Bitcoin: Black swans lurk

Bitcoin: This Time Is Different!

Unlike the grassroots movement it once was, institutional fund flows primarily drove Bitcoin’s (BTC-USD) recent bull trend. In 2020, the US Federal Reserve cut interest rates to 0 and provided over $2.3 trillion in loans to support the economy. This, combined with Covid-19 stimulus checks given directly to citizens, worked to funnel billions of surplus liquidity into the cryptocasino.

With Bitcoin’s dissolution and drop below $20k, much of the magic surrounding cryptocurrencies has diminished. We believe the current bear market is forcing investors to face a number of hard truths, including:

1. Bitcoin’s unsustainable growth rate,
2. Incoming Regulations for Ethereum (ETH-USD) and DeFi,
3. Crypto market’s overdependence on loose monetary policy and a bullish stock market.

After a violent rally from June 18 to August 15, Bitcoin’s all-time chart has one of the most bearish patterns I’ve ever seen. To understand this, you must note that a backdrop of favorable economic conditions has characterized Bitcoin’s entire existence. This includes 13 years of a Federal Funds rate between 0% – 2%, fostering a consistently bullish market for stocks.

Now, when you face one bearish the stock market and high prices, we expect Bitcoin’s price to plummet.

Bitcoin All-Time Price Chart

The chart below compares Bitcoin vs. The NASDAQ-100 Index (NDX). Observably, a rising stock market has always supported Bitcoin:

In the middle of such much favorable market conditions, Bitcoin’s price has fluctuated wildly between two massive hype cycles (first driven by retail from 2012 to 2017 and second by institutions from 2018 to 2021). These hype cycles are identified by the green and red boxes in the chart above.

• Bitcoin’s hype cycles together form a decade-long 5-wave impulsive move peaking at $68k/BTC (identified by the orange lines).

Therefore, the data shows that Bitcoin’s growth rate has always been supported by a favorable market that promoted increasing hype. This hype emerged as retail FOMO in 2017 and institutional FOMO in 2021. (Next could be the nation state of FOMO. We’re not kidding. If there’s another ‘cryptocurrency cycle’, it could see governments FOMO into Bitcoin in attempt to curb inflation).

As monetary conditions tighten and stocks collapse, we believe that Bitcoin’s previous growth trend is no longer sustainable. Accordingly, we expect Bitcoin to decline to at least $13.7k (exactly 80% below all-time high) by November.

• Going forward, further downside in Bitcoin (and all other cryptocurrencies) could be fueled by worsening economic conditions, increasing regulatory pressure, and the shattering of many deeply held cryptocurrency beliefs.
• We expect that new regulations will soon require Ethereum applications to collect user information.
• We are also very concerned about the ongoing DOJ probe into Tether (USDT-USD); we suspect more crypto exchange insolvencies are on the way, and we expect global monkeypox cases to worsen into 2023.

Bitcoin TA shows another 60% decline

Technically, Bitcoin has moved impressively bullish since the bottom of $17,637 on June 18, 2022. However, indicators have since changed rapidly bearish, leading us to believe that the rally is over. Currently, the main bearish indicators include:

• An impulsive 5-wave move that ended with a $25k peak,
• the daily MACD crosses negative 0,
• the daily/weekly trend lines remain untested.

In our previous article, we identified that Bitcoin moved in a reflexive rally driven by less bad economic conditions and positive investor sentiment. Although we expected the bull trend to last until mid-September, recent government action against Tornado Cash seems to have killed the hype:

The chart below uses trend lines with multiple timeframes to determine Bitcoin’s speed, direction and significant support levels. TrendSpider indicates that Bitcoin is moving in an approx. 35 degree downtrend, projected to reach weekly support of $8k – $5k between October and November 2022. This projection is over 60% below Bitcoin’s current price!

Zooming out, we believe TrendSpider’s weekly trend lines reflect Bitcoins genuine logarithmic growth curves (as opposed to the false curve often circulated, see here). Consequently, we expect Bitcoin to move like a “bowling ball thrown out of a window” until it reaches $10k psychological support or weekly trendline support between $8k – $5k.

Therefore, all of Bitcoin’s technical characteristics signal bearish. To conclude, we plan three opportunities to trade Bitcoin’s bottom:

1. The bottom is in and Bitcoin will now resume its long-term bull trend.
2. Bitcoin will mirror previous cycles and bottom about 80% below the all-time high located around $13.7k – $11k.
3. Fears caused by new cryptocurrency regulations and worsening economic conditions will push Bitcoin below $10k. In this scenario, we expect BTC to find support at its weekly trend lines between $8k – $5k.

Bitcoin’s first real bear market

By observing Bitcoin’s lifetime of price action, we can see that Bitcoin’s long-term bull trend has always been driven by hype (where investors allocate funds in anticipation of more investors entering crypto) as well as favorable conditions (including loose monetary policy, a rising stock market and lack of regulations). After over a decade of favorable conditions, Bitcoin is now facing opposite of each of these dynamics.

In our view, Bitcoin’s recent 75% downtrend from November 2021 to June 2022 represents “phase 1” of a much larger bear market. In fact, we believe that Bitcoin is currently entering its first ever genuine bear market.

As shown in the chart below, the last two Bitcoin ‘bear markets’ were not actually bear markets. Instead, they were bull market corrections!

At the time of writing, Bitcoin has yet to enter genuine bear market territory. We believe Bitcoin’s first bear market begins below $20k, after which all the most well-known bull trend indicators become invalid.

While Bitcoin’s stock-to-flow model and logarithmic growth curves have already been broken, we expect Bitcoin’s Pi cycle indicator (shown below) to be the next to break:

Incoming Black Swan events

So far we’ve covered Bitcoin’s bearish technicals and fundamentals. We also explained why we expect an impending crash to be Bitcoins worst ever. Going forward, we expect the following “Black Swan” events to drive a violent downturn:

1) Stock market collapse

Despite the recent 7-month decline, the NASDAQ-100 index is still up overrated relative to its base-level long-term trend line:

As shown above, the similarities between Nasdaq’s current structure to 2008 and 1999 are uncanny. If the NDX is destined to crash like the dot-com bubble, this will reduce the index by another 64%.

2) Regulations on cryptocurrency

As previously mentioned, the US government sanctioned the Ethereum mixer application ‘Tornado Cash’ on August 8, 2022. As regulatory uncertainty has haunted cryptocurrencies for years, we believe that the recent government action against Tornado Cash represents one of many attack coming soon.

Furthermore, the Tornado Cash sanction proved it Ethereum is not censorship resistant. This flies in the face of millions of ETH investors (myself included) who previously assumed that Ethereum applications were immune to government censorship.

Therefore, we expect increasing regulation and renounce previous beliefs will drive the prices of Ethereum and its DeFi economy much lower.

Laura Shin’s ‘Unchained’ podcast episode with Dave Jevans, CEO of Cipher Trace, is the best source I’ve found for spotting incoming cryptocurrency regulations.

3) Tether Collapse

Tether stablecoin represents another dynamic that has haunted the crypto market for years. In 2018, two university professors released a 60-page report detailing how Tether used market manipulation tactics to drive up Bitcoin’s price during the 2017 rally.

Although the crypto market has ignored this controversy for years, the US Department of Justice has recently moved to reopen the investigation into Tether. As the crypto market’s largest stablecoin (valued at $43 billion), it’s reasonable to assume that a Tether bank fraud conviction would negatively impact cryptocurrency prices.

4) Exchange Insolvency

“Phase 1” of Bitcoin’s bear market (from $68k to $17k) saw many cryptocurrency lenders declare insolvency. During phase 2 of the downtrend (which will bring Bitcoin below $20k), we believe more exchanges and lenders will declare insolvency/bankruptcy.

Notably, in a move similar to Celsius and Voyager’s pre-insolvency actions, Crypto.com (CRO-USD) has recently reduced the rewards paid to its credit card holders. Although this does not prove something, that’s objectively not a good sign.

5) Monkeypox

Finally, we believe that the Monkeypox virus represents a significant “black swan” event that the markets are not pricing in. As of 18 August 2022, there are 38,735 confirmed global Monkeypox cases and 2,446 suspected cases:

Although it is unlikely that Monkeypox will spread as rapidly as Covid-19, it is worth noting that cumulative international Monkeypox cases are currently at the same number as Covid-19 during February 2020:

We expect Monkeypox to develop into a much bigger problem as cases increase into 2023. Increasing monkeypox cases could scare many residents, causing them to seek vaccinations from a dwindling supply.

Short trades

Currently we are missing margin Bitcoin with an entry of $24.2k and we are missing Ethereum at $1902. We are also short Uniswap (UNI-USD) and Curve Finance (CRV-USD) as we expect incoming cryptocurrency regulations to seriously damage these protocols.

Risks

Trends in macroeconomics and central bank policy support our bearish outlook for Bitcoin. Risk includes any hint of prowess from the Fed (which would rocket the markets higher) and uncertainty surrounding the congressional elections in November 2022. The markets could bounce if the Republicans win the majority in the House of Representatives. Alternatively, we expect a heavy dump if the Democrats win.

In addition, investors should continue to expect each month’s inflationary pressures and economic data to strongly influence prices.

Important takeaways

• After 13 years of favorable economic conditions and two massive hype cycles, Bitcoin is poised for its biggest crash ever (the first genuine bear market).
• We expect this decline could push Bitcoin to $13k – $11k or to $8k – $5k.
• Very damaging events are brewing beneath the surface of the crypto market, including regulatory crackdowns, a deteriorating economy, poor economic conditions, and the spread of the Monkeypox virus.