Bitcoin Hodlers: Time is running out to convert nothing into something

Three important takeaways:

1. For weeks, the Bitcoin market has looked supported by the whales, especially after the recent FTX disaster.
2. Bitcoin hodlers should strongly consider moving to gold, silver or at least Ether.
3. Full disclosure, I have a complicated relationship with Crypto.

An artificial market

I have specifically avoided writing about Bitcoin despite having strong opinions on the subject. Bitcoin is a very hot topic and most people have already made up their minds. In short, I think it has zero merit, but that argument has been made many times before, so I couldn’t add anything new to the conversation.

Full disclosure, I have been in the crypto market since 2013 and am net positive. That said, given recent market events, I cannot in good conscience sit without giving fair warning. This is not a Bitcoin is worthless analysis, this is a wake-up call to push people to ask what is keeping this market from imploding. FTX is not the canary in the coal mine (it was Celsius, or one of the other firms that crashed this year). FTX is the coal mine, and it just collapsed.

I think the data shows that this market is backed by whales. If the dam breaks, it could send markets crashing. Back on October 31st, before anything happened with FTX, I texted a close friend:

My new theory is that the whales are not trying to pump the price anymore. Instead, they are trying to stabilize the price to win back institutional investors. I have never seen bitcoin price volatility this low over a 6 month stretch in 10 years. It just stopped moving after an epic collapse in June. No bounce, no continue, no nothing. Just super tight price range even while the stock market has continued to fall.

I was led to this thought after watching Bitcoin crash in June to ~19k and then just hold. It spent the next few months consolidating while the bond and stock markets went into turmoil. See the chart below with the simple price of SPY superimposed on Bitcoin since 2021. You may notice how flat the orange line has been since June 21, right after the Bitcoin crash below $20k.

Figure: 1 SPY vs BTC

Let’s compare the 30-day rolling annual standard deviation between Bitcoin and SPY. This chart shows the difference in volatility between Bitcoin and SPY. Notice how it has collapsed in recent months and Bitcoin indeed was less more volatile than the S&P for a short period in October. Since when is Bitcoin less volatile than the S&P 500? That has quickly turned around since the FTX fiasco.

Figure: 2 Volatility/Standard deviation

But while price volatility is falling, trading volume is not. The next chart is the 30-day rolling average trading volume for Bitcoin compared to its price. Once again, you may notice a misalignment. As volume increased steadily in recent months, the price remained in a tight range.

Figure: 3 Price and volume

Usually, large changes in volume are accompanied by large movements in price. But in this case, the volume moved steadily up while the price remained almost flat. How and why did this happen?

As I alluded to above in my text to a friend, this looked like an artificial market. The market almost collapsed back in June and then just flatlined near 20k. That doesn’t happen, especially in Bitcoin. After the last week, I am now convinced that this market is being artificially propped up. After all, 27% of the market is dominated by a super minority of less than 0.01%. They have a great vested interest in keeping this market inflated. I think the increased volume against stable price action is from whales defending the price and grinding the band.

I won’t repeat what happened to FTX this week (there are 1000’s of articles explaining the epic collapse). Instead, I just want to highlight that this is a HUGE event in the Crypto space. For Crypto, this will be like 3 Enron events at once, or Enron and Madoff happening in the same weekend. This is disastrous on every level, but the price of Bitcoin just fell by around 20%. What?!?

In the stock market in recent weeks, companies have reported disappointing earnings at a frequent clip. Every company has been absolutely punished for it. Some have dropped 20% or more in a single day, which is extremely rare. This is poor earnings for large companies that still have income. Yet Bitcoin is having its Enron + Madoff moment and the price of Bitcoin is falling by the same ~20%?

Never! I’m not buying it!

Step back and think about this for a moment. Take another look at the charts above that show how price volatility collapsed despite ever-increasing trading volume. Most importantly, look at the recent massive increase in trading volume from FTX and the relatively small drop in price. For all the mathematicians who might argue that scale and relative impact are not properly reflected, take a look at the same chart on log scale below.

Figure: 4 Price and volume on a timber scale

Okay, this looks a little more reasonable… until you remember that this was Enron + Madoff! No. I’m sorry, but no. The price should be down 50-70% after this event. I am convinced that it will be. Think how much cryptocurrency just went up in smoke. Think of the lost trust.

Everyone keeps saying that crypto winters come and go, and so will this one. But will the summer ever be as bright for Bitcoin? Each winter has been followed by a bigger hype train than the last. How can the next hype train be bigger than the last? You had EVERYTHING in place last year. The price was screamingly higher, the hype was at a fever pitch, Superbowl ads, celebrity endorsements. Everything!

When this crypto winter breaks, Bitcoin will not make it to new highs without being artificially pumped up. Who will enter the market on the next upswing that was not already in the market? Institutional investors have abandoned ship and the whales are left trying to stem the tide.

Want more proof that institutional investors have quit? Take a look at the GBTC Premium/Discount chart.

Figure: 5 GBTC Premium and Discount

This is easy money to institutions. If you want Bitcoin exposure, you can get exposure at a 42% discount. Why is this arbitration not closed? Let’s make this a bit more advanced and adjust the price of Bitcoin with the premium/discount of GBTC.

Figure: 6 GBTC implicit price

Notice something? Right now, GBTC suggests that the fair market price of Bitcoin is under $10k. So who’s here? I’m betting the smart money isn’t willing to buy GBTC at a whopping 47% discount.

I understand. Bitcoin is like a religion to some people. HODL, laser eyes, Michael Saylor, blah blah. But sometimes something is just so obvious that you have to get your head out of the sand. If you want true independence from the banking system and you want to reduce counterparty risk, then buy physical gold and silver. Unlike GBTC, the smart money is raiding the Comex vaults right now, while institutional investors are also paying a hefty premium for silver.

Let me guess, you still want Crypto exposure to maybe get the moon shot. Triple up or more. Ok, at least buy something of value like Ether. At least it has some value. Probably not $1200, but definitely greater than $0. It also has potential and versatility.

If it’s me, I still think about value. I wouldn’t pay $500 for a gallon of gas, and I wouldn’t pay $10,000 for an ounce of gold (unless hyperinflation hits). So at $1200, Ether is probably overpriced. But then again, at least it has value. I personally bought at $150 and sold prematurely at around $700.

Ether is far from perfect or a value investment, but it is a better option than Bitcoin. Still, anyone looking to leave the banking system and gain value…look at physical precious metals!

My complicated history with Crypto

Full disclosure. I have a complex relationship with Crypto. I’ve probably made more money on Crypto than gold and silver. I have been bullish and bearish at different times in my life.

As a libertarian, I heard about Bitcoin back in 2012 and told myself to spend $2000 and buy 1000 BTC, throw half in cold storage and then trade the other half. Whew. I forgot to do this because it looked complicated. Then Cyprus happened and Bitcoin shot up to $50. I didn’t want to miss the next move, so I started buying. Had a decent stack at one point. Ripped it up to $1100 and then MtGox crashed and poof my Bitcoins went. I eventually sold the bankruptcy claim to an opportunistic buyer.

I decided I needed to understand the technology to see if I should buy back in. I read everything. The Bitcoin white paper, articles, wiki pages on hashing and how blocks are connected. How computers compete to solve for the nonce with the right amount of leading 0’s (this is how the algo gets harder). I looked at transactions on the actual Bitcoin blockchain to try to understand it. It started to make sense to me, so when prices went down, I bought and sold the return. Doesn’t mean I was all in. Back in 2020 I wrote:

I think Blockchain is a hugely overhyped technology. Blockchain removes the need for trust and eliminates counterparty risk, but the costs are enormous. Blockchain is really just a super expensive database with low performance. Not to mention that there’s nothing really unique about it [Bitcoin] blockchain code, Bitcoin simply has first mover advantage.

I still stand by this. Blockchain is a database, only very expensive. What makes Bitcoin different from Litecoin or Bitcoin Cash? Maybe different hashing algos or transaction speeds. But structurally very little. I bet if you ask most crypto fanatics, they actually understand very little about the underlying technology. There is nothing about Bitcoin that makes it special except that it came first. When you factor in the cost of mining, Bitcoin actually has a negative value.

Ethereum is different. It wants to be Web 3.0 and wants to be the world computer. Maybe it will get there, maybe not. But it has a much better chance of being worth more than $0 in 10 years. You know what will definitely be worth more than $0 in 10 years, 100 years and 1000 years? Physical gold and silver. Not necessarily a futures contract or an ETF, but physical metal you can hold in your hand.

If you are still in Bitcoin, then you are betting and hoping that the whales continue to support this market. But there will be an avalanche of sales. As I said, FTX is not the canary in the coal mine (it was Celsius, or one of the other firms that crashed this year). FTX is the coal mine, and it just collapsed. Somehow you can still trade BTC for almost $17,000. That’s an extraordinary amount given what just happened.

If you’re still dithering, I encourage you to reconsider. Buy something of real value with that money such as physical gold and silver. There is no counterparty risk, no trust concerns, and no risk of a hacker or losing your keys. It is the best form of insurance against the turmoil ahead.

If you really want crypto exposure, you should at least consider Ether. Although overpriced, it is worth something greater than $0. Bitcoin is worth whatever the whales can force it to be worth, but one day soon they may lose the capital needed to manipulate the price higher or even just keep it from crashing. As we learned with FTX, things are looking good until then the moment itself they are not. And then billions can be lost in one very shortly. How much do you trust the Bitcoin whales to keep this market afloat?

Data source: Tiingo, Coin Market Cap and Block

Some of these views and charts can be accessed through the Exploring Finance Portfolio Builder tool

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