Where Do We Go Now?
Correspondence from the Financial "Pain Cave"
Lots of blood in the streets. Bitcoin tested a $29K support line yesterday morning. Anxiety provoking, for sure. But also not really all that anxiety provoking considering that the price of bitcoin was $13,720.36 on November 1, 2020, a little over six months ago. Perspective matters.
So, is the bull market over? Is it all downhill from here? Not in my humble opinion, but I am not so sure anymore. Time will tell.
Let’s start with the newly minted “Worst Case Scenario” chart from Plan B.
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I wrote about Plan B’s Stock to Flow model in one of the first editions of the this newsletter. I recommend checking that out you if you haven’t yet. In this revised version above of the S2F model, bitcoin still climbs to just above the $100k level, but doesn’t seem to feature the blow-off top that previous bull runs have featured. Please keep in mind, though, that this is Plan B’s “Worst Case Scenario” prediction. His “Best Case Scenario” prediction sees bitcoin at $450K at the peak of this bull market (as per his response to a comment to this Tweet). Do I think bitcoin reaches a peak of $450K or even Plan B’s original $288K prediction for this cycle? I don’t. Over $100K? Maybe. Hard to tell as bitcoin’s price bleeds into a second standard deviation of the model.
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I’ve lost a bit of faith in bitcoin’s price increasing. However, this isn’t due to the underlying fundamentals of the asset. Those are as strong as ever. I’ve lost some faith because of the ramifications of people trading this asset with leverage.
Bitcoin’s price crashed so severely a few weeks back because of leverage trading. As I have said in previous editions of this newsletter, the type of people who use leverage to trade something like bitcoin are the type of people who bring heroin to a cocaine party. It’s seemingly not enough for these types to be invested in an asset that tends to grow in value exponentially during bull markets; they have to try to turbo charge that growth with leverage. What we end up with are big crashes and a subsequently traumatized market. And the MSM loves to pile on the “FUD” while the market is in such a state. The latest round of this FUD is China banning bitcoin for the 200 millionth time.
Caitlin Long mentioned a one Michael J. Burry in her Tweet above. Mr. Burry is one of the people on whom the book and film The Big Short was based. He was the guy played by Christian Bale in the film. Burry believes that Bitcoin is a good idea, but he doesn’t believe that it will succeed because 1.) He doesn’t think governments will ever let it succeed and 2.) Too many people are betting on it with leverage. Below is his recent take on bitcoin’s current price action.
He sees a head-and-shoulders pattern forming in bitcoin. I don’t necessarily agree with his take, but when someone as smart as him speaks up, I listen. If this is the actual pattern that is forming in the market, then bitcoin’s price will go much, much lower. Obviously, this Tweet caused a radical shift in sentiment amongst some in the marketplace.
If Burry is wrong, then we are likely to see something like a Wyckoff Accumulation Schematic play out. For more on that, watch the video below.
If you want to learn more about different scenarios that can play out from here, I recommend reading through the thread below.
Here’s an important Tweet from that thread.
If we move into Phase E in the chart above, we likely free fall to some pretty intense lows. As Mr. Rekt Capital has said, this is highly unlikely, but then again, so was bitcoin’s price dropping 53% in a matter of hours. Based on what I have gathered from people who have been in this space far long than I have, this bull run is starting to resemble something far different than previous ones. Could bitcoin’s price action bounce back and bounce back significantly? Sure. Could it drop lower? Sure. We are in uncharted territory at this point. If you are looking for some hopium, though, here is a chart for you.
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As I said, I don’t think we see another massive correction in bitcoin soon, but we will likely see a truly massive correction in the coming months, maybe as early as early fall.
To clarify about how I feel about the state of both legacy and traditional markets right now, we are all basically dancing on a knife’s edge in an artificially propped up market. Legacy markets are experiencing what David Hunter (interviewee in video below) has a termed a “melt up”. In short, a “melt-up” is when the prices of assets in markets rapidly climb only to eventually crash violently (experience a 60-80% correction). It’s hard to provide a timeline for when this crash will occur; instead, Hunter offers price targets for the S&P 500, the NASDAQ, and DJIA.
Is Hunter an oracle, a guru, or a human crystal ball? No. But his estimates make sense to me given the amount of capital sloshing around in the system. It seems that a crash, or a major correction, is inevitable. More on this in the video below.
These sorts of crashes are sometimes called “VaR” (Value-at-Risk) shocks, and I bring up the potential of one of these occurring because bitcoin and the digital asset markets at large are far from immune to them. We learned this from the March 2020 financial crash. To get to the point that I am trying to make, if the next VaR shock comes as bitcoin hits $90K, then $90K will likely be the peak price for this cycle. I don’t see a scenario in which legacy markets crash again and digital asset markets just proceed according to Plan B. So, while it is important to zoom out and look at the bigger picture via Plan B’s models, it is also important to look at the bigger bigger picture, which is how the digital asset market will likely feel the same pain that legacy markets will feel - a pain that I feel markets will experience before the year is out.
In summary, while I am a bit concerned with bitcoin’s performance in the short term, as it surely could go lower, I am also concerned with the bigger picture and how this bull market cycle could be terminated more quickly than some in the crypto space think. In my humble opinion, the longer bitcoin stays stuck in the channel that it is in, the shorter the time frame for its price to increase becomes, as the likely big correction that is on its way will bring all markets to their knees, despite what any model might be telling you.
Best,
Frank
Twitter: @frankcorva
Currently Reading: Basic Economics, by Thomas Sowell
Disclaimer: I am not a financial advisor, and nothing written above should be taken as financial advice. Do your own research. Make your own decisions.
“There are three ways to make a living in this business: do DeFi, trade on price, or hack protocols. Well, I don’t hack protocols. And although I like to think I’m pretty good at trading price, it sure is a hell of lot easier to just do DeFi.”
Found a great DeFi risk management toolbox here: https://githubmemory.com/repo/twhay/defi-risk-tools-list