The bitcoin crisis
Bitcoin’s problems could be just starting. Having rapidly fallen 30% from its highs, leveraged bulls could become forced sellers, with wider implications for markets and gold.
ALASDAIR MACLEOD
Introduction
The concept behind bitcoin was that its quantity would become progressively harder to mine as it approached its hard stop of 21,000,000.
It was promoted as a future private sector money compared with the endless expansion of government currency.
Valued in continually debasing government currency, bitcoin’s value would increase and increase.
It succeeded in alerting generally complacent investors to the issue of currency debasement.
And here was a new technology which allowed individuals to hedge against it.
It seemed to hold greater promise than gold, which already had significant aboveground stocks and was frankly old hat not going anywhere at the time and whose supply would always expand.
Surely, the argument went that a new technocratic solution could do better.
Enthusiasts promoted the idea that as a world currency you could compare bitcoin with the global fiat money supply.
It offered the prospects of soaring towards infinity — and from time to time it appeared to be on its way.
But in the last month the dream has become severely tested, with its dollar value crashing up to 30%.
But as the chart above shows, in real terms as opposed to arithmetic it appears to have lost momentum in successive bullish phases and appears likely to be heading for further declines, potentially testing a six-year uptrend currently below $50,000.
Given that there are significant leveraged positions in bitcoin, a decline to this level could be swift as some major holders are foreclosed on by their lenders.
Chief among these is Michael Saylor’s Strategy Inc (MSTR). whose further buying into the bitcoin crash was to no effect.
According to Coinbase, MSTR appears to have now stopped buying, suggesting that it has run out of firepower.
Furthermore, MSTR is likely to be removed from major benchmarks leading to automated selling by tracker funds.
Coinbase estimates that this could lead to further automated sales of $2.8bn when Morgan Stanley Capital International (a major compiler of international indices) issues its ruling on 15 January, and a further $8.8bn if other index compilers follow suit.
As a leveraged play on bitcoin MSTR’s shares have already declined by 70% from their peak.
The question arises as to whether the market disruption faced by MSTR and similar leveraged vehicles can be contained without undermining bitcoin itself.
It seems highly unlikely.
Currently, bitcoin is capitalised at about $1.5 trillion, and its destabilisation is bound to have an impact elsewhere.
In recent years it has correlated neatly with NASDAQ, as the chart below indicates — until now:
The point behind this correlation is that holders of bitcoin are technology investors generally.
And if bitcoin collapses as speculative leverage is unwound, then tech stocks will be undermined as well.
Could this be chaos theory’s butterfly in the jungle whose flapping wings become magnified by a domino effect into a financial hurricane on Wall Street?
We know that there’s a massive financial credit bubble waiting to implode and that momentum stocks such as the Magnificent 7 are vulnerable.
What’s particularly striking is that bitcoin’s negative performance comes at a time when previously unfashionable gold is now outperforming bitcoin.
To put it in perspective, global portfolio exposure to gold is estimated by the World Gold Council at only $500 billion, one-third of bitcoin’s capitalisation.
Bitcoin’s collapse will undoubtedly leave investors without the protection from debasing fiat currencies that they originally sought.
As stackers in gold might muse, it’s an ill wind that brings benefits.
Bulls of bitcoin hiding from currency debasement will have lost it and can only turn to tried and tested protection, which is gold.
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