Bitcoin at crossroads?

Abraham George Market Musings

It’s not a secret that the Chinese authorities don’t like Bitcoin but the Chinese people are one of its biggest investors, users and miners. The Chinese government actually sees the value in blockchain technology - for the government’s own use but not for the common man. They have been talking about a ban on Bitcoin for almost a decade but looks like they implemented it fully last week.

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While the latest Bitcoin buyers are unable to cash out and sitting underwater, there are many who bought Bitcoin sometime back and are sitting on very healthy profits even when Bitcoin has corrected more than 50% from its recent highs at $65,000.

The market is very divided on Bitcoin. There are a group of people who very strongly believe that these are the beginnings of a bear market in Bitcoin. But the other group believes that Bitcoin is ‘pricing in’ all the worst news that anyone can think of. It is still fighting back to hold onto 200% gains over the past year.

A 50% sell off in any traditional assets like stocks or bonds would have led to total mania, panic and terrible consequences. Yet when it happened to Bitcoin (it has happened many times) no financial institutions failed, the Fed didn’t have to bail out anyone, there were no massive margin calls, no industry collapsed or any massive layoffs were announced. There won’t be big books written on it or will there be movies made on it. It won’t change the course of history or banks will be terrified to lend again.

A major, albeit fairly new asset class lost more than $1 trillion in value less than two weeks. According to Bridgewater, this amounts to 2% of US GDP compared to a bit over 1% during the 2017 crash. No doubt the speculators took a licking but the system will keep on ticking.

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Last week there were lot of worries surrounding the so called ‘death cross’ in Bitcoin’s technical price picture. It simply means the crypto’s shorter term 50 day moving average dropped below its longer term, 200 day moving average. Many market observers consider this as a sign of more bad things to come. Such moves happened before big major crashes in stock markets. The crashes in 1929, 1938, 1974 and 2008 come to mind.

But when it comes to Bitcoin, if you believe in using recent history as an indicator a ‘death cross’ could actually be a bullish sign in the short term. One-week historic returns after such moves in Bitcoin’s history are positive, with a 2.5% average gain.

In the longer term, the results are more scattered. It depends on the timeline that you choose. But the last instance was massively bullish. The last ‘death cross’ for Bitcoin occurred on Mar 2020 after it had plunged nearly 60% in six days. And that was right before it started the epic rally of more than 1,000% over the next year!

Bitcoin was born out of a system when people abandoned faith in the government and the official system. There is every reason to believe that the government will disappoint you again. So Bitcoin will continue to offer mystical appeal and will be the currency of refuge for most of the die-hard libertarians.

Abraham George is a seasoned investment manager with more than 40 years of experience in trading & investment and portfolio management spanning diverse environments like banks (HSBC, ADCB), sovereign wealth fund (ADIA), a royal family office and a hedge fund.