Bitcoin had been holding the key $42,000 level for the past month. Last year ended up with analysts calling for $100,000 and more. It had become one of the most favored asset class since Covid induced lows in March 2020. Today, Bitcoin is off about 50%+ from its highs reached last November, and after holding onto the key $42,000 level for weeks, it has now collapsed and was down 7% as the European markets opened.
The new generation of wanna-be portfolio managers who claim to have real alpha as they made money on almost any stock last year, even bankrupt ones, are scratching their heads wondering why the "buy the dip" is not working anymore for them. Lacking real in risk management principles, what they also may not realize is that by just holding on to their longs, the price that Bitcoin would need to get to for them to breakeven, moves much higher. It would need to rally 200% for them to get back to flat!
If one is not levered and can hold and look past years of negative returns, that may be ok, but most of the holders of Bitcoin are severely leveraged and "hoping" to make a quick buck. As much as Bitcoin was pitched as a "decorrelated" asset class to retail and institutions, it's true it used to be at one time. But as more and more hedge funds adopt it in their portfolios, it becomes correlated. Sod's law.
One of the strongest arguments for Bitcoin had been how it would be the perfect inflation hedge. Consumer price inflation is averaging about 7% year over year in December, we cannot get any higher inflation than that (or can we?), yet Bitcoin has collapsed over the past three months! Something is not adding up. Bitcoin's bottoms up fundamental story is based around its a cycle that reduces the supply of Bitcoins in half every four years and on back of its on-chain metrics and adoption. That is a powerful fundamental case, but when the Fed printed $4.5T in a matter of a few months, fundamentals go out the door as all that mattered was liquidity.
The Everything Bubble
Too much money sloshing around with too few assets to invest in, implies everything goes up - the "Everything Bubble". As inflation is becoming anything but "transitory", global central banks have been draining that same liquidity bar and that the Fed has continuously been buying Treasury Assets till today! They are buying up to $90B in assets every month and S&P 500 is down 7%, one wonders would happen if they were to stop buying anything altogether or start selling off assets? It was this aggregate boost in money supply from the Fed that exacerbated any fundamentally decent story and taken markets parabolic last year.
The market and levered assets have been like opioid addicts addicted to the Fed QE money printing. But the Fed's hands are now tied as they are unable to print more and buy up assets because inflation is seriously out of control, levels not witnessed since the 80's. All they can do, which is what they always do, is wait and hope that prices come down giving them some room to print more if need be. If they did play a preemptive role, they would have started normalizing their balance sheet last year when global economies were bouncing hard post Covid induced lockdowns. Today, they are unable to raise rates, let alone raise them aggressively and consistently. If they do, the market starts collapsing and they have to U-turn their policy. The bonds and rates markets have been signaling distress for months. It seems they are attempting to test the resolve of the Fed to see when they blink.
Last year when gold underperformed Bitcoin, everyone got bored of it. Today, gold is holding its level and outperforming massively relatively, even if it is flat on absolute levels. Sometimes it is not just about absolute performance, capital preservation is equally important. Traders threw the towel on the narrative that gold was an inflation hedge, instead insisting Bitcoin had taken its place as the new "Digital Gold", a true store of value. Well, no store of value trades up and down 7% in a day, nor moves down 50% in a few months! As hedge funds lose out in funds like (ARKW) and (ARKK) , their other holding gets hit too - classic deleveraging 101. Fundamentals go out the door, but then again, when were they even on the table in the first place.
