Before you prepare to "buy the bottom of Bitcoin", please answer these 4 questions first

Source: BlockBeats, original title: "Are you thinking about buying the bottom of Bitcoin?"

Author: 0x22

“It’s broken 8,000! I’m screwed.” The WeChat chat history is filled with discussions within the cryptocurrency trading group.

On the morning of March 9, 2020, Bitcoin continued to fall without resistance, plummeting from the high of $9,150 two days ago to the lowest point of $7,700. Although it rebounded slightly, as of now, the Bitcoin price on mainstream trading platforms is still below $8,000. As Bitcoin plummeted, when to buy the bottom has become a hot topic for more and more people.

However, most people who want to buy at the bottom have not even figured out the first question: Why buy at the bottom?

The essence of bottom fishing is that investors believe that the downward trend will reverse, or that the price at this time is already at the bottom of the historical cycle. However, for Bitcoin, this is not the case.

Let’s first review the current round of Bitcoin’s rise. In January 2020, the entire cryptocurrency market quietly bottomed out in despair. As Bitcoin closed three long lower shadows below $6,800 in a row, long funds broke through the $7,800 box shock with the excuse of the Iranian incident, and cryptocurrencies rich in “halving (production)” hype expectations were continuously pulled up by funds.

The characteristics of this entire round of market conditions can be summarized in the following sixteen words: inverted price increases, stock leverage, tiny retracements, and high sentiment.

The inverted growth rate means that in the spring market of 2020, the growth rate of junk coins and mainstream coins was significantly higher than that of Bitcoin, and Bitcoin did not experience the general "blood-sucking effect" in 2019;

The existing leverage means that there is no effective incremental capital entering the market in this round of market. All the capital entering the market is a wave of hot money without faith. The leverage of the existing funds creates price illusion. When the Binance spot loan USDT is sold out, the price is at its highest point. The USDT is borrowed out, which means that all potential longs have boarded the train. Once the off-site funds are insufficient to relay, they can only kill the longs.

Small retracement means that there is not much retracement in the main rising wave of mainstream coins, and the trend trading feeling is extremely smooth in the first half of February;

The high sentiment refers to the amazing USDT lending market. The quarterly contract premium has intensified as the delivery deadline approaches, attempting to stage a short squeeze, and the long funding rate of perpetual contracts has once exceeded 150% annualized.

Therefore, this round of funds exited the market at a high level with great determination: in a market where incremental funds are insufficient and existing leverage is used to make up for it, the part of the funding rate arbitrage strategy paid by Bitcoin will be sold completely in the form of Bitcoin by arbitrageurs. Such "blood-sucking" logic of the funding side is doomed to the decline of Bitcoin.

In short: the script may have been wrong from the beginning.

In this context, the tenacious Bitcoin still briefly gained support near $8,400, and quickly broke down after trying to break through the 20-day moving average. This is due to both the direct reason of the capital's own demand for flight and the excessive disturbance in the international financial market and the plummeting of commodities such as crude oil.

Here, we try to discuss a common topic: Is there any correlation between Bitcoin and traditional financial markets?

From the perspective of statistical analysis, BTC does not have much correlation with major macro assets, which is supported by mathematical methods of correlation testing.

But from the actual market perspective, especially when Bitcoin becomes more and more like a commodity and cryptocurrency becomes more and more like a trading game, Bitcoin is often a reflection of global liquidity preferences and market sentiment.

For example, at the end of 2018, the consensus in the circle was that the computing war caused panic in the market and broke through the long-term chip area near $6,000. But in fact, this may not be the truth of the matter. At that time, the entire global commodity was falling sharply, and Brent crude oil also reached a low of 30, a drop comparable to Bitcoin.

The memory of this wave of decline is exactly the same. Let's first review the decline from $9,500 to $8,400: when all global assets were falling, the VIX index was close to the 2008 financial crisis, but if you look at the short-term time when various assets stabilized, Bitcoin is completely consistent with everyone. The night when it fell below 8,500 happened to be the night when Brent crude oil ended its 4-hour downward trend. The Dow Jones and Nasdaq indexes also made historic rebounds, and the bullish sentiment of the entire market recovered.

Let’s review the decline from $9,200 to $7,700: the crude oil market plummeted, the global financial sector entered a new panic, and Bitcoin broke through multiple support levels. In this case, it is difficult to completely look at the relationship between Bitcoin and major asset classes from a mathematical perspective, especially when you understand that Bitcoin is part of the energy industry and that Bitcoin is not a safe-haven asset but a risky asset.

Here, the author would like to propose a hypothesis: From a mathematical point of view, the current Bitcoin has no correlation with major macro assets, and short-term fluctuations are determined by the reflexivity of market participants. However, once a negative disturbance occurs globally and the external market declines as a whole, Bitcoin will show a strong correlation with other major assets.

Having said so much, we still need to understand one thing: What is the logic supporting the rise?

Most people would immediately say, “Halving!” But they are wrong.

Bitcoin has a large amount of trading and speculation demand, a small amount of storage demand and a tiny amount of usage demand. Therefore, under the condition that the overall demand level remains unchanged for a long time, the supply speed of Bitcoin will be halved, which will have a positive impact on the price. Note that there is a prerequisite here, "the overall demand level remains unchanged." Obviously, from a 10-30 year perspective, this condition cannot always hold. You can't expect everyone in the world to buy Bitcoin, and you also want them to buy more, use more, and save more each time. There must be an upper limit to the demographic dividend.

There is a saying that is very true. All retail investors who can buy BTC in this lifetime have entered the market in 2018. Compliance or non-compliance will only affect the allocation of institutions. There are only so many people in the world with this level of cognition and investment purchasing power. So since Bitcoin is just a chip game of cognitive dividends, it may still have room, but the Sharpe ratio must be getting less and less cost-effective.

Having discussed this, we can finally answer the first question: the reason for bottom fishing is that investors mistake a bear market for a bull market.

The second question follows: What exactly is Bitcoin?

The essence of Bitcoin is a trading asset, with almost no hedging function and a very small function of storing value. Bitcoin is also a confidence game. If the ultimate support for commodities is the supply and demand of entities, what Bitcoin has is the consensus of people. If the commodity and stock markets continue to fail and a crisis hits, Bitcoin will be the first to fall. International hot money will not sell stocks, crude oil and gold to buy Bitcoin.

It should be emphasized that the industry computing war was only a superficial phenomenon in the big drop at the end of 2018. The essence was that global assets were falling at the time, especially the commodity market represented by crude oil. Under the circumstances at the time, Bitcoin’s attribute as a safe-haven asset had been falsified. People would only accelerate the abandonment of this speculative and highly volatile asset.

The script for 2020 is exactly the same, except that this time, the danger is greater. First, the decline in crude oil and stock markets is no less than that year. Second, in the market, what is more important than expectations is the gap between expectations and reality. When the halving of Bitcoin is tacitly regarded as a synonym for rising, when investment institutions in the secondary market only explain how to operate in case of rising next year without analyzing how to hedge in case of falling, and when the mining industry believes that halving will definitely lead to rising and expanding in scale, the wonderful story may continue, but what is happening in the global market is already too big. Once it is falsified by macro disturbances, the market's self-correction will intensify.

What is the expectation? Bitcoin will definitely rise this year, and it is expected that it will break through the highest point of $20,000 next year. What is the reality? Global financial turmoil is a reality, some miners cash in on the "halving" profit in advance, and the 2019 expectation is also a reality.

This is the biggest hidden danger. No one in the market is bearish on the halving, as if the probability of a decline after the halving is zero. Bitcoin and crypto leaders have exhausted all fundamental, technical, and data analysis methods, and in the end only discussed the rise of Bitcoin in 2020-2021, as if Bitcoin will never fall at the monthly level.

Here I want to give an example of commodity speculation - Apple. The reason why the price of apples was crazy in 2018 was because it was originally a bumper year, but it encountered extreme weather and a large-scale reduction in production in the main production areas. The same is true for Bitcoin now. Under the overly consistent bullish expectations, it is fine if nothing goes wrong, but if something goes wrong, it will definitely be a big deal.

If you don’t believe it, you can calm down and observe carefully in the market.

In other financial markets, the phrase we hear most often is that this year is the worst year. In the Bitcoin market, the phrase we hear most often is that next year will be the best year. This fully proves that the essence of this game is the transmission of confidence.

An obvious common sense is that in the world, you will never find an asset that only goes up and never goes down, and you will never find an asset that does not eventually have a mean reversion inflation curve. If you find it, it must be because the time period is not long enough.

This is not to say that Bitcoin will definitely fall, but to point out the importance of rational thinking and rational investment. After all, no one except you will be responsible for the net value of your account.

The third question is, will Bitcoin die?

Never. Bitcoin will never die, but it will not be as cheap as it was in the early days. Its endgame is a global, non-stop trading asset. Looking at Bitcoin 20 years from now will be like looking at Texas Hold'em now.

The ultimate reason why Bitcoin will not die is that, thinking from the bottom of human nature, the people of the world need something that satisfies their desire for getting something for nothing and getting rich through speculation, and this is also the most indestructible investment logic of Bitcoin.

But it should be pointed out that not dying out does not mean not falling. After all, Bitcoin did not die out at the end of 2018.

Question 4: What to do now?

Everything depends on you. This article does not represent any investment advice. Investment is risky and you should be cautious when entering the market.

*Note: This article only represents 0x22’s personal views, which were reflected in the past half month. However, due to space limitations and time constraints, some of the views expressed in this article are limited in comprehensiveness and evidence.