Here’s something no one wants to hear, and you may yell “FUD” after reading it. But before you do, please read all the way to the end.
- Bitcoin can fall to $500, $50, or even $0.
- BitMEX isn’t the reason behind declines in bitcoin and altcoins.
- This bear market can go on for years.
First, although it’s highly unlikely that bitcoin falls to 0 (someone will be mining it until the end of the World), it’s not impossible for the cryptocurrency to fall to single digits. For example, legislation banning the ownership of bitcoin may not kill it, but it would lead to massive selloffs. If a scenario is physically possible, there is a probability for such a scenario to occur—however miniscule.
As to the second point. Recently, BitMEX has become the go to scapegoat for bear market wary HODLERs and traders. Here are the top two arguments related to BitMEX’s supposedly negative effect on the cryptocurrency market:
- The massive amounts of short speculation leads to further price declines in the bitcoin and altcoins traded on the platform
- BitMEX introduction of the ether perpetual contract was the major reason for the recent decline in the price of ether.
Just as in most speculative endeavors, the majority of participants lose money. The same holds true for traders on BitMEX, and our educated guess would be that most have been on the wrong side of recent price action.
Although BitMEX’s perpetuals and futures made it possible to go short, the platform isn’t a known habitat for so called ‘whales’. The platform’s contracts may enjoy some of the largest volumes, but that doesn’t mean market moving orders are executed on BitMEX. Instead, most of the large trades are done OTC, off exchanges. As to the introduction of the ether perpetual specifically, the bear market had begun long before this event. And, although we lack sufficient price history, ether is a higher ‘beta’ play than bitcoin. Increases and declines should be more violent.
If anyone needs a reason for the large price declines in ether and altcoins, it’s simply the fact that the bubble burst. That, and realization that many altcoin projects will not only fail, but even if they succeed, their inherent tokens won’t have any value.
During the ICO craze of 2017, there was massive discussion about these offerings being securities. In certain cases that may have been true, but the discussion ended up overshadowing what was really going on: a massive transfer of wealth from speculators to startup founders—without the latter giving up any control or equity, whatsoever.
Founders said “here are some tokens you can use in our digital arcades, they may have some value if our project becomes popular, but you won’t get any share of the profits”. Some had nefarious reasons, while some were simply following the law as well as the example set by Ethereum.1 The point is, if a regular security has a minimum chance of succeeding, the odds of a utility token is even smaller.
The silver lining
Bitcoin does not live in a vacuum, it’s purported perfection does not make it immune to global capital flows. Right now the Federal Reserve is hawkish, and capital is flowing into the dollar.2 It is rightly, albeit temporarily, a safer haven than an asset that lost some 70 percent of its value from its peak nine months ago. Furthermore, if central banks around the World implement measures similar to those of the Reserve Bank of India’s, bitcoin and altcoins may continue to decline.
In the end, it all comes down to the equity markets and actions by central banks. When the next bear market is triggered, and investor pain becomes intolerable, the Federal Reserve will accommodate.3 The value of the dollar and other major currencies will then most likely fall against cryptocurrencies. This point will rightly be viewed as the second genesis of bitcoin.
- Taxonomy aside, we still see ether as one of the very few viable utility tokens. ↑
- The current administration’s repatriation plan is also major tailwind. ↑
- Our view is that bitcoin may rally before the Fed takes action. ↑