Why You Shouldn’t Worry About China Cutting Bitcoin’s Cord

Why You Shouldn’t Worry About China Cutting Bitcoin’s Cord

Dear Investors,

As I write to you today, crypto is facing a number of headwinds. Bitcoin has fallen below $30,000 to essentially become even on the year, and ether is under $2,000. These are two psychologically significant milestones that are causing angst among investors.

These feelings are understandable, but I urge you to think carefully and dutifully about your portfolios as you plot next steps. Why? I am going to make the case that things are not nearly as bearish as they seem.

When It Rains It Pours

Crypto is in the middle of a news-driven perfect storm driven by forthcoming interest rate rises at the Fed as well as concerns about bitcoin’s role in ransomware. 

However, today I am going to focus on China. 

Consider the following: China has always been antagonistic towards bitcoin. This is not new. The country banned retail trading years ago and is now just sweeping up what remnants of its crypto market were left behind, such as bank linkages to OTC desks (how most trading is done these days in the country). 

Yes the shutting down of crypto mining in provinces such as Sichuan and Xinjiang hurts, as they are key centers of gravity for mining. However I strongly believe that this is just a one-time exogenous shock that the market will recover from. Miners are already relocating to Maryland, Kazakhstan, and plenty of other places around the world. It may take some time for everything to be brought back online since these miners will need to rent or purchase warehouses and connect to electricity grids, but once this happens the industry will be much more diversified and resilient. It will no longer have the Sword of Damocles hanging over it. Plus there are plenty of other miners in the US and around the world popping up and purchasing millions of dollars worth of equipment that are yet to come online. 

Therefore, if you are worried about the security of the network during the transition, don’t. Although the network hash rate has dropped, it still remains extremely high from a historical perspective and the bitcoin network automatically adjusts its difficulty levels every two weeks to keep everything in equilibrium.

Most people do not know these facts, so they panic sell. This is borne out in some of the recent charts that I’ve pulled. For instance, bitcoin is also back to where it started to year (though it is still up 200% over the last 12 months).

Still, it is fair to wonder if we’ve reached the bottom. The chart below shows some bearish indicators. For instance, there are recent drops in the number of active addresses and USDT balances on exchanges (this is often a bullish indicator because USDT is the base currency for the majority of crypto trading worldwide). Additionally, the amount of bitcoin that has flowed into exchanges is starting to rise, which suggests that people were getting ready to sell.

It is possible that we still have further to go and it would be presumptuous for me to tell you otherwise. However, given the fact that I see the current China ban as a one-time shock to the system I would urge you to think longer-term about your crypto portfolio. 

Additionally, for those of you thinking about selling now with the intent to buy back in at a lower price, please keep in mind how hard it is to time the market. I know many people that tried to short the stock market back in March 2020 that ended up having to buy back in at much higher prices. If you want to take some money off of the table since many of you are still ‘in the money’ that is your prerogative, but shorting markets is something that can humble people quickly.

Finally, keep in mind that while the markets are dipping, institutional interest remains strong in many corners. MicroStrategy just bought almost another $500 million worth of bitcoin with the proceeds of a debt issuance that was oversubscribed by $1 billion and Goldman Sachs just started offering ether derivative products to clients. Therefore, many institutions are taking a long-term approach.

As always, feel free to reach out to me at sehrlich@forbes.com with any questions. I am also happy to jump on phone calls with anyone that wants to talk (267) 994-3827.

Published at Tue, 22 Jun 2021 15:39:29 +0000