Bitcoin: Panic May Just Be Getting Started (BTC-USD)

solarseven

Bitcoin (BTC-USD), the most popular cryptocurrency in the world, as well as cryptocurrencies in general, have seen negative news coverage at an increasing rate over the past couple of months. The cryptocurrency market made people millions and billions in value after it rose from a near penny-stock level to over $50,000 per Bitcoin at its peak a few quarters back.

Since then, although some tout it as a more secured way of financial transacting, an increasing number of hacks and fraud allegations have been taking place and shining bright in the news all around the world. The problem with this, I believe, is twofold:

The first is that while those who use Bitcoin, estimated at around 106 million people, mostly (60%) trust the system, they only represent less than 2% of the global population. Only 17% of Bitcoin users trust the world governments, showing that although it may be touted by some as a good alternate to global currencies and that more and more businesses are allowing you to use Bitcoin and pay in real time, it’s still not being adapted by a significant population.

Chainalysis Active Bitcoin Accounts

Active Bitcoin Accounts (Chainalysis)


This means that there still is an issue with the hypothetical way forward for Bitcoin or cryptocurrencies in general, which is wide scale adaptability and usage, which may be the only way to make it stable enough to be considered anything near a usable long term global currency. This means, I believe, that we’re going to continue to see volatility in the cryptocurrency system for years to come, which will further deter new participants in the system.

The second is that, on top of not having a growing user base, even current users don’t wholeheartedly support the system of alternative currency, leading it to become more of a commodity without any backing in peoples’ portfolios. This means that, I believe, it will be one of the first things to be sold if and when we head into any form of a recession, which I believe we will do soon.

With the mass (relative) layoffs in the technology sectors, which are where a sizable portion of the Bitcoin holders are from, people who have invested and potentially made a good bit of money are going to think about and eventually sell portions of these investments to fund their lives while they job search.

These two factors mean that, I believe, there isn’t as much of bottom to the cryptocurrency market where people will be buying, and that there is a ceiling in a years long span where we would expect a recession or slowdown. But that’s not all.

The Other Short-Term Problem

There’s also a third group of Bitcoin (and other NFT-style unit) holders – young people. This phenomenon has certainly paid off big time for some, but for the most part it hasn’t resulted in any significant change to these peoples’ lives. But due to the fact that a good portion of these young folks who put whatever money they have into these cryptocurrencies and NFTs because of influencers peddling these various “investments” – they don’t necessarily have an alternative to these if they need money.

Pew Research Center - Crypto Investing

Cryptocurrency Trading (Pew Research Center)

For those who have some cryptocurrency like Bitcoin in their portfolio, which can constitute from 1% to 50% of their holdings, they usually have steady job and other savings and cash flow to mitigate any serious inflows. But if Bitcoin and various non fungible tokens crater more than they already have – they’re likely to sell in a panic due to their downside tolerance being much lower.

What A Crash May Mean

If, as I believe, Bitcoin and most cryptocurrency markets have a ceiling and that the sell-off we’ve seen over the past few months will spook a lot of retail investors who have large amounts of Bitcoin and other cryptocurrencies – we’re likely only at the beginning of this downturn.

The issue here is, given that the system of Bitcoin isn’t backed by anything but faith of one person buying from the other – the bottom here is most likely a lot lower than if we enter a bear market in the ‘regular’ stock market. There are going to be holdouts in the cryptocurrency system, especially those who have Bitcoin as only a small part of their overall financial holdings, which may mean that it’ll take more time for them to hear about the news as it gets worse before they sell.

This means that not only do I believe we are in for a shock to the system soon but also that the risk here is much greater than the ‘regular’ stock market given that, in theory, there is no bottom compared to a company like, say, Apple (AAPL), which still will take in a certain amount of revenues and make a certain amount of cash and have real value on the books, even in a deep recession.

So Now What?

While shorting something like Bitcoin is absolutely insane, even if there was an easy way of doing that, the price, as it has done before, can spike by hundreds of percentage points in a matter of a few days or over a weekend, leaving any short position deep, deep in the red.

But as someone who has had Bitcoin and other cryptocurrencies as a tiny part of their overall portfolio: I think it’s time to take it down even further and avoid it for now. That’s because it can become a slippery slope / snowball.

What I mean by that is that there are several million people out there with a significant portion of their money in Bitcoin, cryptocurrencies and other NFT-style things, which if the price of those assets eventually goes down by 50% to 90% will see their net worth of the value of their holdings fall. This can, I believe, cause an actual spending crunch if the value of said portfolios fall.

So this can become a snowball effect where people sell some of their Bitcoin after losing 50%, which causes the price to fall further, which then prompts them to sell the rest, or all, at a loss which will then cause them financial hardship and their spending will go down. Which will then hurt the economy and cause even more people to look at selling their non tangible assets etc.

Given these factors, I have turned very bearish on Bitcoin and the prospect of cryptocurrencies and NFTs in general and will be avoiding Bitcoin for a while.