losses. And if the user cannot post more collaterals to the platform, their holdings will be automatically liquidated.
In other words, a small initial decline in the Bitcoin price triggered a sell-off and cascaded into a sequence of liquidation events.
It was reported that 1,063,216 traders were liquidated for an eye-watering $10.1 billion in the 24 hours between last Saturday and Sunday. This sets a new record and beating the March 2020 crash!
Ben Hunt, hedge fund manager & founder of Epsilon Theory who was just on our podcast this week, has been studying and writing about leverage throughout his career. “It all comes down to excessive leverage and who is paying to keep that leverage from boiling over to cascade to liquidity-driven financial institutions,” he said his podcast episode “Hunger Games” about the GameStop situation.
The Bitcoin crash seems just like any market accident we saw this year: GameStop, Greensill, Archegoes… and also similar to the 2008 financial crisis and the crashes before them. It all came down to extreme leverage, which has the power to exacerbate the initial sell-off and cascade into dramatic market panics.
So where do we go from here?
The Bitcoin and cryptocurrency markets aren’t getting regulated anytime soon, and even regulations can’t solve the issue of over-leverage as we have seen from all the recent market accidents.
You can go either way from here on:
Something is broken with the Bitcoin system. If there’s another sell-off, the price could break 40k and maybe down further. I don’t feel comfortable investing in Bitcoin, at least not at this stage.
This crash is healthy for the markets. Now it’s more de-levered since those with large amounts of derivatives liquidated their positions. You should shake out those who are here for the speculative bets and only leave the system with those who truly believe in Bitcoin. This is a great time to “buy the dip.”
To me these are all plausible narratives. You may choose to believe one over the other depending on risk tolerance and their fundamental thesis about the long-term prospect about Bitcoin.
I genuinely think both arguments above are valid because I’ve learned that short-term price prediction for Bitcoin is an illusion and fallacy.
Price targets for crypto are BS
With more legacy financial institutions trying to get into the business of Bitcoin and cryptocurrencies, it’s natural to see investment banks release price targets. JPM at $130k, then Citi at $300k, and then some other sleep-deprived analyst churned out some other forecast… Some say “oh if Bitcoin is worth half the valuation as all the gold out there then it’s worth xxx”; then some say “oh but if Bitcoin is worth twice as gold then it should be at this price xxx by xxx”….
Wall Street is in the business of selling financial products. They want to get you in on the trade so they can make a fee. That is why of course Fidelity and Morgan Stanley and all the wealth management firms are allowing their high net worth clients to buy Bitcoin – because it’s just another financial product they sell! This is the ultimate reason why Bitcoin is getting institutionalized!
But we’ve got to realize that’s their fundamental incentives and not be fooled by these short-term narratives and predictions. Just do your own research, talk to people, ask questions, develop a core worldview, and update your beliefs as you gradually go along the journey. All the rest are noises:
There are so many charts on Twitter that show you trendlines and how Bitcoin is either positioned for “a 20% rally” or “20% crash” or whatever. Sure, some of them are right and some wrong. But the beauty of predicting Bitcoin prices (and investing in general) is that you can be right but still wrong, and you can be wrong but still right. Namely, maybe your short-term price prediction is right, but it doesn’t mean your thesis about Bitcoin is right; maybe you’re losing money right now, but you could still be right about many things in the long run. That’s why these technical charts are not just wrong but also so useless at a very fundamental level.
The saga of Bitcoin is to be continued…
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