I posted an analysis three weeks ago outlining that I feared Bitcoin was one bad news event away, dropping to $15,000. And hell, we got that event. Now I didn’t foresee this. My article made no reference to FTX. Not only that, but I’ve been lyrical in the past about Bankman-Fried’s acumen. I misinterpreted his character hugely, I was very wrong. In an analysis of FTX’s solvency published Monday, I still believed that it was highly unlikely that FTX was insolvent. I’ve also recorded many times repeating the same old adage: playing Bitcoin in the short term is like spinning a roulette wheel. But as we got stuck at $20,000 and headed into a winter fraught with ominous variables such as the energy crisis, high inflation, nasty geopolitical weather and political unrest in the US, UK and many nations in Europe, the risk was extremely high. high. And then a weird variable – FTX imploding. And in the words of the wonderful Black Eyed Peas, “it’s falling now and not a little later.”
Is it time to buy the drop?
I don’t like this question for two reasons. The first is, being a random kid on the Internet, how am I supposed to know? As I said a few sentences ago, short-term betting on Bitcoin is like spinning a roulette wheel. My opinion of whether I like red or black would be as valid as my opinion of Bitcoin’s short-term action. The second reason is that this question is almost a muscle memory reaction to the drop in cryptocurrency prices. Born out of space culture, I suppose. Central to this is people pointing to past cycles and referencing how Bitcoin has always come back. But they fail to notice something. Bitcoin launched in January 2009, in one of the longest and most explosive bull runs in history. As of this year, it is no longer like that. Free money turned off – so the Federal Reserve raised interest rates at historically rapid rates, with inflation at levels not seen since the 1970s. This is the first time Bitcoin has ever experienced a bear market in the broader economy. And for that reason, all bets are off. And it is now trading at lower levels than it was five years ago, in December 2017. There is no such thing as buying the dip and laughing on a trip to the bank. A look at the chart above will show you how many declines have taken place this year. This thing is difficult. Trading is difficult. Crypto is a volatile game. For every 100X earnings screenshot you see on Twitter, there are 100 more people who have lost everything.
Don’t take your eyes off the broader economy
FTX implosion is wild. And it’s incredibly bearish for the crypto economy in general. Expect some contagion to spread from this, as we still don’t know who was exposed to whom – but FTX, as such a huge player in the industry, will no doubt drag some bodies with them. But don’t take your eyes off the bigger trend. Crypto is following the stock market. Blue chip assets like Bitcoin and Ethereum are the dog’s tail, with the dog being the stock market. And that stock market is swinging back and forth on inflation readings and the Federal Reserve’s approach to interest rates. I wrote last month about how this correlation between stocks and Bitcoin is higher than ever. It rebounded sharply in April 2022, just as we transitioned into this high interest rate environment. In the short term, this FTX episode needs to happen. The contagion will spread, the news will come, the surprises will come. And after that, he goes back to following the stock market. If it is still unclear – cryptocurrency markets are ruthless. Don’t forget that, and stay safe.
