cryptocurrency

Bitcoin: The Trojan Horses Have Bolted (Cryptocurrency:BTC-USD) – Seeking Alpha


Bitcoin ATM for cryptocurrency exchange machine in Poland

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In my article from October 2021, Bitcoin: You Have Been Warned, I said that some of the Bitcoin (BTC-USD) influencers were maybe not the gods that they were being touted to be. As the coin suffers another downturn, two of the most prominent investors have fled. This is my updated outlook.

The trojan horses have bolted from the Bitcoin paddock

In October of 2021 when Bitcoin was trading at $66K, I warned for the second time that a downturn was coming. The first time saw a 50% pullback, but the second is still down 65% despite the July rally and the outlook for BTC is fairly grim.

In my article during that frothy October, one of the problems I saw in BTC was the weight being shouldered on celebrity influencers. At the time I doubted their true intentions in the world’s most valuable cryptocurrency and that has now been confirmed nine months later.

At the time of writing, I said:

Many of the professional investors who tout Bitcoin as the future may also be leading investors into this trap. Elon Musk already showed this year that he can change his stance on accepting coins for Tesla (TSLA) vehicles. That announcement helped to fuel the early-2021 rally before Musk changed his mind over its energy usage. He has since clarified that they will likely accept it and the firm is up $1bn on a $1.5bn BTC holding, but he could change his mind again for a more energy-efficient coin.”

The big news recently was that Musk’s EV company had now sold 75% of its holdings in the coin. The stated reason was that supply chain problems had increased the need for short-term cash. Tesla is certainly experiencing some headwinds, but it may be just an opportune time to exit the BTC investment. The 25% token holding may be a speculative attempt to break even on the investment.

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“We are certainly open to increasing our Bitcoin holdings in future so this should not be taken as some verdict on Bitcoin. It’s just that we were concerned about overall liquidity for the company,” Musk said on an earnings call.

Investors should make their own minds up over whether the decision is a verdict on Bitcoin. Personally, I do not see Tesla buying Bitcoin in 2022 and I would say the chances of them doing so in 2023 is in the low single-digits.

The next celebrity Bitcoin influencer under pressure is Michael Saylor, CEO of MicroStrategy (MSTR). Saylor is stepping down as CEO of the software firm after his bets on BTC lost the company $1bn so far.

Saylor is moving to the role of Executive Chairman and is handing the reins of the company to Phong Le.

“I believe that splitting the roles of Chairman and CEO will enable us to better pursue our two corporate strategies of acquiring and holding bitcoin and growing our enterprise analytics software business. As Executive Chairman I will be able to focus more on our bitcoin acquisition strategy and related bitcoin advocacy initiatives, while Phong will be empowered as CEO to manage overall corporate operations,” Saylor said in a statement.

This is an obvious end to the Bitcoin debacle at MicroStrategy and investors were maybe hyped by the 2021 rally and thought that they had a genius at the helm. Now that the losses mount and corporate adoption is once again a distant dream, shareholders will be angry and it is very possible that they have forced this move. In the end, MicroStrategy is a software firm and the CEO has spent all of his time running around at roadshows promoting Bitcoin. If Bitcoin puts further pressure on the company down the road, there could even be potential lawsuits against the company and its former CEO.

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The common theme with Tesla and MicroStrategy is that we have two charismatic CEOs making large speculative bets on cryptocurrency with other people’s money. Unfortunately for many investors, they bought in at $50-60K based on the wisdom of these ‘gurus’.

In Saylor’s case, I feel that he has no other option but to cling to the bullish theme. Abandoning the BTC balance sheet strategy would further destroy the holdings and stock price of MSTR.

Saylor has recently said that he is as “enthusiastic as ever” in an interview and is now likening BTC to Manhattan property.

Do you need to move the asset for it to have value? No, absolutely not. For example, the property in Manhattan doesn’t have to move for it to have value. In fact, you would prefer that Manhattan be built on granite or schist that doesn’t move for hundreds or millions of years. It makes the property more valuable. Bitcoin is that.”

I recently wrote a book called, The Stock Market is Easy, and it is heavily influenced by investment psychology and behavioral investing. There are so many comments that are relative to this story in terms of bias and gurus. Here we have a CEO diversifying his company into a speculative balance sheet security and he has done so in such a large size that it threatens the entire business. In the book I said:

Don’t get married to a position and don’t get stuck in investments when the weather is changing around you. Complex thought requires effort. Your brain will want to choose the easy path. By making the effort and overriding the brain’s path of comfort you can make the stock market easy.

Investors should be wary of the gurus and experts and consider their reasons for being bullish. As Warren Buffett once said: “Never ask a barber if you need a haircut.”

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Bitcoin has mounted a weak rally from the lows

The recent rally has done more damage to the cryptocurrency market than investors realize. Institutions were starting to dip their toe in the water and consider copying the moves of Tesla and MicroStrategy but no CEO is likely to risk following that strategy at the moment.

Bitcoin

BTCUSD (M) (TradingView)

On a monthly basis, the price of BTC-USD has slumped to find support at the previous key resistance level from the late-November highs at $20K. The coin has rallied to $25K but has found some resistance there on a weekly basis. A break of $20 will target $12.5K.

BTC investors should be aware that the coin is a trading vehicle that is following the usual rules of technical analysis. Many think it is a mythical creature that could ‘moon’ at any time but that is not what we are seeing in the price action. The retail money is now heavily long and many are in losing positions above the $50K mark. This period reminds me of the 2018-2020 phase where a price crash scared institutional money away.

The decentralized finance market has also sucked the wind from Bitcoin’s sail after the failure of DeFi darlings like LUNA (LUNA-USD). The current Total Value Locked (TVL) in crypto is $87.7bn, according to DefiLlama and that is down from around $260bn in late 2021.

Crypto

TVL Crypto (DefiLlama)

Aside from crypto developers, there is no real incentive to deposit with these projects when interest rates are soaring on government bonds and there are good dividends available from the recent market sell-off. Again, institutions cannot invest in these projects because of the problems at Terra Luna and it is going to be an uphill battle to create real confidence again.

Adding to that gloom this week was the International Monetary Fund which warned that other projects could fail.

“We could see further selloffs, both in crypto assets and in risky asset markets, like equities. There could be further failures of some of the coin offerings—in particular, some of the algorithmic stablecoins that have been hit most hard, and there are others that could fail,” the group said.

The current outlook for cryptocurrency regulation

Ironically, the outlook for cryptocurrency could be improved by further regulation. With more oversight on the coins and projects that are on the market, there could be more ability for professional investors to get involved. There are currently 20,000 crypto projects listed on CoinMarketCap and there would need to be a cleanup of the sector by regulators. That goes against the purpose of decentralized finance but the current sector is like the Wild West, as SEC Chairman Gary Gensler once stated.

We saw further evidence of that this week with the news that the Securities and Exchange Commission had arrested 11 people over a huge $300M crypto Ponzi scheme. Forsage promoters convinced millions of investors worldwide to get involved and recruit others.

“Forsage is a fraudulent pyramid scheme launched on a massive scale and aggressively marketed to investors,” said Carolyn Welshhans of the SEC. “Fraudsters cannot circumvent the federal securities laws by focusing their schemes on smart contracts and blockchains.”

According to the FT:

The SEC accused the operators of Forsage of raising $300mn from at least January 2020 through an unregistered securities offering.”

That is an interesting choice of words when we consider that Ripple’s XRP (XRP-USD) and the BNB (BNB-USD) token of the Binance exchange have both been under the SEC’s microscope for being securities and we may see a clampdown coming. As I have said in previous posts, this lack of confidence in crypto and the impending regulation only brings us closer to Central Bank Digital Currencies, or a Treasury-issued digital dollar and the majority of crypto projects will likely fade away.

A recent Institutional Investor article on CBDCs noted that Janet Yellen wants clear cryptocurrency rules by year-end. On the recent turmoil in the crypto market they said:

“According to the Fed, a CBDC would offer refuge from this shambolic state of affairs by providing a form of digital money that’s a direct liability of the Fed, firmly bootstrapped to the US dollar and government, as opposed to an offshore, flash-in-the-pan startup that might lie, cheat, steal, implode, or pull a midnight runner.”

That type of offering would appeal to institutional investors and the current banking heavyweights could even offer higher interest rate products that would render DeFi projects worthless. In the end, money is all about confidence, and I feel that Bitcoin and the cryptocurrency market are now on an uphill climb to regain what was once solid.

Conclusion

I will conclude by saying that I was a supporter of cryptocurrency since 2018. I advised subscribers to my Marketplace newsletter to buy at $8-9K in 2020, before the strong upside rung the bells of speculative excess. I believe there is a future for cryptocurrency projects to operate alongside the coming CBDCs but I do not believe Bitcoin will be a winner. Regardless of whether it does, investors should use this opportunity in BTC to learn a real lesson about the experts and gurus in this field. Many of them are bullish with other people’s money, while others are now in so deep that the only path ahead is through further optimistic calls.



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