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The Bitcoin Bubble

Will Bitcoin ever snap back to life? Will it regain its highs and prove naysayers wrong? Is Crypto Winter over? Has crypto earned a permanent seat at the table? Can we take it seriously as a long-term investment?

Many questions and uncertainties surround the crypto space, and today we’ll be breaking down Bitcoin and crypto’s prospects for 2023 and beyond.

To be clear we are no crypto professionals, and we are not qualified to discuss the technology behind crypto or its potential applications. However we do possess a deep understanding of market mechanics, how price action works, and the psychology driving bull and bear markets.

Ultimately, the fate of cryptocurrencies will come through price discovery. If crypto is a winner-take-all market, Bitcoin’s value should skyrocket while other coins disappear. If other viable coins emerge, we’ll simply see a market of winners and losers and it’ll be about finding the right information at the right time.

No deep knowledge is necessary to recognize these trends. Of course there are experts, visionaries, and technical analysts with insider information that may capitalize on certain developments, before it becomes obvious to the general population. But the average participant has virtually no shot at figuring any of this out ahead of time, no matter how many youtube videos or blogs he reads.

First, let’s acknowledge that crypto is not an asset class that lives on its own planet. It’s important to recognize that cryptocurrency and technology are closely intertwined and subject to the same market forces and herd mentality. The Covid Bubble revealed that both the speculative tech market and the crypto market reacted similarly to various market conditions.

In the summer of 2020, both markets experienced a breakout as lockdown trading gained momentum, leading to the final mania phase of the bubble. Take a look at the image below. While the charts for Bitcoin and the Ark Innovation ETF (ARKK) — a reliable proxy for the tech-growth trade — are not exactly identical, they both posted their most significant moves in the second half of 2020.

Both the crypto and tech markets attempted to rally towards the end of 2021, but their efforts failed, and an ugly bear market materialized. Even during the short relief rallies in 2022, crypto and tech continued to move in sync, making it difficult to determine which market is leading the other. We might be able to solve this mystery in the upcoming months if these markets eventually show some sort of divergence. Until then, they are one and the same.

If you want to actually make a profit in the cryptocurrency market, you have to abandon the pipe dreams and crazy NFT pitches and focus on how buyers and sellers are behaving in the market.

So what happened to Bitcoin in 2022? What is the anatomy of a Bubble?

Basically, it is early adopters and investors that will be true believers in any new idea. In Bitcoin’s case, we’re talking about the people who understand the tech and longer-term prospects of crypto. The market then became much more complicated as crypto assets began to rapidly increase.

This bubbled action attracted a new class of investor: the greedy speculator. Their primary goal is making fast money off rapidly rising asset prices, and they don’t care about the longer-term prospects of cryptocurrencies.

While Bitcoin has been sold as an alternative to fiat currencies, as an inflation hedge, and as the key to a decentralized future, a bubble is still a bubble. Whether you’re talking about tulips, dot-coms, or monkey tokens, none of it matters once the speculative class takes over, except making as much money as possible in the shortest amount of time.

When it comes to crypto’s most recent bubble, bitcoin bottomed out just below $16,000 in November after losing more than 75% of its value in 2022. The digital gold has since posted an impressive impulse to begin 2023, gaining 40% on the back of a strong January rally.

Now the big question: was 2022’s correction sufficient to eliminate the majority of bubble-addict speculators and “reset” the market?

Does crypto need more time to recuperate?

For Bitcoin, our attention is focused on the $25,000 level.

Why?

Both Bitcoin and Ethereum are currently consolidating their January rally in a constructive manner and if BTC can hold a move above $25K, it could very well break free and build a new, sustainable uptrend.

It is also essential to closely watch tech-growth. Will Bitcoin diverge from tech and find its own path? Or will these trades continue to push and pull each other in the same direction? Any changes in the correlation between crypto and tech-stocks will offer valuable information to anyone paying attention.

To conclude, you don’t need to possess an acute expertise in the crypto space to survive as a trader. You have to think like a crypto outsider to avoid getting sucked into the compelling storylines that might cloud your judgment. Don’t jump the gun, watch for the reaction at $25K and act accordingly.

Stay alert, stay informed.

Wave Cap



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