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Bitcoin Selloff Explained – and Recovery Ahead
Bitcoin Trapped in Downward Channel
It’s been a tough week for cryptos so far. On-chain data by Glassnode reveals a huge dip in the number of Bitcoin held by OTC desks, showing that over 1,000 BTC (worth over $60 million) have left their addresses since Aug. 27 and moved to exchanges. The data accompanies reports of whales transferring some $141ml of Bitcoin to exchanges. Moves from OTC to exchanges suggests these big holders are selling the bitcoins they are transferring.
Bitcoin Drawdowns – Large
As few as 5% of all BTC addresses own over 62% of all available Bitcoin. Thus, liquidity is far far worse than meets the eye. If one large holder needs to sell, the spread between him and the available liquidity is large (see the colossal drawdowns above). Gold is a $16T market vs. a $700B realistic liquidity pool for Bitcoin. Over the last decade, Gold’s largest drawdown was just 22%. Think of the yen carry trade blow-up in Japan in early August, Bitcoin lost 30% of its value in 5 trading days! All it takes is one large Bitcoin holder, borrowing cheaply in yen, forced out of the trade to create a large drawdown in Bitcoin. In our new book – “When Markets Speak” we are big Bitcoin fans, supporters indeed.
All we are trying to do is broaden investor awareness in bitcoin, gold, silver platinum, palladium, and all hard assets. Liquidity and large drawdowns can be your friend, but you must know how to play the game and deeply understand what you are up against as an investor.
When you have an asset with serious liquidity issues. You must be prepared. You see the pump artists and strippers at the highs, but it’s always crickets at the lows in Bitcoin. Young investors get sucked into the get-rich sales pitch. Next thing they know…
They are down 60-70% for 12, 18 months. Everyone says “I will never sell.” But when you are down a lot, for a long time, and a wedding or a home purchase comes a long, most times the small investors sell at the wrong time. You must enter Bitcoin, with the goal of adding 50% down!
Bottom line, when you are long bitcoin, you must know the state of play. If a multi-billionaire owns $100m of bitcoin – he or she can handle the volatility – if it’s true that 5% of bitcoin holders control 60% of the market. It will take decades for this market to normalize.
Bitcoin – it’s just a young market. Twenty years from now the liquidity and drawdowns will be far far more manageable. Between now and then lighten with you see the strippers and pump artists pumping the sales pitch, they want greater fools at the highs. Buy the crickets!
Excess Reserves Big Driver of Bitcoin
We continue to believe in the strong relationship between bitcoin and excess bank reserves. The recent price action suggests excess reserves have come down this week, which corroborates with the RRP, which has now reached $388bl, compared to $321bl last Wednesday. That means excess reserves went down by $60bl week over week, and probably more given the Fed QT. we know the exact figure tomorrow night when the Fed reports the weekly balance sheet. The RRP is filling up due to the customary month-end flows, but this should reverse once we enter September, and excess reserves are likely to recover a bit as a result.
Bitcoin Seasonality – September Down Month
Seasonality for crypto is often not that good in September, so that may weigh on the space as well. October should be better, because FTX administrators (remember, Sam Bankman-Fried) will begin awarding cash to creditors from the bankrupt crypto broker, estimated around $15bl. A lot of that cash will be used to buy crypto, so this will have the exact opposite effect of the payments-in-kind (meaning creditors received $9bl in bitcoin that was locked up by courts for 10 years!) that were made to Mt Gox creditors this summer. In other words, the FTX cash awards are more bullish bitcoin than the Mt Gox distribution was bearish bitcoin. Note that amidst the Mt Gox distribution pressure, bitcoin went from roughly $72K to $58K.
Ethereum Outperforms Today
Its interesting that ethereum is outperforming bitcoin today. Normally it lags bitcoin, which suggests that this is indeed large holders (whales) selling bitcoin out of inventory, while other cryptos are going down in sympathy.
