Macro uncertainty has flared up again this month. China’s economy and property sector are underwhelming, sparking contagion fears. Bitcoin’s path to the next bull phase will require the price to climb the wall of worry. However, the halving and future liquidity injections will be the critical drivers of Bitcoin’s performance.
Key Takeaways
- SpaceX rumours caused BTC to drop.
- Evergrande fears have resurfaced, sparking concerns that it could cause a negative spiral.
- Volatility has finally made a return, but that led to massive liquidations.
- The halving is a catalyst for Bitcoin, but only if demand doesn’t fall.
- Liquidity will be the key to how high Bitcoin can go.
Content
The Building Is Burning, Run Towards the Fire
The rumours of SpaceX selling its bitcoin (BTC) holdings contributed to BTC’s price falling late last week. The company has reportedly written down $373M over the last couple of years, signifying that the holdings had been sold off.
Concurrently, Evergrande, China’s poster child for excessive leverage and debt in the property sector, has filed for bankruptcy. On the surface, it may not seem like it’s linked to Bitcoin and crypto, but the reality is that the property sector is critical to the economic health of China. It forms 70% of household wealth, so as property values fall, so too does people’s perceived wealth. Since China is still one of the most prominent investors in the crypto space, it is unsurprising that woes in the property sector can cause a scare for its citizens.
The interesting point is that altcoins have bounced more than Bitcoin at the time of writing this article. It is worth watching Bitcoin’s dominance over the coming days and weeks. Another thing to watch is the SEC’s appeal of the XRP decision.
The Good & Bad of Volatility
The good news is that Bitcoin and crypto are finally getting some volatility. The bad news is that prices have gone down via a big candle. The initial drop had caused a $1 billion liquidation. When the Bollinger bands were squeezed tightly, inexperienced traders set inappropriate stops that get triggered when the price breaks to the downside. It leads to a waterfall of liquidations as more stops are triggered, or traders cover their long positions by selling to exit. It is notably worse when liquidity is low because it doesn’t take much to manipulate the price.
If you read my latest article and Checkmate’s article a few days later on our options positions that cover both the long and short sides, you will see that we manage risk differently than most traders. I’m currently scaling out of my profitable short positions because I don’t know how low this move can go, plus sudden moves cause a rise in options volatility. This means that if people need insurance as the hurricane approaches, the insurance price will spike up. Taking some profits now means that if Bitcoin and Eth slowly bleed below the current price, the future option’s value may be less than the current price because a slow drop does not require hurricane insurance.
I will use the profits to DCA in long-term projects that I like. I made the mistake of trying to time the market when Bitcoin was at $20k, and despite making the right call on direction and price point, I got the duration wrong. I thought I had more time for DCA, so I missed my entries when prices made a V shape recovery. This is why I’ll enter positions as I take profits on my options.
BVOL24H this time around was coordinated FUD (again) with Evergrande bankruptcy + SpaceX selling #Bitcoin @Moneytaur_
Interest Rate Declines Alone Won’t Help Crypto
I don’t believe the future decline in interest rates will be overly important for the price of Bitcoin and crypto. This is based on the notion that the Fed will drop rates after it breaks something big. It’s not to say that it won’t have an impact, but the magnitude of the effect will be less than the subsequent points, and the initial decline in rates may hurt prices.
During the GFC, when U.S. interest rates fell, so did everything else. Gold initially dropped substantially before making a massive rally. Interest rates generally fall because the economy is doing poorly. It causes the market to panic, leading to a mass exodus from traders and investors alike. When things finally settle, the markets begin to figure out the implications and reinvest accordingly.
I also believe that the hype towards an interest-rate drop will impact crypto more than the drop itself. Markets are great at pricing in what’s to come, so we may see a ‘buy the rumour, sell the news’ event.
The Halving Shock
You may have heard that the Bitcoin Halving will be a major catalyst because the supply of the orange coin will reduce by half. However, a supply shock will only occur if demand stays the same or increases. I believe the halving will be bullish for Bitcoin in the long term, but you should be aware that macro is rarely straightforward.
If the global economy faces another black swan event, people will tighten their belts to ride out the uncertainty. Of course, this merely delays the inevitable, so having a long-term time horizon will reduce your stress levels.
SEC to the Backseat
Crypto writers have started to comment on the possibility of crypto-mom Hester Peirce replacing Gary Gensler as the SEC chair. The upcoming U.S. presidential election could be the driver behind such as move due to the increasing ownership of crypto by U.S. citizens. As seen in the last election, Biden’s victory was marginal, so upsetting 20% of Americans that own crypto is not a smart political move.
Moreover, the possibility of a spot Bitcoin ETF approval had increased to 65%. It was virtually at zero last year. Similarly, the odds of an Ethereum futures ETF approval have shot up to 75%. Perhaps this is why altcoins have not collapsed in the wake of BTC’s fall.
Election Year Bulls
Not a single president of the U.S. would have wanted a poor-performing stock market just before the election. In 87% of the cases since 1928, the performance of the S&P 500 in the 3 months before the votes were cast had predicted the election outcome. In fact, since 1984, it has predicted the presidential outcome 100% of the time.
All presidencies plan to create policies that will benefit the economy and markets well in advance of the elections. Will the Fed stay out of the way?
Liquidity Will be the Key
So far, China’s efforts to stimulate its economy have largely been unsuccessful. Combined with the onslaught of the possible Evergrande contagion, it would be surprising if the Chinese government did not add to the stimulus. As mentioned in the previous article, the Chinese economy is going through deflation. As such, their ability to inject liquidity into their economy is drastically better than most other economies.
Furthermore, China is a centrally controlled economy, so there is no requirement to ascertain the consensus of 2 parties before undertaking drastic measures. While this has drawbacks, the speed at which they can change course can reduce the impact of economic slowdowns.
Lastly, do not fear the downside. Know that the media will drum up positive news as prices move up. As prices fall, you will see the opposite. If you have an investment plan, stick to it. DCA during red days before a bull market can be a solid strategy, especially when the RSI is in oversold territory.
Recap
The world is messy, but don’t let that deter you from investing. You have missed out on substantial gains if you were too scared to average into positions when Bitcoin and the stock markets made their bottom.
China cannot afford to allow economic turmoil, so it will do everything it can to kickstart the economy. Time will tell how much it will impact crypto, but history has shown that it has a direct correlation.