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Bitcoin Bear Market – Further To Go?

I published an article approximately this time last year announcing that I felt it was likely that we had seen the top in Bitcoin’s price. As it turns out, this article was remarkably prescient. Now, this doesn’t mean that I’m a genius; it may well be that, on this occasion, I was just lucky. However, my article attempted to outline reasons for the top in Bitcoin’s price and why the run-up was less exuberant than seen previously. As it turns out, this is how things panned out. As a year has gone by and we have seen a significant fall in the Bitcoin price, I felt that now may be a good time to review the position and see what is likely to happen going forward.

Many of those who follow me and have read my book will be convinced about the future of Bitcoin and may have invested at some point in the last two years and will be keen to know what we can expect from the price going forwards. Has the price of Bitcoin decreased as far as it will go, or is there a further downside to come?

Having lived through a Bitcoin bear market, I know this stage in the Bitcoin price cycle is somewhat tricky.

Those convinced in the technology and invested heavily wait with bated breath to see whether the price will go up and live in trepidation at the price going any further down. Indeed as the price was stuck around $6000 in 2018, that is how I felt, and the price remained at this level for a markedly long time.

Those who strongly believe in the technology find it hard to believe that anyone would ever sell their Bitcoin, and as such, they are persuaded that they should hold onto it, and at some point, circumstances will turn a corner.

As it turned out in 2019, this is what happened.

After a capitulation from $6000 down to $3000, those who couldn’t believe their luck started scooping up as much Bitcoin as possible. As soon as the price reached $3,000, the momentum of the price rise gathered steam until it reached a peak of $12,000 just four months later. Those who were heavily invested breathed a massive sigh of relief, and the price stabilised below this level for approximately another year.

If we look at the price trajectory in 2015, unlike in 2019, the price data levelled out at a low level for a much more extended period. To such an extent, at that stage, people did believe that maybe Bitcoin had no future after having rallied to a price of $1300 and then rapidly crashing to a level of $200. It was the first time anyone had seen that kind of bear market play out, so people were less sure that, eventually, the price would take off again.

Bitcoin 2017 High

So sentiment certainly has a large part to play in Bitcoin price cycles.

The technology and how the issuance of bitcoins works means that as we approach the halvening (the next one due in 2024), the momentum of the price tends to take off, and once we reach a parabolic peak, it falls again.

The point at which the price starts to take off tends to be determined by sentiment, but other macroeconomic factors are worth bearing in mind if we are to predict the path of Bitcoin’s price. Until 2021 the overall financial markets have been in an environment that may be broadly termed one of loose monetary policy.

The 2008 crisis introduced a new way of managing money behind the scenes – quantitative easing. Central banks were keen to provide extra liquidity to the system to help support the economy and keep it going.

The central banks exacerbated this monetary ‘help’ in 2020 as the pandemic began. People were looking at the closure of their businesses, so to ensure companies stayed open and people kept their jobs, central banks again used quantitative easing to help support the economy.

Governments around the world injected billions of pounds into their economies. In Britain, the government sponsored loans to individuals and companies. In the United States, individuals were given checks. This kind of policy is known as “helicopter money” and had been predicted by economists as a potential solution the next time there was a financial crisis. So we saw this solution play out precisely as the economists had described. 

Once the pandemic was over, businesses could open up. People were allowed to leave their houses and travel. Suddenly the money saved and unspent due to the uncertainty of the crisis entered into the system and was spent again. However, many supply chains disrupted by the pandemic led to a lack of goods available in the market. Struggling businesses experienced higher expenses, contributing to an increase in their costs. The increase in circulating money, chasing fewer goods and services, resulted in signs of rapidly increasing inflation affecting the population in ways unnoticed previously, by sudden increases in food prices and at the gas or petrol stations. 

A sudden rise in inflation is concerning as this is known to be a very dangerous indication that the economy could tip into hyperinflation. A circumstance I keenly describe in my book, Truth Decay – How Bitcoin Fixes This.

Images of the Book, Hardback and Kindle, "Truth Decay - How Bitcoin Fixes This"
"Truth Decay - How Bitcoin Fixes This"

Therefore it is not surprising that the banks wanted to take heavy action to slow the process down. The central banks have come out guns blazing with persistent interest-rate hikes, unprecedented in the last few decades.

Interest rates managed by central banks and higher taxes controlled by governments are the only tools the authorities have in trying to help slow down demand in the economy until supply chains have a chance to recover. Things can then balance out more evenly.

It is a tricky balance, though, because if demand is restrained too aggressively and supply chains recover, the balance can be skewed in the other direction, driving the economy into a recession or even depression if the restraints are too severe. Creating the alternative problem – excess supply – at this point, companies have to let go of extra capital – including their employees. 

The other problem is that effective interest rate hikes can also have a lag in effect. So although central banks have been gradually increasing interest rates over the last year, they have yet to see their policies reflected in the numbers on their reports to have the impact they are looking for in the economy.

The increase in interest rates and taxes affects the amount of money people have available to spend, known as the M2 money supply. As Lyn Alden explains, the Bitcoin price tends to be mainly correlated to the M2 money supply. Some people have talked about the Bitcoin price being linked to the stock market, but the stock market is also related to the M2 money supply. So any correlation between the price of Bitcoin with the stock market can be misleading; it is more correlated to something else.

At the most recent FOMC meeting, the Federal Reserve, which is in charge of the monetary policy, i.e. how many dollars are in circulation, stated that they are particularly keen to get inflation back to 2%. Although many economists are arguing that their ability to do this will fail at some point, whilst they can raise interest rates, they intend to keep doing so.

Increasing interest rates further increases businesses’ costs and the money people pay for their mortgages. Companies’ expenses also increase the amount they need to charge their customers to maintain their performance for their investors – affecting the stock market. Still, due to rising costs at home, customers have less disposable income to pay for things – hence the recession. It becomes an ever-decreasing circle. As company profits are affected, equity prices start to come down, and the cost of mortgages causes house prices to fall. As this happens, the assets that have benefited from rising prices due to loose monetary policy will start to lose these high valuations. We are already seeing evidence of this in the housing market.

At this stage in Bitcoin‘s development, many engineers and businesses are working as quickly as possible to bring Bitcoin to the public as a daily payment solution; there is still a way to go until this is achieved. In the last month, some bugs have been discovered in the lightning network – the second layer to Bitcoin’s code which helps to make payments with Bitcoin more accessible. While these flaws still need to be ironed out, it is not yet ready to become the payment solution for which everyone is waiting.

Bitcoin will come into its own once we reach this stage. Once it is the easy payment solution using the backbone of secure money that people can adopt and use in their everyday lives, that will be the point the value of bitcoin will become apparent to everyone – and the price will take off.

Unfortunately, we aren’t there yet.

Given that the current macro environment is creating a situation where there is less liquidity in the financial markets which will squeeze asset prices, it is difficult to see how Bitcoin’s price could start to take off under these conditions. Ultimately the Fed is on a mission to restore credibility to the existing financial system. It will only be when their efforts inevitably fail that the usefulness of Bitcoin will eventually pay off.

Some analysts of the price charts argued as recently as two weeks ago that Bitcoin had reached a low in its price for this stage in Bitcoin’s regular price cycle. Of course, their calculations are based on how Bitcoin had performed in the past when monetary policy was looser, and therefore some of their assumptions may be inaccurate

These were my thoughts two weeks ago as I was contemplating writing this newsletter, and I predicted that the Bitcoin price was likely to have further to fall on my Twitter feed – see here – 

Descending Triangle
Descending Triangle on the chart of the USD/Bitcoin chart, via Trading View.

Since then, this weekend, the most explosive event in the cryptocurrency scene has erupted, more significant than almost anything else in its history. The second largest exchange based in the Bahamas that seemed to grow almost out of nowhere in the last couple of years, sponsoring everything from the Superbowl to the US election, has scandalously collapsed, losing billions of dollars of customers’ money. I discuss this with some of my colleagues on the World Crypto Network in the video below.

Whilst Bitcoin creates a new gold standard and allows us to use fairer money, the other crypto tokens are similarly recreating the existing financial system using the new and exciting ‘crypto’ as their unique selling point. Such exchanges like FTX mirror some of the large banking institutions in the existing financial system but without the complex regulation that has developed over decades, normally in response to similar crises, the resulting laws keeping them relatively stable over time. 

FTX had no similar constraints, and its collapse and close connection to other investors in the Bitcoin industry is the trigger that has caused the failure in support of Bitcoin’s price. The fall in the price will have further go. It is difficult to assess all the organisations that could be affected by the collapse of FTX. Still, the contagion could affect unseen areas of the economy.

Alameda Research & FTX Ventures' Portfolio
Alameda Research & FTX Ventures' Portfolio

As a result, I caution against being fully invested in Bitcoin right now.

The central banks are aware of the problems with existing fiat currencies such as the pound, the dollar and the Euro and know they are vulnerable to losing their confidence game. The rise in the price of Bitcoin since 2020 has also been a warning sign for them that the broader market is figuring things out, and they know that Bitcoin has the potential to take over their power. As a result, it is not surprising that they are using every tool they have to keep things under control. Even if it means that ordinary families suffer disproportionately under the pressure of exponentially rising interest rates—multiples of which they have never experienced before

Ordinary people have been discovering Bitcoin and investing in it as they can see it is a new way of managing the financial system that is likely to be fairer and give them their power back. I discuss this in my newsletter Bitcoin and Property Rights and gave two talks on this subject earlier in the year in the UK and Majorca. You can find links to these talks here and here

Whilst the future for Bitcoin is bright, the battle with the existing failing financial system rages on, and in such circumstances, it is wise to be cautious.

Until next time enthusiasts!


Play Video about WCN Cover

WCN discusses FTX collapse

Join my colleagues and I on the World Crypto Network as we discuss the news of the week, specifically the spectacular collapse of the Crypto Exchange – FTX

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