The for and against cases against Bitcoin

By | CYH

Bitcoin (BTC) has crashed 30% in the last week. It makes the drop in US stocks look weak.

BTC has reached a peak of $67,567 on 8 Nov 2021 and has since tanked by 67%. Mind you that this is the iconic crypto that many considered as a blue chip. If you look at the less well known coins and tokens, many of them has crashed more than 90%.

This is not the first time BTC has experienced a crash. It is the fourth time based on my count.

The first time was when BTC first crossed $1,000 in 2013. It crashed by 63% after a year.

The second time was in 2017 where it almost made the $20,000 mark. It crashed 64% within 2 months.

The third crash happened in 2021 after achieving a peak of $63,503. BTC crashed to $30,818 or by 49% in 3 months.

Now we are seeing the fourth crash. Is this the bottom? I am not sure but if we based it on the previous crashes that averaged about 60+%, we should not be far from the bottom.

Of course some would say the outlook has been gloomy and interest rates are still climbing. It has hurt not just the growth stocks but crypto too. I believe the strengthening of the USD and the risk-off mentality among investors were the causes.

Crypto didn’t behave like inflation hedge or alternative money. They moved in tandem with the high growth stocks, which makes them correlated bets even if investors think they are different asset classes.

Will crypto die entirely given that we saw the LUNA collapse as well as the cascading effect to other stablecoins? My view is that crypto is here to stay but not all coins or tokens will survive. Most won’t.

On the other hand, BTC is highly likely to survive based on resilience and Lindy Effect concepts.

BTC has crashed many times before, yet it refuses to die. After each crash, BTC made a higher peak:
2013: $1,132
2017: $19,141
2021 (Apr): $63,503
2021 (Nov): $67,567

This means that the next bull run is likely to create a higher peak once more. This is resilience.

BTC was created in 2009 after the Great Financial Crisis. It has survived 13 years despite many calling it worthless. By Lindy Effect, BTC is likely to be around for another 13 years.

If my views are right, buying BTC at $20k would yield 4x and 5x returns if BTC make higher peaks at $80k and $100k respectively.

That said, I don’t think crypto should be the sole investment. I would limit to no more than 10% of the portfolio. It would help not to look at the price movements too.

When it comes to controversial investments like cryptocurrencies, it will naturally draw the ire of some investors. Differences in opinion are a given. And it is important we look at disconfirming evidence as much as possible to catch our own bullshit. So I respect alternative views, just not when they are delivered in a rude manner. An educated mind is able to entertain an opposing view without accepting it in the first place.

I got a few messages about why Bitcoin might not be able to extrapolate its historical performance into the future. These views are warranted and I want to share them with you.

First, Bitcoin has never experienced a real financial crisis. Yes, it has experienced many crashes in the past but all were limited to the crypto space and not a widespread financial disaster. The last one was in 2008 and Bitcoin was only created in 2009.

The current inflation, culminating into a possible recession or even a stagflation is the first time Bitcoin is experiencing a real crisis. This is the actual exam and we have yet to see if Bitcoin can survive.

Second, the last 13 years have been a very different environment because interest rates were so low. The liquidity in the markets was unprecedented due to massive money printing by the Fed. Money made its way to the financial assets and inflated their values, creating one of the strongest bull runs in US history.

Crypto was one of the assets that money has flowed into. Bitcoin prices were buoyed by cheap money finding a home. Each QE pumped more liquidity and hence helped to push Bitcoin to record highs. 4 QEs = 4 Bitcoin record highs.

The era of QE is over and has been replaced by Quantitative Tightening. The reverse move is likely to drain the liquidity from the crypto market and blue chip Bitcoin will not be spared either.

Third, Bitcoin has no value creation. It has no real world use cases. Unlike businesses where they create products or services to serve customers, Bitcoin only destroys the environment. Stock market goes up in the long run and is able to break the previous high because value creation increases. It wouldn’t apply to Bitcoin.

Fourth, Bitcoin is just a Ponzi scheme. It has no value and hence people are just buying up hoping to sell at higher prices to the next sucker. As crypto gains more popularity, more suckers are attracted into the game. By now, there are no more suckers left and there is no way for Bitcoin to go higher anymore.

Finally, let me address these views. I agree that Bitcoin has not really been tested in a widespread financial crisis and this is the first exam it has to go through. Bitcoin price will definitely crash but I don’t think it will disappear. I am not saying all crypto will survive, some already didn’t make it. But Bitcoin likely will but I won’t know how low it will trade at.

Interest rates regime alternates all the time. Now it is going up but in the future it would fall again. Yes, it will take years. But the cycle will repeat. And if we buy the argument that liquidity drives up assets, even risky ones, the bull for Bitcoin will return. We just don’t know when.

Not all things have value create value. The Mona Lisa painting is so valuable until it is priceless. Does it provide value? I don’t think so but art connoisseurs will say I lack cultural sophistication. Does a Louis Vuitton bag provide thousands of dollars value more than a unbranded leather bag? I doubt so as they fulfil the same job equally well. LV cost more because of higher perceived value. So the thing here is not about value creation, is about value perception. Bitcoin has value as long as enough people perceived it has value. Same as stamps, coins, gold and even fiat money. Beauty is in the eye of the beholder.

But don’t mistake me as a crypto diehard. I am not as I only allocate a small part of my capital to it. An amount that it won’t hurt me if I am wrong. But I just think there might be something going on there and I don’t want to miss out totally.

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