The entire cryptocurrency sector is crashing, with bitcoin now well below $30,000. This is big, says Dominic Frisby. So just how low could bitcoin go?
Bitcoin has become highly correlated to the Nasdaq and tech stocks
With bitcoin crashing in fact, the entire cryptocurrency sector crashing I thought I should quickly cover it today.
Needless to say, its not pretty.
Faith in cryptocurrencies has been battered in most cases, quite rightly
This time last year, bitcoin went on one its monster runs above $60,000. It then had one of its monster crashes.
I cant remember if it was on these pages or on Twitter, but somewhere I suggested that a reasonable target for the correction might be $20,000.
$20,000 was the old high from the 2017 boom and bust and an obvious pivotal price point.
But the correction stopped at $30,000, or just below.
The conclusion I drew and on current evidence wrongly drew was that, as bitcoin matured, its volatility was declining. The 90% corrections of previous bull markets were now 50%-60% corrections.
Bitcoin had a second run above $60,000 in the autumn, followed by another of its humongous corrections, and lo and behold, $30,000 held again (actually just below, but I use round numbers as they are more readable).
As an asset, bitcoin has become highly correlated to the Nasdaq and tech stocks and, as we all know, tech stocks have been walloped. Peloton, for example, which we wrote about yesterday, is down over 90%.
So over the past fortnight, I was quite encouraged to see bitcoin holding up quite well relative to other tech stocks. $30,000 looked like it was a floor.
Then we got the collapse in the protocol Terra, and its so-called stablecoin UST, which John covered earlier in the week, and the sector has been absolutely battered.
This is big, and its going to take some recovering from. The bubble of 2016 was verging-on the-fraudulent ICOs. Today its staking and stable coins. The yields on staking over 20% in some cases were unsustainable and so they have not been sustained. (If youre baffled as to what Im talking about here, dont worry, you havent missed out and at this stage its very much for the best).
Hundreds of thousands of people have lost money, in some cases fortunes, and the reputational damage to crypto is considerable. All those who declared that crypto is a fraud are now looking wise, while those, myself to an extent included, who made the argument that bitcoin is a hedge against currency debasement are looking stupid, given that it is off some 65% from its highs.
Bitcoin will survive (again) but its likely to hit $20,000 and could go even lower
Of course, bitcoin and cryptocurrencies are not one and the same. Bitcoin remains a product of technical and open-source genius, but forever in its wake, and surrounding it, are disasters, gaffes, frauds and scams.
Altcoins, NFTs, the Metaverse, Defi, staking, whatever the latest buzz thing is all of it is puking value, and the bubble has well and truly burst. Again.
And there lies the keyword again. This is not the first time this has happened, and it will not be the last. And, for all the junk that surrounds it, bitcoin keeps plodding on.
As I write it sits at $27,500. I cant see how it doesnt retest $20,000 in the coming days.
We hope $20,000 holds, but these are horrible, horrible, horrible markets and Im not just talking about crypto. It was oil going bananas in 2008, rising to $150 a barrel, which triggered that collapse. It seems like something not too dissimilar is happening now, following oils spike to $130 last month.
There will be a lot of forced sellers out there leveraged players (those using borrowed money) and so on. So we are going to see a lot of liquidation. My advice, if you own quality assets, and you dont have to sell, is not to.
Gold, bitcoin, good companies whatever. Their price may go lower, but if you are not confident you can beat the market, then dont sell. Because just as bubbles always burst, so does quality always come good. And bitcoin itself Im not talking about other cryptocurrencies bitcoin itself is a quality asset.
Theres even a chance it could go back to its corona-panic lows of March 2020. Heck, everything else seems to be going that way. That would take us to $3,000. I would have thought that unlikely, but never say never, especially in these markets.
If you think you can beat the market, as I say, go for it.
If not, HODL quality. Dont trade it.
Dominics film, Adam Smith: Father of the Fringe, about the unlikely influence of the father of economics on the greatest arts festival in the world is now available to watch on YouTube.