Similar to the dot-com bubble, the lure of quick riches has led the cryptocurrency market to stray far from reality. Since 2020, disinformation (peddled by VC funds and social media influencers) has spread like wildfire across a global population of inexperienced investors. With massive retail inflows and Fed support, Bitcoin (BTC-USD) and crypto-companies became overvalued.
As a result, cryptocurrency prices have plummeted in capitulation throughout 2022. On June 18th, Bitcoin broke below its previous cycle high of $20k/BTC. Although many investors are convinced this dip represents ‘the final bottom,’ we believe there is significantly more downside to come. In fact:
- We believe this crypto crash marks the beginning of Bitcoin’s decline as a market leader.
This article describes the new perspective necessary to successfully invest in the changing crypto market.
Bitcoin: Unprecedented Death Spiral
At the risk of saying ‘this time is different,’ there are fundamental reasons why this crypto crash is unique. Primarily, this crash is similar to the dot-com bubble as it represents the shattering of many deeply rooted beliefs in the crypto market.
Over the past decade, Bitcoin’s secular bull trend has bounced between multiple failed narratives:
‘Bitcoin is an inflation hedge.’ X
‘Bitcoin can be used as collateral.’ X
‘Millions will adopt Bitcoin as a store of value / peer-to-peer currency.’ X
‘The price of Bitcoin never breaks its previous cycle high.’ X
While these narratives made sense in a post-2008 expansionary market, we believe they lose their validity within a contracting economy. When looking objectively, our opinion is that Bitcoin’s only actual use case is to convince others to buy it.
The result of Bitcoin’s lack of real-world use is that it puts the asset at risk of a death spiral when the music stops.
As BTC prices drop, Bitcoin investors collectively realize their asset has no tangible price floor. A decreasing BTC price increasingly incentivizes investors to sell their holdings in an effort to grab any available liquidity. Eventually, this positive feedback loop leads to widespread panic and capitulation.
We believe Bitcoin’s death spiral price drop is occurring right now. At the time of writing, $20k/BTC (the previous cycle high) is being defended by the bulls. However, we believe this support will not last, as $20k represents the last chance of liquidity for hedge funds, venture capital firms, and other financial institutions looking to sell before an ugly cryptocurrency collapse.
Bitcoin Bottom Prediction
In a recession, markets reprice excess valuations given to financial assets during the previous expansion. We believe this repricing will drastically affect Bitcoin, as investors collectively realize the asset has no tangible value.
As the above-mentioned scenario plays out, we expect Bitcoin to bottom below $10k around September – November 2022. This prediction is a ballpark estimate derived from Bitcoin’s Price Cycle theory.
As we stated in our previous Bitcoin article,
“After each parabolic run-up, Bitcoin has decreased from peak to trough by 80% approximately one year later.”
Accordingly, $13,757 is exactly 80% below Bitcoin’s previous all-time high of $68,789. While we previously targeted this price as Bitcoin’s bottom, we now believe momentum can take BTC even lower below $10k. Unlike the previous two Bitcoin bear markets (in 2018 and 2014), this crash marks the first time Bitcoin has ever fallen below its previous cycle’s high. As such, we expect the crash to be deeper than the usual 80%.
We also expect Bitcoin to melt back up to above $20k during the first half of 2023. As we can see in the chart below, we believe $20k will be a pivotal level for Bitcoin over the coming year.
After Bitcoin finds bottom support, a subsequent melt-up can be powered by highly oversold conditions and looser monetary policy as inflation subdues.
- Bitcoin is experiencing a crash unlike any other. A paradigm shift is taking place, eventually leading Bitcoin to relinquish its throne.
- Rather than die immediately (go directly to 0), we expect Bitcoin to loosely follow previous cycles and bottom below $10k around September – November 2022.
- A violent bottom can further power a reflexive rally back to $20k in 2023.
The Brutal Truth
In reality, Ethereum (ETH-USD) best fulfills the narratives that the masses of Bitcoiners want. While Bitcoin is an old and limited technology, Ethereum uniquely exists as a decentralized application network, a store of value, and a widely used form of money.
A simple mental model to compare Bitcoin vs. Ethereum is as follows:
- While Bitcoin is the invention of decentralized digital money.
- Ethereum is the first-ever application of decentralized digital money.
In the future, as the crypto market dies and regrows to support protocols with positive organic cash flow, Ethereum will become the market’s most dominant player. In fact, we believe Ethereum’s unbeatable decentralization and subsequent network effects will power its growth to become a primary settlement layer for the entire internet!
As we stated in an article from September 2021:
“Ethereum will continuously absorb value from all institutions that prioritize power over efficiency.”
Ethereum’s application efficiency and unique structure as a triple-point asset give it a competitive edge against brick-and-mortar corporations. As Ethereum’s software stack continuously improves, applications built on Ethereum will single out and benefit from any inefficiencies within legacy technology networks. DeFi, for example, is already doing this by eliminating the need for financial intermediaries.
- We believe DeFi will redefine traditional finance and develop into a trillion-dollar industry. However, we are very early in this journey. As such, the present state of Decentralized Finance still has many problems (specifically a lack of regulation or ‘rules’).
On a long enough timeframe, it’s likely that decentralized, autonomous, and efficient software applications built on Ethereum will overtake all industries. The logic for this conclusion derives from Ethereum’s open-network reliance on the free market. As the market always seeks maximum profits, it makes sense that the next era of business will involve the most decentralized and trustless technology networks, thereby maximizing profitability for all parties. To read more context on this thesis, see here.
- Ethereum applications maximize profits for everyone by replacing bureaucracy with automation.
In simple terms, we believe Ethereum – a decentralized, self-governing, ever-expanding, and widely trusted transaction network – will eventually develop more efficient applications than most brick-and-mortar corporations.
Since the masses are still unaware of Ethereum’s long-term growth potential, we expect Ethereum to crash alongside all other cryptocurrencies near the end of 2022. After sufficient cooling time, however, we believe ETH will eventually emerge from the ashes to begin another long-term bull trend, reaching $10k/ETH in 2025.
Following the 2022 crash and subsequent bear market, we expect Ethereum to emerge as the crypto market’s biggest winner. We will flesh out this thesis more with upcoming Ethereum/altcoin articles. Although most altcoins are poor investments, some work to create genuine revenue. We plan to identify and take advantage of these opportunities over the 2020 – 2030 decade-long transition from Industrial to Information age.