BITO And Bitcoin: History Doesn’t Repeat Itself, But It Rhymes

Thesis Summary

The thesis for this is simple – nearly everything points at this being a major capitulation event, the first we’ve really seen since 2018 when Bitcoin (BTC-USD) fell over 30% in just a matter of two weeks.

One could argue there was another such event in 2020, during the liquidity crisis, however this was a broad-market event that affected more than just cryptocurrencies, and thus I would argue it was not quite the same type of capitulation.

During these capitulation events all these same headlines and perma-bears come out of the woodwork – swearing Bitcoin is going down to <$3,000 or even going to $1 or $0 as it’s fundamentally worth nothing in their mind. The same question of the legitimacy and security of cryptocurrencies and Bitcoin is brought up – despite the on-chain security not being affected at all, and the reality that this is all just price action, not a security threat or vulnerability.

With Bitcoin trading at 2-year lows, back to the price it was just as the inflation narrative took off in 2020, the pot odds down here are fantastic – nearly nothing has to go right for cryptocurrency to go back up.

It’s my belief that the best way to play this is to go long via ProShares Bitcoin Strategy ETF (NYSEARCA:BITO) due to the lack of exchange risk combined with options availability, as it is not spot Bitcoin but rather a futures derivative that does not have custodianship risk.

Similarities Are Everywhere

For folks who haven’t been through these events before they can be nerve-racking, especially if you’re heavily invested in cryptocurrencies as everything is put into question during these events. The very fabric of the space often seems to be crumbling, with exchanges collapsing or at-risk of collapsing, user funds potentially being unsafe or stolen, government regulations or bans being rumored, etc.

Going back in time to the November 2018 crash, which was the final capitulation of the 2017-2020 bear market where the real bottom in sentiment, interest, and weekly price was made, there are many similarities to today.

It’s almost strange how many similarities there are, with both of these events occurring right around the same time the U.S. midterm elections happened – both times in November.

Another similarity is the volatility; both periods had the previous few months filled with seemingly disinterest, nothing happening, and extremely low volatility relative to the past.

But the similarities hardly stop there, with Google trends charts showing nearly an identical picture during the time period as well, with a slow fall in search interest in the preceding few months before the collapse in prices.

Searches on Google pertaining to “Bitcoin” globally fell from around 75~ in mid-August 2018 to around 45~ right as the bottom dropped out of the market and the crash began. This represented around a 40% drop in relative searches globally over the period of 90 days preceding the crash.

Likewise in 2022 the Google trend data for the search term “Bitcoin” fell globally from around 85 down to 55, representing a 38% decline in relative search interest globally in the last 90 days preceding this decline.

I can continue with chart after chart, similarity after similarity, but the reality is the situation in 2018 was very different than today – there was no liquidity crises amongst the biggest crypto exchanges. There was no real risk of cascading collapse of other platforms/exchanges either.

History Doesn’t Repeat Itself But It Rhymes

The situation today is different than in 2018, the macro environment has evolved, the risks plaguing markets have changed, and a lot has changed – yet there are many similarities between this capitulation event and the 2018 capitulation event.

I’d suggest this capitulation event is NOT caused by SBF and the potential collapse of FTX (FTT-USD) but rather this is just the reason we’ve collectively decided to panic.

Nobody has been interested in crypto for months, interest has continued declining to almost nothing – down nearly 40% in the last 3 months alone. Volatility has contracted as nobody dares to bet on the upside, nor the downside as Bitcoin sat in a zone most folks thought was reasonable, but uncertain – with no catalyst to move it up or down.

People largely didn’t jump in and go long as with inflation seemingly not expanding, hawkish monetary policy, and a potential economic crisis on the horizon there was a lot of uncertainty, but with Bitcoin down so much why would you sell after already eating the majority of the loss?

That’s what people thought – until they woke up to see that Bitcoin and Ethereum (ETH-USD) that has been largely stable for many months now, in an “accumulation zone” drop 25% -> 30% in a matter of days with absolutely no certainty of a bottom being set – all facades of stability gone.

They woke up to this reality after checking their portfolio, or seeing headlines like the one above, with a taste of blood in their mouth, feeling queasy that they just lost another 1/4th of their investment.

What if Bitcoin does go to $3,000? What if this stupid internet money has no value? What if the U.S. bans and regulates everything to oblivion over this? What if FTX has been propping up the price of Bitcoin? Oh god what about Tether (USDT-USD), is this the time they get regulated and proven to be a Ponzi?

Cold chills rush over them, they log in, and they puke it – selling at any price they can as the dread sets in that they could lose everything – as the doubt sets in that the bears are right.

This shifted everyone’s mindset from “a bottom is in, we’re accumulating into the next rally” to “why do I own this garbage?” as they woke up from their complacency. SBF and FTX could be bailed out and this awakening will not go away, it was simply the excuse, the event, that made everyone collectively panic.

Neck-Deep In Terror

At this moment Bitcoin is around $1000 off its overnight lows, up at around $16,500~ and I can’t find a single soul who is willing to buy. Not one.

With the strong buy rating you may think I’m going to say it’s only up and away from here – and everyone is wrongly afraid. Unfortunately, I can’t say that – everything is just getting worse and worse.

Previously this was all looking like it was going to be swept under the rug and Binance (BNB-USD) was going to absorb FTX and resolve this – but with them backing away from any dealings or association with FTX this possibility is gone.

There is no rescue. There is no bailout. There is no help.

Currently there is no real substantive data on how problematic this situation is, how much of customer funds are gone, missing, or lost, or the current balance sheet of FTX.

The Deafening Silence Returns

To make matters worse, until this morning, FTX and SBF had gone radio-silent since November 8th, something that has only been done by companies that are on their own, heading straight for Chapter 11 bankruptcy and investigations.

The eerie similarity to Celsius Network (CEL-USD) and other crypto-lending platforms, who also chose this route, is striking to me – and screams the likely outcome of this situation will not only not be soft, but will be far far worse than people are expecting.

There is no rescue. There is no bailout. There is no help.

Takeaway

God help us all – the bottom has fallen out and I don’t see the ground under my feet – all I hear is screaming.

This is exactly how it sounded and felt in the November 2018 crash and the 2020 COVID-19 crash, so I remain long, reluctantly adding at these levels with a feeling of sickness in my chest as I am forced to raise cash and delever from other investments to support my cryptocurrency portfolio.

The bottom should be in, or close to it – and in time us bulls will likely be called lucky bottom fishers when the crypto market returns to normal or begins rallying from these lows in the near future.

Actionable Takeaways

I like to provide actionable takeaways, trade ideas for people in my articles, but I cannot really provide one in this case – every trade would be based on speculation and opinion and with extreme risk.

With one exception.

If you want to go long the asset class (or I suppose short), consider buying medium-long dated spreads, an example being buying the January 20, 2023 7 puts and selling the 12 puts in the same expiration – netting a breakeven at mid-price (market) with a capped upside of $253 and a capped downside of $247.

This would limit downside risk in either direction depending on if you did the above (going long BITO/Bitcoin) or the opposite of it (going short BITO/Bitcoin) and provide a way for an investor to gain exposure without taking on the extreme risks actually holding the asset carry currently.

Risks To Consider

If you haven’t taken the hint, bulls like myself are on the verge of being skinned alive by the market. In mere days, if the true impact of this ordeal is proven to be catastrophic, we could all be joining the screaming with everyone else – falling quickly into the abyss with no sight of the bottom.

Those who do not have a risk tolerance capable of withstanding an entire loss of capital should likely avoid all cryptocurrency products until this whole situation has played out.