Perma-Bears Ring the Bell, AGAIN…

It’s time to tip our cap to Bitcoin Perma-Bears Peter Schiff and Nouriel Rubini for, once again, calling the bottom of the recent sell off.


As predictable as a spring thaw, both of them took to Twitter to triumphantly tweet “I told you so” as Bitcoin retraced 50% of its November bull run in one day.  

Unfortunately for those poor souls that follow either of them for trading advice, their reasoning was as wrong as their trading call…

There were more tweets from both, but both regurgitated the same set of tired arguments.

Bitcoin is not (yet) a currency, nor have all the scalability concerns been solved, but it is an asset that is increasingly being used as a hedge against inflation as luminaries as Paul Tudor Jones and Stanley Druckenmiller have argued. As for manipulation, all volatile assets are manipulated, and the Bitfinex case is old news. Many exchanges and LPs now use software to discover manipulation and the systems are getting better all the time. As for volatility, keep in mind that, as I have previously said, Bitcoin trades like an OPTION on its own potential acceptance as a store-of-value. If/when it gains a critical mass of acceptance, it would indicate a market cap that more closely resembles gold, which would be over 40 times todays price. While that outcome is far from certain, it seems more likely today than at any point in Bitcoin’s history. In the meantime, as befitting an option, the volatility is going to be high.

Getting back to this selloff, it is worth pointing out that there was a confluence of events that made it more likely than usual. Consider the following:

  1. Speculative leverage on the long side had built up to a significant level
  2. U.S. buying had been fueling the spot market led rally
  3. The Thanksgiving holiday meant less liquidity on exchange order books and, due to #2, less buying in general
  4. Arbitrageurs had been able to build up significant positions where they were long actual Bitcoin and short futures / perpetual swaps (at a profit), meaning there was a lot of spot supply to be sold as part of an unwind strategy.

While it is not certain to be the case, if enough of the arbitrage position was unwound by selling the spot Bitcoin before buying back the perpetual swaps, the speculative leverage would have resulted in forced liquidations, which would have driven the market lower once triggered. Of course, there could be other explanations, such as the desire of traders to flatten long positions before the holiday, but the point is that when there is a lot of leverage in the system, volatility becomes more likely.

None of this, in any way, diminishes the bull case for Bitcoin, which is predicated on the continued degradation of fiat money worldwide. In fact, the recent news of more “traditional” money managers moving towards investing in Bitcoin as part of their portfolios make that stronger. The market structure, however, does make Bitcoin prone to bouts of volatility, considering that leverage is available for speculators worldwide. The implication is that investors should be extremely careful using leverage and sizing their Bitcoin position in general. However, rejecting the inclusion of Bitcoin in one’s portfolio entirely is becoming increasingly short-sighted. There are other reasons why I feel this rally has “legs” which I wrote about recently.

NOTE — Everyone should do their own research, and not consider these opinions investment advice. They are provided solely for the education of our readers.

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