All it takes is a small bounce

The Bitcoin (BTC) price has seen sideways action and temporary gains of a couple of percent over the last week. It is trending right under the 200 week moving average that has mostly acted as support for the leading cryptocurrency in the space. It did not take long for the crypto permabulls to come out of their holes and declare that the bottom would be in for the crypto market already in 2022. All it takes is a small bounce to get the hopium in the market to rise again. Although there is some evidence coming mostly from the technical analysis there is more evidence coming from the fundamental side that indicates that we are currently far from the actual bear market bottom for 2022.

An unbroken bearish trend

The fact of the matter is that the trend for Bitcoin since the last all time high is bearish. And this goes along with a macro economical trend that is driven by four essential factors. Before we look at these factors we need to look at some key market indicators. First of all we are in a global recession, secondly we have rampant inflation in almost all major economic powers around the world, the S&P 500 has seen a major draw down, the DXY which describes the strength of the dollar compared to a basket of currencies in the world is on an absolute tare. The global “health” situtation as I like to describe it is still not declared over, we have a raging war just on the east flank of europe that leads to critical resource shortages. It hinders economic growth, fuels inflation, causes food shortages directly by export stops of food and indirect by export stops of fertilizers. On the side of Russia  the western world imposed immense sanctions that causes an anti western block forming and gas sanctions as counter reactions. This is coming into a situation of cracked supply chains that are so deeply cracked that companies like Daimler can not get thei Trucks out because of essential component shortages. Which has immediate effects on the supply chains because logistics companies can not get their vehicles. China on the other side contributes to this development with a health dictatorship executed by the government via social credit system and pandemic rules. A single “health problem” can cause the shutdown of an important container terminal, port or the entire city for weeks.

The Lehman-Effect in crypto

History may not repeat exactly as before but it tends to rhyme. Right now it seems that institutions within the crypto space have repeated the Lehman situation and it rhymes pretty well. The trigger in this case was the collapse of Terra (LUNA) or more specifically the depegging of the UST stable coin which led to a “bank run” on the funds and the implosion of the entire project which sent out seismic shockwaves throughout the market. The immediate effect was the liquidation of leverage traders that where long on Luna and at the same time capital loss of stable coin holders. At this point in time it was not yet clear which other entities might be affected. However, the Terra desaster revealed a much deeper problem: Market actors borrowed money to speculate on market developments with high leverage. This might have led to insane gains during a bullmarket but since the entry into the bear market mechanisms work different. These different mass behaviours led to the death of Terra Luna but are also now threatening lending platforms and hedge funds to be margin called. It so happened that three arrows capital got margin called and was unable to fulfill their obligations to Blockchain.com and Deribit which caused them to file for bankruptcy according to article 15. This article allows foreign entities to file for bankruptcy in the US when US-based entities are affected. Simply put it means that three arrows capital (3AC) is insolvent and potentially all customers money within 3AC is lost. According to insolvency specialist Teneo a “signifcant number of creditors” is expected to make claims against the hedge fund as Financial Times reported first. It is expected that many of these claims can not be met and therefore leading to leveraged losses going into the balance sheets of other companies. We see the cascading effect spreading out to exchanges like Voyager and CoinFlex who reportedly halted withdrawals. As of today crypto exchange Vauld is the last in a sequence of falling dominos declaring that “financial difficulties of our key business partners” were affecting their business. It is a nice way of saying that the default of loans or overleveraged trading might have gotten into the substance of these platforms. To cut a long story short: the effects of credit bundles with rotten credits in it like it has been during the Lehman brothers crash in 2008 repeats itself in the way that hedge funds took loans from lending platforms to infuse their leveraged trades and by not being able to cover the loans they put a loss in the balance sheet of each lender that is taking part in the lending pool of that specific project.

Brace yourself, crypto winter has begun

While eternal crypto bulls shout the bottom from the roof tops it is unclear to me how they got to this conclusion. The fundamentals just do not tell the same story as moving averages and cherry picked indicators do. In my opinion the worst, the max pain moment is yet to com and it might be brutal. Considering the Wallstreet Psychology cheat sheet we might be somewhere between anxiety and denial. At least that is how I interpret the output of social media. We have anxiety and uncertainty because some exchanges and projects get taken out like participants in squid game and on the other hand we have statements of denial like “Bitcoin has never done that.” “Bitcoin has never closed below its previous bull market all time high” “Bitcoin has institutional adoptions now they will not let it go lower”. I want to remember each and everyone: The bulls have declared the bottom in at $25000 and look where we are now.