Bitcoin Is Not Going To Zero
Summary Bitcoin remains fundamentally sound despite recent volatility and recent fears of the price falling to zero, with zero change to its governance in scarcity, durability, or network effects. In reality, Bitcoin's price action is heavily influenced by global liquidity, Fed policy, and macroeconomic uncertainty, which have been bearing down on Bitcoin, not by changes in core fundamentals. Data shows that spot interest is returning to Bitcoin while selling is gradually normalizing, creating rare setups to cost average into. I maintain a tactically bullish stance, cost-averaging at current levels but prepared to trim positions if sharp rallies occur. Risks remain elevated due to potential Fed hawkishness, inflation surprises, and persistent volatility through the year. Investment Thesis At the time of writing this thesis, Bitcoin ( BTC-USD ) has lost almost a quarter of its value since the start of the year and is down 46% since it topped out at an ATH (all-time high) of $126,223.32 in Q4 last year. Bitcoin’s price has momentarily recovered after crashing to a new 52-week low of ~$60k, implying a 52% drawdown from ATH, leading to record lows in the Fear & Greed Index that tracks Bitcoin sentiment. At one of its bearish worsts, Bitcoin’s sentiment is taking a further nosedive with search results like “Bitcoin going to zero” on the rise. In my analysis stated below, I explain why it is un-opportunistic for investors to hold shallow views as search results are trending towards. Instead, I have laid out 3 macro factors that investors must pay attention to. I am still bullish on Bitcoin and am continuing to cost-average my exposure to Bitcoin at these levels. Understand The Macro, To Understand Why Bitcoin Isn’t Worth Zero In late November last year, I issued a bullish post on Bitcoin with the expectation that global liquidity would be improving, turning the tides for Bitcoin after a very turbulent October for Bitcoin last year. Until Jan 17th, Bitcoin’s price had been moderately recovering, but a series of macro events significantly impacted cryptocurrency markets, leading to volatility returning to Bitcoin. I am not changing my bullish thesis just yet, but I will outline my own action plan regarding my exposure to Bitcoin after I explain my updated thesis on Bitcoin. As noted in the previous paragraph, two key macro events seem to have impacted Bitcoin. The first event was the return of the current US administration’s aggressive stance on global trade in January this year, which “short-circuited” the price recovery Bitcoin had been delivering until Jan 17. The significant about-turn in global trade policies forced a re-rating on global liquidity, and portfolio capital eventually picked up on that trail. Spot bitcoin outflows picked up speed, led by spot bitcoin ETFs selling Bitcoin, which at one time hit ~$709M in daily net outflows . The risk-off trade picked up steam, and outflows in cryptocurrencies were paired with significant inflows into assets like gold and silver that do well in times of global turmoil. Exhibit A: Bitcoin loses out to Gold when global turmoil hits markets as shown in the Bitcoin vs Gold ratio. ( LongtermTrends ) The second event to have impacted Bitcoin's outlook, also in January, was the nomination of Kevin Warsh as Fed Chair. Markets were quick to label Warsh as a hawkish pick for the Fed chair, and this Bloomberg article explains all of Warsh’s previous postures on prior monetary policies that made markets label Warsh as “hawkish.” What does Warsh’s nomination have to do with Bitcoin? A lot. One of the examples that Bloomberg points out is Warsh’s prior stance on the Fed’s balance sheet: If Warsh has a signature issue, it was his opposition to QE in the latter years of Ben Bernanke’s chairmanship. He wants to shrink the assets on the Fed balance sheet, an eminently sensible idea that brings with it risks as liquidity in the market is reduced . This is the biggest fear markets have from the Warsh nomination (the part I highlighted in the excerpt above) , which translates into the view that Bitcoin will become an even bigger laggard vs. other assets if the outlook on global liquidity is threatened. It also does not help when the Fed’s latest meeting minutes , released this week, indicate a surprise tone of hawkishness. The meeting minutes showed that more Fed officials were “wary of cutting interest rates when they met last month, with several even suggesting the central bank may need to raise rates if inflation remains stubbornly high.” An increasingly hawkish Fed Board, along with the market's current perceived view of Warsh also being hawkish, has introduced turbulence in Bitcoin since the outlook for global liquidity is expected to remain volatile or range-bound at best until clarity emerges. What I stated in the paragraph above supports the high correlation Bitcoin has had with global liquidity. This brings me to the important question— is Bitcoin really going to zero ? In my opinion, the truth is that Bitcoin’s fundamentals are heavily dependent on the scarcity, durability, and network effects of the underlying token. So far, there has been zero change in the governing framework that promotes the fundamental principles of Bitcoin. For example, the terminal supply of Bitcoin will continue to remain at 21M tokens, and there is no change in that as well. These are the same fundamentals that appealed to retail investors through high liquidity environments during bullish outlooks, and these are also the same fundamentals that appealed to institutional investors like Spot Bitcoin ETFs and Bitcoin treasury companies. Exhibit B: Bitcoin’s price vs global liquidity continues to diverge as risk-off conditions remain persistent. (B2Geometrics) The only thing that changed is the market's perceived outlook on global liquidity. Note how I said "perceived outlook." The reality is that so far global liquidity has been rising, as seen in the chart above. But markets are, via Bitcoin, staking claims on liquidity crashing. What some analysts and institutions also have been claiming for some time is that much of last year’s bull market in Bitcoin, which drove the price to an ATH of $126,223, was driven more by leverage than by spot interest. In my view, the severe drawdown should be shaking off much of that leverage, but the recovery to Bitcoin’s ATH will be slower than I thought. This is also noted by this analyst , who believes that Bitcoin should be close to its bottom here, as it begins to consolidate at the $60-75k level. I also see that spot interest in Bitcoin is returning as selling pressure begins to normalize. Exhibit C: Spot net flows signal selling pressure in Bitcoin is stabilizing while buying volume gradually returns. (CoinGlass) There are quite a few factors this year that can keep the conditions volatile for Bitcoin at least until the fourth quarter of this year, so I am going to adjust my views on Bitcoin to tactical rather than structurally bullish, at least for a majority part of this year. Warsh is expected to join the Fed sometime in May this year, pending Senate confirmation. Then markets will begin to test the new Fed chair’s appetite for monetary policy stance, which will impact Bitcoin, one way or another. The status quo view is that a hawkish Warsh is bad for the liquidity outlook, hence for Bitcoin. What markets are completely discounting is that Warsh might surprise markets with dovish views, as billionaire investor Stanley Druckenmiller hints at . And I believe this is not priced into markets. This creates strong opportunities for 'face-ripping rallies,' which I might use to trim my position. Because the outlook for Bitcoin may still be volatile in the lead-up to the midterm elections this year. Through this time this year, macro data also needs to come clear on the inflation narrative. Currently, US Feds, as I noted earlier, as well as markets , as seen in the chart below, are tracking for a modest increase in inflation this year. This needs to be supported by a weaker dollar, which eventually should return my structural bullishness for Bitcoin. Exhibit D: US 10-year inflation swaps climbed 11bp in January, reducing bets on rate cuts hitting Bitcoin’s outlook. (Bloomberg) In summary, I believe that: 1) Current Bitcoin levels are worth buying. I might trim my positions if I do see violent/face-ripping rallies in Bitcoin through H1 this year. 2) Bitcoin is not worth zero but is strongly tied to the outlook on global liquidity. Risks To My Thesis Before I end my thesis, I want to reiterate the risks of investing in Bitcoin since the confusion and chaos in the narrative surrounding Bitcoin continue to persist. The risk of volatility of investing in Bitcoin has never been higher amid the confusion in the investability of Bitcoin. Investors should allocate a share to Bitcoin as is consistent with their risk appetite. The other part that I wanted to reiterate is that macro conditions could worsen from here, complicating Bitcoin’s outlook. There need to be signs of disinflation, which improve the outlook on rates, soften the US dollar, and should return spot interest in Bitcoin. Takeaway As explained in my thesis, I find the notion of Bitcoin being worth zero as decoupled from the token’s fundamentals, with investors distracted from the actual factors such as global liquidity. I am tactically bullish on Bitcoin and have been adding Bitcoin at these levels into my portfolio.