Bitcoin Crashes and Burns: What Next?

Web 3.0 is turning out to be an absolute mess. Someone named otterooo (that’s all anyone knows about him) is on Twitter accusing a cryptocurrency exchange operating in over 200 countries, KuCoin, of being insolvent. In response, the CEO posts his conversations with otter on the company’s blog (translated from Mandarin) along with screenshots of otterooo offering to sell his Twitter account for $50,000 “because all the gigachads follow him.”

It’s almost like a bunch of middle school kids decided to play capitalism and their classmates invested their parents’ savings in all the “business models” that were created over a bowl of chronics. When a CEO uses the acronym FUD (fear, usecurity, ddoubt), he’s not a leader, he’s just a one-eyed man who leads the blind through his rendition of the Web 3.0 cult which – just like in high school – has its own language you have to use to show belonging. Ngmi.

Cryptocrash in 2022

Even TechCrunch warns us about it Get ready for a lot of dead DAOs. Ah yes, that one ddecentralized oneautonomous oorganization (DAO), an idea straight out of a Karl Marx manifesto. Opensource has served as a DAO for decades, and some of the most impressive software platforms out there have been developed by opensource communities. Web 3.0 DAOs ended up being collections of people who spend half their time “influencing” and the other half being interviewed by “influencers.”

The hits are coming hard and fast. Remember when we warned about one of the world’s most popular stablecoins, Tether? While we’ve been waiting for Tether’s house of cards to collapse, another stablecoin imploded. TerraUSD, a $16 billion stablecoin supposedly built to maintain parity with the US dollar along with Luna, a $40 billion crypto asset tied to it, both collapsed. News on TheStreet is that a co-founder could be on the hook for an $80 million payday, while all the lemmings on Twitter were writing suicide notes because they were stupid enough to put their savings into an investment product offering 19% interest without looking. The reason.

The world’s largest crypto exchange with millions of customer accounts has been on the receiving end of insolvency rumours. Crypto billionaire Sam Bankman-Fried has bailed out some players like BlockFi (had $1.8 billion in unsecured loans) and Voyager (a bankrupt crypto lender). In a recent Forbes piece, he talks about how some crypto exchanges are secretly insolvent. (If that’s true and they open new customer accounts, that’s pretty much the definition of a Ponzi scheme.) Singapore-based Three Arrows Capital, a leveraged crypto-trading firm with a $200 million exposure to Luna, revealed it was nearly insolvent after borrowing a bunch of money from the firms that — you guessed it — were just bailed out by Mr. Fried – Banker. Other crypto firms such as CoinFlex and Babel Finance have blocked withdrawals due to lack of liquidity causing the crypto equivalent of a bank run. One of the largest crypto lenders in the world, Celsius Network, filed for bankruptcy weeks ago when their customers suddenly lost their “diamond hands.”

Before it halted all withdrawals last month, Celsius had amassed more than $20 billion in assets by offering depositors interest rates as high as 18 percent. This was in response to a panic flight from clients.

Credit: Bitcoinist

The whole incestuous house of cards has broken down as it rightly should. Even the flagship of Web 3.0, bitcoin, has not escaped unscathed.

The Fall of Bitcoin

Since the beginning of this year, bitcoin has fallen approx 52%. As we warned, bitcoin miners have underperformed in each case. Here are the year-to-date returns of all five bitcoin mining stocks we’ve covered over the years and warned investors to avoid like the plague (company name links to relevant research).

All of these miners, along with all of the bitcoin bulls, have firmly believed that bitcoin will always increase in value. But because bitcoin has no intrinsic value, the price of bitcoin is just what someone else is willing to pay for it. When the price of gold falls, gold mines begin to produce less, projects fall through, and the price of gold stocks plummet because they are usually leveraged plays on the underlying commodity. Bitcoin is no different.

How Low Can Bitcoin Go?

Because bitcoin has no intrinsic value, we are left with past performance data as an indicator of how low it can go. The herd has a habit of acting in the same way when faced with fear and uncertainty, so populations have been shown to exhibit patterns of behavior in (some claim) predictable mannerisms. The study of these patterns is referred to as technical analysis. Here is a simple example of how this works.

A drawdown refers to the distance between the peak price of an asset and the lowest price of an asset. Over time, bitcoin has seen drawdowns ranging from 83% to 93% as shown below:

• 2011 period which ended after 160 days and a 93% pull down
• The period 2013-2015, which ended after 410 days and one 85% pull down
• The period 2017-2018, which ended after 360 days, and a 83% pull down

Notice how the drawdowns decrease over time, implying that volatility decreases. So if we take bitcoins all time high of $69,000 and extrapolate a few moves, this is what we get:

• 93% drawdown = $4,830
• 85% drawdown = $10,350
• 83% drawdown = $11,730
• 80% drawdown = $13,800
• 75% drawdown = $17,250
• 65% drawdown = $24,150

Those who put their faith in the tea leaves of technical analysis may find some comfort in the numbers above. We should not see a drawdown that surpasses previous drawdowns, so perhaps we have already hit the bottom. The maximum drawdown we have seen for bitcoin so far has been 74.5%, when the price recently reached $17,567. That could be the extent of this hot crypto summer. However, we are in a bear market, so it is entirely possible that we will see a bigger downturn than what has happened so far. This is where we can just tell you to be “cautiously optimistic” and call it a day, but we want to do better than that.

Buy or sell bitcoin?

There are several reasons why we invested in bitcoin. The first was to provide diversification because we believe bitcoin is an alternative asset that is not correlated to the broader market. The second was that we found ARK’s bull thesis to be credible and wanted some exposure to that potential. Then the bear market hit and everything changed.

Almost exactly at the beginning of this year, the Nasdaq began to hit the skids. As soon as that happened, bitcoin suddenly became correlated with the stock market reaching an all-time high correlation in April of this year. When bitcoin bottomed out, the correlation fell off the cliff and everyone breathed a sigh of relief. Bitcoin had resumed its role as an alternative asset. Well actually, everyone absolutely panicked, because bitcoin is only going to go one way – up – according to all the crypto influencers on Twitter. The bottom line is that if we look at things in the long term, bitcoin will still be considered negatively correlated to the stock market.

As for ARK’s thesis, there is a certain self-fulfilling prophecy that takes place when an extremely successful thematic asset manager (in the financial world, success is how much you raise, not how it performs) calls bitcoin the next gold. With a net inflow in 2021 and onessets under mmanagement (OMG) of around 14 billion dollars (down 50% from the top), ARK may have taken a fall, but they are hardly out of the running. Their thesis hasn’t changed, but the crypto world has. We are concerned about what we warned about last December just before the crypto crash – the systemic risk presented by the likes of Tether and their ilk.

As crypto entities begin to implode and billions of dollars evaporate, there’s every reason to believe there’s more where that came from. When Tether decides to get audited, maybe we’ll change our tune.

We can’t tell you what to do because everyone has their own unique circumstances. Ours is a bitcoin position that currently represents about 1% of our total assets under management at a cost basis of $7,815 per coin. To mitigate risk, we recovered our entire investment with a return of +7% at an average selling price of $41,907. We now play with the house’s money, but are careful not to fall victim to the house money effect. Our perception of ARK’s thesis has not changed, but the systemic risk in the cryptocurrency world has increased sharply. Be greedy when others are afraid does not apply to assets without intrinsic value. If the price of bitcoin pulls down below 83%volatility is not decreasing as pundits like ARK have promised and that’s when you should start having some FUD.

In the past, we have not provided details about when we buy or sell art, wine or bitcoin. In the future, we will send another notification Nanalyze Premium annual subscribers if we decide to buy or sell bitcoin based on what we have discussed today.

Conclusion

We have strongly condemned the whole Web 3.0/crypto/ICO thesis since its inception because it was an unregulated volatile mess with more scams than the over-the-counter market. Every time you turn, a crypto exchange reports hundreds of millions disappearing into thin air as everyone says “well” and moves on to the next scheme. There is value to be gained in some of these ideas, and blockchain has seen some momentum with use cases such as supply chains and real estate. As for the two primary cryptocurrencies out there – Bitcoin and Ethereum – be cautiously optimistic and you’ll be just fine. Wagmi.

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