Summary Bitcoin is down ~75 % from peak to trough. Sentiment suggests Crypto is dead once again, and the Winter has begun. The Crypto Industry has never experienced significant monetary tightening. Altcoins should continue to underperform Bitcoin. The liquidity cycle will turn up eventually. Dollar-Cost-Averaging into the safest Crypto Asset should be the way to go in 2023. Bitcoin fulfills its purpose Bitcoin ( BTC-USD ) is a hedge against monetary debasement – not consumer price inflation. Bitcoin started the last bull run in March 2020, when the Federal Reserve announced unlimited Quantitative Easing and Fed Funds were lowered to zero in reaction to the Covid crisis. The resulting easing of financial conditions occurred mainly in 2021 because monetary policy acts with long and variable lags. It is not a coincidence that the broad market and especially interest rate-sensitive tech stocks rallied alongside Crypto. The tremendous easing of monetary policy created another asset bubble because of monetary debasement. Crypto offers the highest beta, so the price of Bitcoin rose tenfold, and many other smaller Cryptocurrencies outperformed massively. Additionally, the unparalleled distribution of the printed money by the fiscal authorities, in combination with supply constraints, resulted in spiking consumer price inflation. The narrative that Bitcoin is an inflation hedge is misleading, or at least not accurate enough. Bitcoin is a hedge against monetary debasement, just like Gold or, in part, any other asset. Bitcoin simply has the highest beta, and therefore the price reaction of Bitcoin looks like a typical bubble on a linear chart. These bubbles are reoccurring, however, because the Central Banks of the world have continuous Zugzwang to finance the enormous debt loads of their governments and economies. Bitcoin profits each time monetary policy is expected to ease, and it usually crashes when monetary policy or financial conditions are expected to tighten. Now, Bitcoin is down ~75 % from peak to trough from the All-time highs of November 2021. At the same time Bitcoin peaked, the Federal Reserve announced that they believe inflation isn’t transitory anymore. This resulted in a fast and aggressive tightening cycle, and the market started discounting the outstanding tightening cycle when Bitcoin and the average of all assets reached their peak in late 2021. Rising rates, Quantitative Tightening, and a strong Dollar ( DXY ) ended the last bull run, the same way falling rates, Quantitative Easing, and a weak Dollar started it. Bitcoin is not money. Bitcoin is not a currency. Bitcoin is not scalable. Bitcoin is not the Crypto Industry with all its useless financial schemes and stupid leverage. Bitcoin is a decentralized monetary debasement hedge. An opportunity to leave the vicious cycle that is the long-term debasement of the currency without the possibility of government interventions (e.g. Gold in 1933 under Roosevelt). It is no coincidence that Bitcoin appeared just after the global financial crisis, when the monetary debasement circus started getting out of hand. Bitcoin fulfilled its purpose of hedging the risks that result from monetary debasement. The tremendous drawdown during 2022 is a feature, not a bug. The liquidity cycle will turn at some point. The world isn’t linear. Let’s hope for intense boredom in 2023 The bull case for Bitcoin and, therefore, Ethereum ( ETH-USD ) and, by in large, the whole Crypto Industry is a boring 2023 without any significant and sustainable price movements. As I have expressed in many of my previous articles , I believe that the Federal Reserve won’t just do a 180 on their monetary policy stance the moment inflationary pressures ease. They will likely keep short-end rates high until the economy enters a proper recession, where unemployment rises and demand falls. The focus is on the economy now – not on the Central Bank policy changes. There is no significant catalyst for new all-time highs in 2023 unless the Central Banks start easing aggressively again. I believe a sideways chop would be a good setup for 2024 and 2025 when the next halving takes place. Eventually, the monetary easing will return. Over the long run, debt loads have to be eroded, and austerity is too painful for the masses and politicians to be a real solution. The obvious choice is financial oppression by keeping real rates in negative territory over the long term. There are periods of financial tightening, but they can't last forever. During 2022 we had the most aggressive tightening of monetary policy for 40+ years. In 2023 the rate of change of the tightening will decrease, or towards the later stages, even reverse. But I still believe the chances for a right tail risk event for Bitcoin remain small. On the contrary, another leg down for Crypto seems likely. If the economic downturn leads to higher unemployment, then a risk-off environment could hurt Bitcoin, as market participants rush to purchase Dollars and reduce risk. Another leg down for stocks at the current prices is my base case. Given how low Bitcoin has fallen already, I think that Dollar-Cost-Averaging throughout the year 2023 will sow the seeds for harvesting season in two to three years. In the end, nobody knows where exactly the bottom is. In my personal portfolio , I sold all of my Crypto Assets in early April 2021, except for some Bitcoin which I still hold for the long term in cold storage: Bitcoin Purchases & Sales of Author (tradingview.com) Two weeks ago, I started accumulating Bitcoin again. I plan to purchase every month, with a total allocation goal of 15-17% of my portfolio, on the 31st of December 2023. During the first half of the year, I’ll limit my purchases to Bitcoin because of the recent Crypto Industry turmoil. Let me be clear: I don’t believe the bottom is in for Bitcoin, but I believe Dollar-Cost-Averaging during 2023 prices will yield a significant return 2 or 3 years down the road. I believe the current rally only represents a short-term squeeze. The macroeconomic conditions are likely to stay the same in 2023 and continue to weigh on asset prices. Significant risks remain because Bitcoin has never experienced such a fast and aggressive tightening cycle. Therefore the drawdown could be much more extended than I currently expect and what history suggests. After all, Bitcoin is only 14 years old. The current drawdown doesn’t stand out in any particular way compared to other cycles of Bitcoin, contrary to what the macroeconomic conditions could indicate: Sum of Realized Profit and Loss (insights.glassnode.com) Profit and Loss by Return Bands (insights.glassnode.com) MVRV Z-Score (lookintobitcoin.com) The silent Altcoin underperformance Usually, during a downturn of the Crypto market the safest assets outperform. The Bitcoin dominance (market cap of Bitcoin / market cap of Crypto Assets) usually rises in a bear market because of the increased downside of smaller, riskier, and more centralized projects. However, during 2022 it seemed like the Bitcoin dominance didn’t increase, even though prices fell. Some argued that the use cases of Defi were the reason for the lack of Bitcoin dominance. However, if we erase the biggest Stablecoins from the equation, which act as cash allocation without leaving the blockchain space, the Bitcoin dominance looks like this: Bitcoin dominance ex Stablecoins (tradingview.com) Although the dominance slowly increased to ~50 % (ex stablecoins), I believe that there is still ~10–15 % upside left, compared to the 2021 high of ~70 %. Meaning, Altcoins remain expensive relative to the price of Bitcoin. Indeed, some of the larger Altcoins (e.g. ETH-USD, BNB-USD , MATIC-USD ) almost managed to outperform Bitcoin during 2022. The contagion risks for the Crypto Industry still pose a threat after the Luna-Terra failure initiated a collateral crash, and several Crypto Lenders, Miners, and Exchanges went bankrupt. Only a few people know about the liquidity levels of the currently operating businesses. Most of the time, it’s a black hole (e.g. Binance). Time will tell if there is another shoe to drop. Therefore, I limit my Crypto allocation during the first half of 2023 solely to Bitcoin, as it is the most reliable and decentralized Crypto Asset, and Altcoins remain relatively expensive on average. There might be an argument for limiting the purchases to Bitcoin and Ethereum though. Only later in the liquidity cycle, I might add additional risk via a small allocation in Altcoins. I think projects in the Layer 2 and Layer 0 space are particularly interesting in that regard. But that’s a conversation for tomorrow. The Bear Case: No Boredom If the year 2023 doesn’t get boring for the Crypto space, it’s likely because of bad news pushing prices and sentiment even lower. There are many possibilities: The Greyscale Bitcoin Trust ( BTC )" target="_blank">GBTC ) currently trades at a discount to Net-Asset-Value of 36 %. There are rumors about the closed-end fund potentially being liquidated because of its ties to Genesis. Genesis is a Crypto Lender which came under pressure because of the recent FTX scandal. Genesis was a financial backer of Greyscale, and both companies had the same parent company: Digital Currency Group. If the Trust gets liquidated 634.000 Bitcoin with a 36 % discount would be thrown into the market. For a comparison: As a result of the Luna-Terra fiasco, only 80.000 Bitcoin were liquidated. During the panic, the price of Bitcoin halved from $40.000 to $20.000. Additionally, there is the possibility of another bankruptcy of a large financial player in the Crypto Industry. Terra-Luna happened in May 2022, and it was one of the key reasons how FTX got in trouble. However, the bankruptcy of FTX didn’t happen until November 2022. There’s absolutely no reason to assume that the contagion has already wiped out all of the overleveraged financial players. Only after a sustained period of time without any incidents we can be somewhat sure that the deleveraging is finished. Furthermore, Bitcoin and the Crypto industry have never experienced an aggressive and prolonged tightening cycle. Therefore I would be cautious to assume that this cycle will play out just as the last three. As of now though, there are no distinct differences in this cycle in comparison to the last ones – at least in terms of on-chain data and price action. But nobody knows how a prolonged tightening cycle will affect an asset that has never experienced such tight monetary conditions. Key Takeaways Bitcoin is a decentralized monetary debasement hedge, not an inflation hedge. It fulfilled its purpose of hedging the risks that resulted from monetary debasement in the past. Eventually, monetary easing will return. Over the long run, debt loads have to be eroded, and austerity is too painful for the masses and politicians to be a real solution. The obvious choice is financial oppression by keeping real rates in negative territory over the long term. There are periods of financial tightening, but they can't last forever. Bitcoin will profit from the start of the next liquidity cycle. Nobody can time the bottom. Therefore I believe Dollar-Cost-Averaging throughout the year 2023 should result in a good entry price with a two to three year time horizon. That’s at least what I will be doing. There are plenty of possible catalysts that could result in much lower prices because of an incredibly overleveraged Crypto Industry and continuing macroeconomic headwinds. For these reasons I view the current pump as short-winded. A sustained period of boredom should be very bullish for Bitcoin in the long run.
