From 312 to 805, will BTC repeat the 2020-2021 script?

Author: Matt Hougan, Chief Investment Officer of Bitwise; Compiled by: 0xjs@黄金财经

This week, the cryptocurrency market has sold off sharply. Starting at 4 p.m. U.S. time on Friday, as of 7 a.m. Monday, Bitcoin fell nearly 20%, from $63,356 to $51,026. Ethereum performed even worse, falling from $3,307 to $2,234, a drop of more than 30%.

Of course, cryptocurrencies are not the only ones.

Global capital markets are turbulent due to economic concerns and increased geopolitical concerns. In Japan, the Nikkei just had its worst day since 1987, falling more than 12%. In the United States, Nasdaq futures fell more than 4%, and the VIX volatility index has risen 100% since last Friday.

If you are like most cryptocurrency investors, you experience violent swings in emotions, including fear or despair. For many people, the most shocking emotions are emotions like anger.

I thought crypto was supposed to be a hedge against global uncertainty!? What’s up?

I felt the same way.

But there’s one thing I feel even more deeply, based on my experience managing crypto money full-time for over six years: opportunity.

Lessons from the COVID-19 Selloff

The last time the market crashed like this was on March 12, 2020. That was the day the world realized COVID was a big deal.

In case you forgot, let me remind you: it was chaos.

On March 12, the Dow Jones Industrial Average fell 2,353 points, its biggest one-day drop since 1987. Tech stocks and commodities fell sharply. We all thought the global economy was coming to an end. The next morning, the President declared a national emergency.

Of all assets, Bitcoin saw the biggest drop, falling 37% from $7,911 to $4,971. It was a dramatic one-day move that wiped out a year’s worth of gains in 24 hours.

It felt like we might never recover. The media claimed Bitcoin had failed as a hedge.

Then something remarkable happened. As world leaders took steps to stabilize their economies — lowering interest rates, printing money — Bitcoin began to rise. A year later, Bitcoin was trading at $57,332, up more than 1,000%.

In retrospect, March 12, 2020 was not a day to panic. It was the best time to buy Bitcoin in a decade.

In hindsight, it’s easy to see why. Bitcoin didn’t fundamentally change because of the coronavirus. The maximum number of Bitcoins (21 million) was the same on March 11 and March 12. You didn’t need to rely on any bank, government, or company to store your wealth in Bitcoin on March 11, and the same was true on March 12.

At the same time, the coronavirus pandemic also provided more reasons for Bitcoin’s long-term rise. It showed that central banks would step in to save the economy at the first sign of trouble. It demonstrated the limits of centralized institutions. It reminded us that the future will be more online and digital.

All of these changes suggest that Bitcoin will continue to become more important, not less. In the long run, it has.

I saw the same scenario today.

What caused this market crash

I don’t want to spend too much time reviewing what caused the current market pullback.

But in short: weak economic data released by the US on Friday raised concerns about a global economic slowdown. This triggered panic in Asia, and the rapid unwinding of yen carry trades (a strategy designed to exploit interest rate differentials between currencies) led to a sharp drop in Japanese stocks. Heightened concerns about geopolitical risks in the Middle East did not help, with Iran threatening to attack Israel.

These events collided with peculiarly negative developments in the cryptocurrency market, with a large market maker (Jump Trading) getting into trouble and facing forced liquidation of a large number of ETH positions.

All of this happened on a summer weekend with low liquidity, further exacerbating the move.

But watch what happens next: it looks like we are about to see a repeat of the Covid script.

The federal funds futures market has already priced in an aggressive response. A week ago, Fed Chairman Jerome Powell was downplaying the need for rate cuts this year, with markets pricing in just an 11% chance of a 50 basis point cut at the Fed’s September meeting. Now, markets have raised that probability to 98%. Some are even calling for an “emergency rate cut” before the September meeting.

Probability of target interest rate at the Fed meeting on September 18, 2024

Source: CME Fedwatch. Data as of August 5, 2024.

So, will the printing press really come? If history is any guide, the answer is yes. It happened during the COVID-19 pandemic. It also happened after the European debt crisis in 2010. It also happened in 2008. It could happen again if the events of this weekend lead to real economic turmoil.

What to watch for in the future

In the short term, the key question is whether the crypto market has bottomed. A sharp correction in the crypto market could feed back on itself, creating a downward cycle that would need to exhaust itself before bottoming out. This is because, as prices fall, leveraged traders face margin calls and are forced to sell. We have already seen over $1 billion in futures liquidations, and it is unclear if we have hit bottom. You can watch here to see if forced liquidations slow down.

It is also worth keeping an eye on the health of companies in the crypto ecosystem. As we saw in the 2021 crisis, very sharp volatility can knock out companies with overleveraged balance sheets. As I mentioned, there are already rumors of challenges at least one market maker (Jump Trading), which could extend the downtrend if contagion occurs.

I would also watch ETF flows to see if ETF investors take advantage of this pullback to sell or buy more. These three factors will largely determine where we go in the short term.

But My real advice is to ignore the short-term factors and look beyond. Bitcoin is a volatile asset that can go up and down in a big way. It always has been, and it will continue to be that way for some time. Times like this once again prove the futility of trying to time short-term trades.

Bringing a trading desk mentality into crypto is a mistake. You are investing in a once-in-a-lifetime transformation in the way global money works. Resist the urge to focus on intraday prices and instead focus on where Bitcoin could be next year, five years, and ten years from now.

When you get your first job on Wall Street, they will tell you that the four most expensive words in finance are “this time is different.”

Historically, whenever we've seen this kind of global economic panic, cryptocurrencies have initially fallen, but have risen over the following year. Maybe this time it really is different, but I wouldn't bet on it. In fact, I'd bet in the opposite direction.