Bitcoin: This Will Be The Worst 'Crypto Winter'
Summary
- Bitcoin valuations are crashing hard and many analysts seem to be making the case that China’s crackdown on cryptocurrency is the central reason behind the collapse.
- However, the Chinese government has made many similar comments in the past and it seems unlikely that this “new information” is what’s inspiring investors to close BTC-USD long positions.
- Instead, fundamental questions of legitimacy are now being re-considered by the market-at-large and all of this suggests that we might now be entering the worst “crypto winter” on record.
In many prior articles, we have laid out bullish arguments calling for strong rallies in the BTC-USD currency pair. In fact, we called for a parabolic breakout in BTC-USD all the way back in December 2020 (when prices were still trading near 18K), so it should not appear as though we have always adopted a rigidly bearish trading stance that completely disregards the positive potential for cryptocurrency assets to modernize, secure, and decentralize financial transactions (in both consumer markets and in investment markets).
However, the recent declines in BTC-USD are looking especially problematic and these declines have gone far beyond the depths that many analysts would have thought possible just a short time ago. In addition to this, various news stories discussing another “crypto crackdown” from the People’s Bank of China (PBoC) suggest that bitcoin assets might have difficulties in gaining traction within the world’s second-largest economy.
For these reasons, we think that the cryptocurrency community is still facing legitimacy issues that haven’t yet been fully resolved and that an acceleration of momentum in the market’s selling pressure could generate losses in BTC-USD that surpass those seen during the prior “crypto winter” that began in 2018.
Chart Analysis: The Income Machine
Anytime we are attempting to make an assessment of any asset’s true value, it’s important to weigh the relevance of each of the dominant narratives that are driving sentiment in the market.
In this case, the negative news that China plans to crack down on bitcoin mining and trading activities created a market storyline that triggered a global cryptocurrency sell-off and led to an initial test of the $30,000 level in BTC-USD.
But the recent news coming out of China largely echoes the prohibitive tones expressed in similar instances of restriction on cryptocurrency assets and this is why it is difficult to see how investors could be interpreting this information as a novel or unexpected development.
To be sure, there is little doubt that the potential to add nearly 1.4 billion Chinese users to the bitcoin ecosystem would have a tremendously bullish influence on BTC-USD market valuations.
However, the possibility that bitcoin (and other cryptocurrencies) could be banned from the Chinese mainland is nothing new and it makes little sense that we would see a decline of more than 50% in BTC-USD in less than six weeks based on this information alone.
For these reasons, we believe that there are deeper issues at work and that the question of cryptocurrency legitimacy is one that still lingers in the minds of many traditional investors.
Of course, it should also be understood that the perma-bulls are still out there. Even popular fund managers like Cathie Wood are still calling for bitcoin to reach $500,000, saying that volatile asset classes are the ones being most heavily punished right now (due to inflation fears) and that:
We go through soul searching times like this and scrape the models, and yes our conviction is just as high.
Conviction? Inflation? Could either of these investment arguments really be enough to initiate contrarian buying activity in bitcoin assets? At best, these suggestions seem to amount to little more than flimsy speculation and the market does not seem to be responding to these bullish opinions with much actual buying activity (even at these lower prices).
If we were to ask every bullish bitcoin investor why they decided to buy BTC-USD in the first place, how many would check the “inflation” box on the questionnaire? It seems unlikely that a significant number of global investors made the initial decision to buy bitcoin assets based on the need to provide a safe-guard hedge against inflation.
Chart Analysis: The Income Machine
If that were the case, it seems much more likely that those investors would have gravitated toward precious metals assets that contain a better history of inflation protection (such as gold or silver assets).
However, it should be understood that gold and silver prices actually traded in the bearish direction during most of the recent rallying period in BTC-USD (which largely occurred from December 2020 to April 2021).
But now that this rallying period is showing signs of clear reversal on the long-term charts, it’s time for cryptocurrency investors to assess the potential damage that might occur if this recent selling pressure continues.
Based on our analysis, BTC-USD support levels near the $30,000 mark would need to hold in order for bulls to remain in control. At this stage, this appears unlikely given the fact that a head-and-shoulders pattern has formed on the BTC-USD daily charts and the price trend has shown a series of lower highs since the middle of April.
Chart Analysis: The Income Machine
In addition to the substantial selling activity that has emerged on the BTC side of the equation during the last six weeks, we think that near-term bullish prospects for the U.S. dollar could put further pressure on the BTC-USD currency pair.
Specifically, it now seems as though rising inflation levels might actually work in the opposite direction and bring renewed buying activity back into the U.S. dollar (based on the possibility that the U.S. Federal Reserve will be forced to start raising interest rates before many other nations around the world).
Ultimately, we think that bullish near-term prospects for the U.S. dollar could prevent BTC-USD from establishing the rally that would be necessary in order to reverse the current outlook. Unfortunately, this means that further declines through the $30,000 level in BTC-USD could trip additional stop loss orders and accelerate the market’s current momentum to the downside.
Given the lack of buying activity that has developed near the $30,000 demarcation, the most likely outlook now appears to be a sharp drop through this price zone before the end of the month. However, if we are looking at these markets from the opposing perspective, a break of resistance at the $43,000 level (which marks the BTC-USD price high from May 20th) could change our outlook as a bullish signal indicating better prospects for another run at April’s all-time highs.
Overall, it seems that the market appears to be lacking a viable reason to buy cryptocurrency assets (even at these recent lows). Interestingly, these struggles also seem to be personified within the Doge Father himself, as Elon Musk has sent mixed messages with respect to his changing views on bitcoin and other cryptocurrencies.
Without clear signs of confidence from the “leaders of the movement,” the reality is that BTC-USD lacks another catalyst that could help crypto investors avoid what could become the worst “crypto winter” on record. Given the historic highs that have been achieved in BTC-USD over the last few months, crypto investors must also understand that the prospects for massive decline have also expanded at an equal rate.
Ultimately, this could mean that bitcoin’s prior bear market of 2017-2018 might seem like a walk in the park compared to what we might soon encounter and that market prices in BTC-USD could be ready to plumb the depths of Wall Street’s current expectations in a relatively short period of time.
This article was written by
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.