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Is bitcoin due for a major drop? … the importance of seeing the bigger picture … Matt McCall’s latest, unique approach to bitcoin
When you’re watching a scary movie and the monster suddenly jumps out from behind the door, what do you do?
You probably bolt up in your seat.
The reason why is simple – you weren’t expecting it.
Bur when you’ve seen the movie 20 times and the monster jumps out, what then?
You knew what was coming. Expectations met reality.
This dynamic plays out similarly in the investment markets, pointing toward an interesting takeaway…
The event that actually happens in the market – whether good or bad – isn’t what drives price-action.
Instead, the real driver is the difference between what actually happened and what was expected to happen. When you know what’s coming, you can prepare yourself and avoid a major reaction.
This “major reaction” in investing is usually a fear-based, kneejerk “sell” order…that often turns into regret some weeks or months down the road.
Today, let’s do our best to save you from regret.
We’ll do this by naming a very real monster that’s lurking somewhere up the road – probably not too far away.
It’s going to jump out from behind the door… it’s going to be terrifying… and unless you’re prepared, you’re going to have a major reaction.
I’m talking about a bitcoin crash.
Now is the time to prepare yourself so that when this happens, you can make a calm, logical decision that’s right for you and your investment time-frame – whether that be “hold,” or “take some profits.”
Of course, equally important is what comes after this monster-attack, which I suspect crypto investors will like far more…
But you’ll only get there if you handle the surprise-attack calmly and responsibly.
Today, let’s see what that entails.
***An objective look at bitcoin following its latest 15%+ drop
Last weekend, bitcoin suffered what the press are calling a “flash crash.” Top-to-bottom, it pulled back around 16% (as I write, it remains down around 14% over the last five days.
This is not the “monster” I’m talking about.
I’m referring to a full-on bitcoin crash of 50%+. Possibly much more.
Yesterday, bitcoin bull and Guggenheim Partner CIO, Scott Minerd, warned about such an event:
Given the massive move we’ve had in bitcoin over the short run, things are very frothy, and I think we’re going to have to have a major correction in bitcoin.
I think we could pull back to $20,000 to $30,000 on bitcoin, which would be a 50% decline…
Par for the course?
Let’s do a quick trip down memory lane…
From June to November of 2011, bitcoin lost 93%.
In August of 2012, it crashed 57%.
In April of 2013, down 87%.
From December 2013 through January 2015, it plunged 85%.
From December 2017 through December of 2018, it lost 84%.
As recently as last year, it crashed 52%, from February through March.
And yet, early investors are still up thousands of percent.
Now, yes, bitcoin and the crypto world are going mainstream. And as this continues, over time, it will reduce bitcoin’s volatility.
But we’re not yet at a point where a 50%+ crash isn’t still very-much in the cards.
***In fact, we’re at a point where a crash could be even larger than in the recent past precisely because so many retail investors now own bitcoin – and most of them aren’t prepared for losses
I’m referring to investors with “weak hands” as opposed to “strong hands.”
In investment parlance, weak hands refer to traders or investors who lack conviction in their strategies. They’re basically “me too” investors. So, when bad news or headwinds come their way, they sell.
Investors who fully understand why they’re investing… who see the big picture… who can distinguish between a short-term speedbump versus a real, significant problem… these investors either ignore temporary price weakness, or use it to increase their position size (assuming the big picture is still bullish). They have strong hands.
It’s hard to say exactly how many investors own bitcoin today, but according to data from Bitinfo and Glassnode, the number of people engaging in daily bitcoin transactions jumped from average of 600k-700k in January of 2020 to about one million per day by last November. This number is likely to have surged in the months since.
How many of these people have seen a major bitcoin wipeout?
If they’ve jumped into crypto purely to capitalize on a major up-trend without a long-term belief in sector, how quickly will they sell when they get caught up in a major down-trend?
The more these weak-hand investors sell during a crash, the more downward pressure it will have on market prices, sucking in other weak-handed investors who sell, further intensifying the crash. It’s a self-perpetuating downward spiral.
It’s time to prepare for this.
After all, what goes up fast can come down even faster.
On that note, bitcoin has soared 681% since January 1, 2020.
Should we not expect some kind of major reset from here?
***Prepare yourself for the “why?” just as much as the what?”
It’s one thing to prepare for the dollar-value impact of a crash on your crypto account – that’s the “what?”– meaning “what” the crash-size is.
The other thing to prepare for is the “why?” – meaning, the reasons the media will point toward behind crash.
Frankly, the “why?” could be scarier. That’s because, in real-time, you won’t know how far prices will drop. So, your imagination could run away with itself based on the “why?”, projecting a complete bitcoin wipe-out that could jolt you into a panic-sell.
The more terrifying the “why?”, the more susceptible you might be to a fear-based action.
For example, one of the biggest worries today is a government making crypto illegal.
In fact, many in the media tried to blame the recent flash crash on news that Turkey’s central bank had banned the use of cryptos.
This comes after news earlier in the year that India will propose a law banning cryptocurrencies, fining anyone trading in the country or even holding such digital assets.
I reached out to our crypto specialist, Matt McCall, for his thoughts after this India news.
Here was his response:
To me it is a long-term non-event. It only makes the limited supply more valuable if they are able to go through with it.
Keep in mind, in 2017, China banned initial coin offerings (IOCs) and shut down local cryptocurrency exchanges. But this position has mellowed in recent years.
China’s central bank is now calling bitcoin an “investment alternative” — marking a significant shift in Beijing’s tone after a crackdown on cryptocurrency issuance and trading nearly four years ago.
Industry insiders called the comments “progressive” and are watching closely for any regulatory changes made by the People’s Bank of China (PBOC).
“We regard Bitcoin and stablecoin as crypto assets … These are investment alternatives,” Li Bo, deputy governor of the PBOC, said on Sunday during a panel hosted by CNBC at the Boao Forum for Asia.
“They are not currency per se. And so the main role we see for crypto assets going forward, the main role is investment alternative.”
Now, we should expect some sort of coming regulation, but that’s actually a good thing. It will be another sign of acceptance and adoption, paving the way for even more capital flowing into the sector.
***What’s on the other side of a bitcoin wipeout…because a crash isn’t the end of the story
Let’s return to Scott Minerd, who thinks we’re due for a 50% crash.
“I think we could pull back to $20,000 to $30,000 on bitcoin, which would be a 50% decline, but the interesting thing about bitcoin is we’ve seen these kinds of declines before,” Minerd said.
However, he said he thinks it’s part of “the normal evolution in what is a longer-term bull market,” withbitcoin priceseventually reaching between $400,000 to $600,000 per unit.
In the nearer-term, billionaire bitcoin bull Mike Novogratz thinks we’ll see bitcoin hit $100,000 by the end of this year.
Whether that happens or not, his long-term analysis is important for investors to consider.
Right now, total crypto wealth is roughly $2 trillion, so that’s one half of 1% of all wealth. If you don’t think in the next two to three years that can be 2% to 3%, you’re not paying attention to the trends.
The amount of growth that we’re going to see in our space is staggering. We’re just getting started.
Speaking about Coinbase’s debut last week, he went on to say:
Let’s not miss the big picture: This is like the Netscape moment for the cryptocurrency economy.
Remember, Netscape in 1995 — four years before we had this crazy frenzy — basically signaled the beginning of the internet age.
***But returning to right now, could we be starting such a major correction?
As I write Thursday morning, bitcoin has fallen through its 50-day moving average (circled below).
The 50-day has been a key level of support over the last 12 months.
The further bitcoin’s price falls below this average, and remains below, the greater odds become of this turning into a major pullback.
That’s not to say it will happen, only that the odds are increasing.
Of course, no one knows – bitcoin could be at $70,000 by this time next week. But if not, and a major crash happens tomorrow, next month, or next year, see it for what it is…the price you pay for being part of a revolutionary-yet-volatile asset class that’s going to mint a new batch of millionaires in the coming years.
As importantly, don’t mistake a crash for what it’s not – the death of this asset class.
***A unique approach to bitcoin
Before we wrap up, I want to mention Matt McCall’s latest issue of Early Stage Investor (ESI), which came out yesterday…
For newer Digest readers, ESI is dedicated to finding small, explosive stocks that are surging on the backs of world-changing trends. In this latest issue, Matt recommends three stocks that are unique ways to play the surge in the crypto sector.
As more big money moves into the sector, demand for coins will increase… and supply will not be able to keep up. Simple economics tells me that leads to higher prices.
When sectors grow, we see ancillary business models that can flourish from that growth. That’s what we see right now in cryptocurrencies, as a number of ancillary businesses are starting to benefit from the sector’s big gains.
Matt points toward three areas – crypto miners, crypto exchanges, and crypto transaction facilitators, noting “these are all potential ancillary plays on cryptos where we can invest in stocks that benefit from the sector’s hypergrowth.” Matt recommended three new picks to capitalize on these areas.
To learn more as an Early Stage Investor subscriber, click here.
As we wrap up, your homework assignment today is to prepare for the monster that could be jumping out from behind the door.
Are you in a position to ride out the attack, or given your investment situation, would it be better to take some profits? If profits, how much, and at what price?
Preparing now prevents pain later.
Have a good evening,
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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.