Response To Bitcoin Bull Critiques Of The $1,000 Bitcoin Bear Case

|
Includes: BTC-USD, COIN, FB, GBTC
by: Geoffrey Caveney

Summary

Many bitcoin bulls responded to my previous article with various arguments and criticisms. I appreciate the debate and discussion with them.

In this article, I would like to address several of their critiques of my argument that I consider the most important and significant.

The arguments and perspectives of "new school" high-cost bitcoin miners since 2017 vs. "old school" bitcoin bull true believers.

The old school bitcoin bull believer who thinks Tether is a fraud, and the bitcoin price would crash without it, but he's bullish on bitcoin anyway.

A final word about the Winklevii.

I appreciate all of the reader response to my previous article "Warning: Good Chance Bitcoin Is Below $1,000 By Next Year". The comment that I appreciate the most was the following:

Indeed, this is exactly my goal in writing these articles. In this case, I'm not recommending a way to make money, I'm just recommending a cautionary approach to quite possibly save money, by avoiding losses.

I will add that even if "my premise pans out poorly", you won't lose any money by following my advice. You may simply miss out on a chance to make money. But this happens every time any penny stock anywhere in the world goes up 400% or something. If you didn't buy that particular penny stock, you missed out. It is the same with cryptocurrencies, even bitcoin (BTC-USD) (COIN) (OTCQX:GBTC). An investor is not obligated to participate in every market, no matter how popular it is or how much media attention it gets.

Many bitcoin bulls responded to my article with various arguments and criticisms. I appreciate the debate and discussion with them as well. In this article, I would like to address several of their critiques of my argument that I consider the most important and significant:

Bitcoin Bull Argument #1: My $1,000 bitcoin bearish case is based only on sentiment analysis and a loose comparison to the dot-com bubble.

Well, sentiment analysis is an important part of my case. Yes, that is true. Sentiment is a key factor in short-term price movements in any market or asset, and I think it is especially so with an asset like bitcoin. It's not like a cryptocurrency has any "book value" in dollar terms. It's not a "hard asset" that has inherent physical value. So yes, sentiment is absolutely critical.

And yes, any comparison to a different asset class in a different time period is merely a potential analogy at best. And yes, the most important part of the comparison is the bubbly sentiment levels. I compare the current moment in the bitcoin market to August 2000 in the dot-com bubble, but of course that remains to be determined. All such potential comparisons always remain to be determined, at the time that they are proposed.

But those were not the only two points in my case. I also specifically pointed to the spring 2017 bitcoin and crypto rally, and to my belief that this rally will also be retraced downward -- just as all of the November-December 2017 rally has already been retraced downward.

Many bitcoin bulls have mentioned the retracement so far as a potentially positive development. I will say this: for a bull in any asset, any retracement that has already happened is a potentially positive development, but any further retracement that has not happened yet is probably a negative development!

Now some bulls go farther and discuss the possibility of another retracement down to $3,000, retracing the entire rally in the fall of 2017. But I don't understand why it would be normal and natural to retrace this rally, but not the equally significant and massive rally in the spring of 2017. I suspect it is just because $3,000 sounds like a more tolerable decline from the current level, whereas $1,000 is more jarring and scary to current bitcoin investors and traders.

Getting back to sentiment: it is primarily speculative traders and investors who are still bidding up bitcoin above $6,000. Yes, there is now a whole new "bitcoin-industrial complex" of whales, miners, exchanges, etc., who all benefit from a high bitcoin price. But the bottom and biggest layer of the pyramid remains the broad base of speculative traders and investors.

And it is sentiment which is key to determine which way the speculative traders and investors will turn next.

Bitcoin Bull Argument #2: Most bitcoin miners today have costs above $6,000, so they need at least this price level to operate. If the price falls much below this level, bitcoin would collapse entirely.

This is what I call the "new school" of bitcoin bulls, who got into the mining operations beginning around the middle of 2017. They only know a world of high priced bitcoin. They cannot imagine $1,000 bitcoin, so they presume it cannot function at all at that price.

Their argument actually supports my $1,000 case argument: If bitcoin falls to $5,000 and stays there, these miners say, bitcoin as they know it will collapse. This can take it down to $1,000 or below very quickly.

Bitcoin Bull Argument #3: Bitcoin can operate and be mined and traded at any price.

This is more of a response of one group of bitcoin advocates to the "new school" miners' argument #2 above.

I call these folks the "old school" bitcoin bulls and true believers.

They bought and sold and traded and used and mined bitcoin at very low prices for many years.

However, they do not take into account that the number of people trying to place sell orders at the same time during a rapid bitcoin price downturn, may be far greater than the number of people who ever bought / sold / traded / used bitcoin up to the end of 2016.

The methods and network functioning that worked in 2016, may simply not work in 2018 or 2019. If the newer bitcoin miners are all shutting down their operations, at precisely the moment when large numbers of people all want to sell their bitcoin all at the same time -- this could overwhelm the network. If 90% or more of the people who want to place sell orders during a price decline, are unable to get their orders executed, this could start a panic and make the selling worse.

This kind of event is a big concern even for the more orderly and established largest equity markets in the world. The New York Stock Exchange has also had such panics and crashes, with Black Monday in October 1987 being the most famous one in a single day in most of our lifetimes. But the NYSE has instituted all sorts of circuit breakers and other institutional mechanisms to control and moderate the effect of such selling stampedes. They may not work, but at least they have them and they will try to use them.

Bitcoin and cryptocurrencies have no such institutional or regulatory mechanisms at all. There is nothing in place to make the trading orderly at all. There is nothing in place to stop or even slow down a panic or crash.

The price decline from above $6,000 to below $1,000 could happen in a day, or even overnight or on a holiday, since bitcoin trades 24/7/365 all around the world. Imagine the public reaction if such a crash happened on Thanksgiving Day or Christmas Day in the U.S.

Bitcoin Bull Argument #4: The bitcoin price can go up or down or any which way by any amount in the short term, but this is a long term investment.

This is my summary of the perspective of bullish bitcoin authors such as Hans Hauge. I would describe him as an "old school" bitcoin bull believer. He is very knowledgeable.

Hauge has even gone so far as to argue that Tether is a scam, and if Tether collapsed the bitcoin price would crash:

(For the link to this comment click here.)

(For the link to this comment click here.)

But despite these two beliefs, Hauge remains bullish on bitcoin right now!

I gather that he thinks the short term price moves are just noise from a long term perspective. In the grand scheme of things, in his view, Tether's role today is just a blip. Maybe bitcoin will rise to $50,000 before Tether collapses, he could argue, and maybe by then Tether won't be so essential to propping up bitcoin trading and the bitcoin price.

Hauge will not panic if bitcoin crashes to $1,000 or below. He will be stoic and continue to take the long term view.

But again, this is not really an argument against my suggestion that there's a good chance bitcoin could crash to below $1,000 by next year. Hauge's perspective is simply a calm reaction that true old school bitcoin bulls will be fine, even if such a crash to below $1,000 transpires.

But many of Hauge's bullish readers and followers may not react so calmly. I note that in addition to his deeper analysis articles, Hauge has also published articles such as "Bitcoin - Buy The ETF Rejection Dip". This argument is not focused on deep long term fundamentals, it is focused on a short term trading / bargain buying opportunity around a contemporary news event catalyst. (I consider any investment thesis that calls itself "buy the dip" to be focused on a short term trading opportunity, at least in terms of its timing, even if the intent is to hold the purchase long term.)

I suspect that readers and followers who "bought the bitcoin ETF rejection dip" may not be so calm and stoical as Hans Hauge, if bitcoin crashes to below $1,000 by next year.

Last Word Against Bitcoin: Winklevoss

(Note for the sarcasm impaired: This section is intended to be taken tongue-in-cheek.)

As a final comment, I have one last argument for why the bitcoin price must crash:

This story simply must end with the Winklevoss twins being financially ruined.

One of my favorite arguments against the bitcoin bull market, is that any asset bubble that enriches such untalented freeloaders as the Winklevoss twins, simply cannot be legitimate and lasting.

Mark Zuckerberg hated paying tens of millions of dollars to them, even though it was the prudent business decision for him and for Facebook (FB). He couldn't stand the idea of people like them making such a fortune, just for nothing more than shooting the breeze with him in a college dorm room about the concept of an online social network.

And now the Winklevoss twins have turned those millions into billions through their bitcoin investment!

The universe simply will not allow them to get away with this.

Somehow, some way, the bitcoin market must turn sour in a way that causes the Winklevoss twins to lose everything, the billions and the millions, and wind up deeply in debt and financially ruined.

Just last week, the Winklevoss twins rolled out the "Gemini dollar" (get it, Gemini, twins?) as a U.S. dollar-pegged cryptocurrency. So their new token "looks to supplant Tether (USDT) as the stablecoin of choice among bitcoin traders". What a combination: the Winklevoss twins and a Tether substitute. What could possibly go wrong?

Yes, one way or another, this has to happen: the Winklevoss twins bring down bitcoin, and themselves in the process. This is how the story must end.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: I sold almost all my cryptocurrency in December 2017. I still hold tiny amounts of bitcoin.