With the seeming ability to mint millionaires overnight, bitcoin (BTC-USD) and the broader cryptocurrency industry enjoyed a remarkable coming of age in 2021, soaring to record valuations. However, faced with extraordinary economic pressures, even virtual currencies cannot indefinitely withstand the heat. Although I own a small position in BTC, I am currently bearish.
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In a journey that has come full circle during the weekend preceding the Juneteenth holiday, bitcoin was agonizingly treading water at the $20,000 level. However, as the clock ticked midnight on June 18, BTC slipped below this critical psychological barrier. At one point, the crypto coin fell below $18,000 before mounting a desperate climb back toward the aforementioned pivotal threshold.
For anyone following the virtual currency space, the cratering of bitcoin represented a harsh wake-up call. It was only in November of last year that BTC appeared to credibly move toward the $70,000 level. Back then, the concept of a six-digit price was no longer a fantasy, requiring roughly a 49% gain to achieve.
However, the proverbial invisible hand of the free market is having quite a laugh at blockchain advocates’ expense. From bitcoin’s peak to the early morning hours of June 19, the digital asset hemorrhaged roughly 71% of its market value. Investors must go back to around mid-December of 2020 to see prices this low.
Even worse, it’s very possible that BTC isn’t done disappointing investors. It’s time to set aside the rose-tinted glasses and view BTC with objective reality.
The Collision Requires a Resolution
When Harold Kushner suffered a shocking family tragedy, the conservative rabbi’s world understandably fell apart. At the heart of his sorrow was a nagging question: how can a benevolent and loving deity allow such horrors to descend upon the righteous?
In seeking answers to this pressing inquiry, Kushner theorized that his deity was good but not fully in control of the universe. His journey culminated in the bestselling book, “When Bad Things Happen to Good People.”
Now, Kushner is a controversial figure within religious communities, which is a different story for a different day. The main takeaway here is that Kushner was confronted with a collision, a collision that challenged his long-established worldview and thus forced a resolution to the conflict.
Similarly, many bitcoin proponents are struggling with reconciling the myriad promises of BTC and cryptos – that decentralized digital assets will overthrow the centralized fiat monetary system and other outlandish narratives – with the reality of what’s actually happening.
Yes, bitcoin can supposedly correct wealth disparities, address global hunger, and perhaps cure cancer along the way. Still, right now, bitcoin is struggling in a manner that is incongruent with the promises of blockchain advocates. After all, wasn’t crypto supposed to be a safe haven against soaring inflation?
Unfortunately, BTC holders may not have the luxury of simply ignoring the pressures of reconciling the contradiction between narrative and reality. Should the economy slip into a severe downturn, for instance, mass layoffs will materialize, thus raising demand for cash.
As well, for members of Generation Z, bitcoin may be the only investment opportunity they know. Logically, then, this slump may be the first negative market event for young investors, perhaps causing a widescale panic.
Needless to say, that would be a net negative for bitcoin prices.
Actions Speak Louder Than Words
Beyond the psychology of a crypto market crash, there’s the canary in the coal mine regarding cash outflows. Supporters can speak as much as they want about the future of money being decentralized. Actions almost always speak louder than words.
As of the morning of June 19, the total amount of money leaving bitcoin wallets tethered to crypto exchanges amounted to $12.45 billion (over the trailing seven days). Despite all the talk from blockchain advocates about “buying the dips,” total exchange inflows measured $12.21 billion – significant, yes, but just short of the money going out.
What’s more, on June 16, the money leaving BTC wallets over the trailing week was $10.22 billion. In contrast, the amount of money moving into bitcoin was only $8.44 billion. Frankly, prospective BTC investors must assess the hard data rather than listen to cute memes or exhortations to hold the line.
Worse yet, the ratio of BTC holders making money at the current price has slipped to the negative: 48% is in the money while 49% is out, with 3% neither winning nor losing. However, should prices creep increasingly below $20,000, the temptation to back out will become too much for many investors.
Certainly, you don’t want to get caught unexpectedly should the above ratio really tip over to the bearish spectrum. It’s not an impossible outcome either.
With the inflation rate hitting 40-year highs, consumer sentiment has dipped to all-time record lows. Simultaneously, the velocity of the M2 money stock has been languishing in subterranean territory since the start of the pandemic, implying a lack of overall business activity. Unless the underlying fundamentals change — and right quick — people will likely run to cash, not to BTC.
Keep the Powder Keg Dry
While bitcoin may have permanently imprinted the concept of decentralized assets into the collective consciousness, that alone may not be enough to save BTC from a severe correction. At the end of the day, free-market forces are playing the role of arbiter – and they’re incentivizing a pivot to dollars, not cryptos.
Therefore, investors should seriously consider keeping the powder keg dry. Given how badly bitcoin has fallen, it would not be inconceivable for BTC to drop below $10,000 before eventually making its way higher again.
