Now that the dust has settled on last week's market volatility, let's examine again what may have caused the sell-off and why it was so intense.
According to a few of the leading on-chain analysts [discussions found here and here], it appears that a large portion of the selling pressure came from new wallets (less than 5 months old) that contained large amounts of bitcoin. Again, remember that every transaction on the Bitcoin blockchain is broadcast to and thus widely known to the market and data miners. This is called "on-chain data", of which no other financial instrument, asset, or equity can offer to market participants. But because Bitcoin wallet activity is pseudonymous, assumptions must be made as to who owns certain wallets and why they do what they do, so the explanations that on-chain data provides are far from an exact science. It's probably 70% art and narrative, 30% science and data - but at least it's something other than pure conjecture, media ignorance, and blatant subterfuge.
It's assumed these wallets were new high-net-worth individuals or hedge funds who have recently entered the space since January, and especially since February when Elon Musk announced that Tesla had purchased $1.5 billion dollars’ worth of BTC for their treasury reserve. The initial selling appeared to have coincided with Musk's tweet stating that Tesla will no longer accept Bitcoin for auto sales, citing "the negative environmental impacts of bitcoin mining", something we've previously covered. The market began to move down, overleveraged positions were liquidated which intensified the selling momentum causing more new, large bitcoin-containing wallets to sell, hurtling the price lower and lower. To worsen matters, traders were continually trying to time the bottom which never seemed to come by opening overleveraged long positions which, again, kept getting liquidated by the panic selling. As I briefly mentioned when Musk began his shenanigans, if Bitcoin needed to shake out all these weak hands who had entered simply because "the billionaire physics guy with the rocket ship company" did so, then that's what needed to happen. And it did.
Bitcoin will probably take a long time to recover to the $60k level. The new coins acquired by the wealthy speculators and institutional ship-jumpers in February need to pass to long-term strong hands or be converted thereto and accumulate from here with the proper mindset. Strong hands can only be acquired through education which augments one's long-term vision with the proper conviction to weather the storms that this market and the societal transition it is inaugurating will and are currently bringing. Markets in general and Bitcoin in particular, largely because this is an unregulated and unmanipulated global market that maintains 100% 24/7 uptime, are designed to punish certain impulsive activities and reward others. If this were not the case, the richest people in the world would be gamblers while the left-behinds would be the rational, grounded, educated, and prudent investor who simply dollar-cost-averages day in and day out, in good market and bad. But gamblers, as we all can attest, never win in the long run. Every tournament-winning poker player has some side addiction - be it betting on ponies, greyhounds, blackjack, roulette, sports, or the stock market - which absorbs the vast bulk of their poker winnings.
Since January, Bitcoin had been extremely overleveraged, thus a correction was bound to happen. Unsafe leverage positions, coupled with the Dogecoin hysteria and shitcoin price explosion, the Elon tweets, China FUD, and the sudden celebrity interest all combined to ring the bell on the recent fun, and Bitcoin - as well as the rest of crypto - paid "the price". This bull run, as I eluded a few months ago, is now looking more like the 2013 run which saw a double-top, one in April of that year which led to a 5-6 month consolidation period before it exploded to its December peak, 4.5x increase from its April peak. I'm not saying we'll witness the same activity this year because I do believe this run will be different in its own unique way from the others. But if it does, expect a few more months of boring, sideways action that goes neither powerfully up nor down before it recharges for an autumnal explosion which, using 2013 as our example, would put the Bitcoin price at $250,000, or thereabouts (my price prediction - such a nice round number). Actually, 4.5x from the $64k local top is $288k which just so happens to be the exact target that PlanB, the creator of the widely-used stock-to-flow model, has been predicting since at least last summer.
If this and virtually everything else I say concerning Bitcoin adoption, market forecasts, societal predictions, and the civilizational changes that digital money will bring to our way of life as so unbelievably fantastic, nonsensical, and incomprehensible that is, without a doubt, the natural and normal psychological prejudice one is supposed to have. The reason: the human mind cannot grasp exponential or logarithmic growth. Here's a good example illustrating the power of compounding growth, In short, if a single drop of water was to double every minute, how long would it take to fill Yankee Stadium? The short answer, less than an hour. Little happened in the first 45 minutes, but if you were looking to escape the top bleachers in the last ten minutes, you wouldn't be able to. A similar, though slightly blunted, phenomenon is at work with the adoption of certain particularly disruptive communication technologies like the radio, TV, internet, smartphones, social media, and e-commerce.
Bitcoin adoption will, at least from a certain long-range price perspective, be similar to the example of the water drops in Yankee Stadium. Consider the chart below, a simple, linear scale. Bitcoin's genesis block occurred on Jan 3rd, 2009. For years, the price, at least from our current vantage of around $40K - $45K, did not appear to do anything at all. Indeed, 2013 (referenced in the chart above), a highly volatile and explosive time for Bitcoin, barely makes a blip on the linear scale. By the end of this year, 2013 will no longer be visible and perhaps 2017 will be the blip. 12 years down the road, according to the power of network effects, exponential growth, the disruptive and revolutionary nature of bitcoin's blockchain monetary technology, Bitcoin's use case, and the addressable market ($1247 trillion) it is poised to absorb, I am confident that our current bull run, as powerful as it may seem to we who are currently living through it, will also look like a mere blip on the linear chart.
However, this is as hard to take into account as the water droplets in Yankee Stadium. A lot of nothing, then all at once. One day you weren't buying anything on Amazon and the next day you were, and probably a lot and also your neighbors. One day you weren't on Facebook then you were suddenly spending hours of your day on it. One day we weren't using the Internet and the next day we were and could never go back, not as a society or an individual. A weak example for Bitcoin adoption, perhaps, but you get the idea.
"Well, what about that Ethereum thing? And all the others, I mean, there are thousands."
I am not too much of a "Bitcoin Maximalist" to not acknowledge that some of these projects will have utility in the digital economy moving forward, but they should all be considered early-stage venture capitalist investments that are works-in-progress, far from finished products. As I've stressed at length, Bitcoin is not the first attempt at digital money. Many failed iterations went before it. It was more or less a completed product when it launched and as a result, has undergone comparatively minor code changes since its birth. The price of Bitcoin moves - no one knows why - and then the narratives ensue, even and especially the big ones produced by the Bitcoin community itself, the long-term narratives which seem to prevail and predominate the discussion around the asset and the ecosystem in general.
But just as the micronarratives that react to Bitcoin's daily moves never supply an adequate "why?" as to what precipitated an actual movement in the first place, so too the larger narratives (such as digital gold, inflation hedge, new global reserve currency, etc.) are also little more than reactions to the exponential price increases that we will continue to witness every four years, even though none it makes total sense to our minds which are by default linear and not logarithmic.
NSV