Bitcoin

Is the current bitcoin carnage lighter than the previous bearish episodes?

An Omaha revelation, Warren Buffett, was recently included in the so-called “financial judgment of aging” by Paypal and Palantir co-founder Peter Thiel, to maintain an old and very down-to-earth stance on Bitcoin and other cryptocurrencies.

Well, now Buffett responded, recently saying that he wouldn’t even buy Bitcoin at $25. Readers can watch the entire clip here:

Bitcoin is now poised for a bounce even though the Fed’s stock market carnage continues to act as a strong downturn

As the war of words over Bitcoin’s prospects continues, MicroStrategy (NASDAQ:MSTR) has now issued a warning that it will face margin call for its large stake in Bitcoin if the cryptocurrency price drops to $21,000. Keep in mind that the company currently has about 129,218 bitcoins acquired for $3.97 billion, or $30,700 per coin. However, the margin call relates only to the $205 million bitcoin secured loan that MicroStrategy has taken from Silvergate Bank, and in the event of a startup, the company will simply have to provide additional bitcoins from its large unencumbered stake to maintain the appropriate loan guarantee. .

Of course, we did a thorough analysis of Bitcoin’s prospects over the weekend, noting that the cryptocurrency has now entered a broad support range extending to $29,000. Backed by the setup of more favorable near-term metrics on the chain, we continue to believe that the potential for a breakout of key nearby support areas remains weak, setting the stage for a significant bounce.

However, as we have repeatedly pointed out over the past few months, Bitcoin’s ever-increasing relationship with US stocks in general and high-beta heavy-growth stocks, in particular, is a major cause for concern. Consider the fact that Bitcoin’s 60-day correlation with the S&P 500 is currently 0.70 (the metal scales), which indicates that about 70 percent of the cryptocurrency’s movements replicate those of the S&P 500.

This is a major threat to the Bitcoin narrative as it is a unique asset that does not fall within the realm of traditional finance. Moreover, by failing to keep its head above the proverbial waters amid the current macroeconomic environment characterized by a fierce inflationary drive, Bitcoin has also proven that it cannot act as a viable inflation hedge, for the time being at least.

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So why has this correlation system remained so constant? Well, institutional adoption is a double-edged sword. On the other hand, as more and more institutions engage in bitcoin, the cryptocurrency is benefiting from increased liquidity, which should mitigate its legendary volatility.

Source: https://www.vaneck.com/us/en/blogs/gold-investing/revisiting-gold-and-bitcoin-as-commodities-rally/bitcoin-and-gold-friends-or-foes.pdf

In fact, according to a recent report by VanEck, institutional adoption of Bitcoin has never been more vibrant than it was in 2022, so far this year, nearly 160 separate 13F files by many hedge funds have referred to their Bitcoin holdings.

This new onslaught of liquidity is having a noticeable impact on Bitcoin’s volatility. For example, the current bitcoin price of $33,092.5 corresponds to a peak-to-bottom drop of 51.19 percent so far, well below a typical bear market drop of more than 80 percent. Of course, the current bearish cycle is not over, and it remains to be seen if Bitcoin can avoid a more typical pullback in the current cycle on the back of additional liquidity from institutional investors. Even if the bitcoin price fell to as low as the $21,000 price level, it would still correspond to a peak-to-bottom drop of 69 percent, well below the typical decline of over 80 percent.

Source: https://www.vaneck.com/us/en/blogs/gold-investing/revisiting-gold-and-bitcoin-as-commodities-rally/bitcoin-and-gold-friends-or-foes.pdf

The above chart, taken from a VanEck report, clearly shows how the cryptocurrency’s relative volatility has decreased in relation to the Nasdaq 100 Index (as of January 26, 2022).

So, while institutional investors bring additional liquidity to the table that plays an important role in curbing Bitcoin’s legendary volatility, the downside comes from the cryptocurrency’s high correlation with other traditional financial assets, particularly high beta US stocks.

The rationale here is simple. Institutional investors are currently pooling bitcoin with other riskier assets, leading to similar liquidation waves and increased correlation.

Over the weekend, we observed how the Federal Reserve was trying to hit risky assets in order to reduce the wealth effect pervading the US economy, thus hoping to subdue consumer spending and cool the current inflationary impulse. As long as this pattern continues, US stocks will not be able to recover, which leads to waves of institutional selling that will continue to expand into Bitcoin, given the supposedly similar risk profiles.

It’s a sure thing in finance that trends never last. Thus, we believe that the prevailing infernal system of Bitcoin will eventually come to an end, either as a result of the fading of the inflationary impulse or the institutional adoption of the cryptocurrency reaching a critical mass that frees the cryptocurrency from the clutches of the prevailing high correlation system with US stocks.

Warren Buffett believes that Bitcoin is not even worth $25. Peter Thiel, on the other hand, is believed to be worth at least $4 million. Given Buffett’s historical distaste for anything to do with technology — he bought Apple back in 2016 only after its rise was proven beyond doubt — we’ll take Buffett’s outrageous predictions with little caution.

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