Bitcoin Collapse – When Is This Bubble Going to Pop?
Dramatic title, thrilling image and intense music (🎶 dum 🎶 dum 🎶 dumm 🎶). Bitcoin collapse sounds really disturbing. But with all the euphoria, some negativity and drama should be allowed. I’m certainly no expert at predicting bubble bursts. Probably no one is because the entire market is driven by emotions and influenced by mass psychology. The current situation may drag on for years and prices may continue to explode; or they may collapse tomorrow.
This article describes some aspects that you should not close your eyes to. It should outrage and shake you awake, if you permanently think only optimistically. Because the higher you rise, the harder you fall and a possible Bitcoin collapse or the bursting of a bubble in the stock market should always be taken into account by investors. Especially in situations like today.
If you read my blog, you would think that I am a bitcoin disciple. While I still have fractions of Bitcoin, I am not at all convinced of its current value. As described in other posts, I find the blockchain fascinating and I think the value of this technology is priceless. But does that also mean that Bitcoin is priceless?
I see the current market something like this:
The illustration of the bubble is my own creation. Logos on the pins: Tesla, NFT (Non-Fungible Tokens like Crypto Punks), Bitcoin, Gamestop, Dogecoin, Tether, Shiba Inu Cion, Evergrande Real Estate Company, XRP (Ripple).
But let’s start at the beginning.
In the beginning was a speculative bubble
In the past, mankind has already inflated and burst various speculative bubbles. Starting with the tulip mania in 17th century in Holland to the dotcom bubble in 2000 and the real estate bubble in 2007, the stock market has made many people enormously rich and driven even more into poverty. These experiences have made it possible to divide the anatomy and life cycle of such a bubble into the following five phases.
Based on the current situation, I have chosen a representation of the Bitcoin price, with possible development in the future with the case of a bubble bursting. In modeled graphs there is no dip in the middle. This drop of the price in the middle of the year is part of my interpretation in the chapter about my forecast at the end of the article.
Individual investors discover a new guiding idea or technology, which brings a fresh view on existing problems and promises a revolutionary change. These key ideas could be as follows in today’s context:
- «Electric cars against climate change»
- «Decentralized currency versus a governed currency»
- «Currency with limited number to finally end inflation»
- «Reduction of fees for monetary transactions»
- «Artificial intelligence for the full optimization of work processes and the simplification of our everyday life»
Experienced investors recognize the potential of undervalued companies and technologies and start investing on a large scale. News of the substantial gains spreads and the media begins to report on them. The fear of missing out (FOMO) leads to more entrants.
The substantial profits lead to euphoria and inexperienced investors jump in. Whether a bank employee, construction worker, software engineer or hairdresser; all start making investments. Many investors even take out loans to maximize their investments. Traditional valuation methods no longer receive attention because «this time everything is different». Analysts are using new methods of valuing companies to justify the high prices.
Experts start to sell their shares, which leads to an initial drop in the share price. Inexperienced investors, in turn, see this as a buying opportunity. But prices continue to fall and borrowers get into financial distress, forcing them to sell. This further selling brings the market to its knees. Bad news fuels the price plunge.
The asset class becomes a no-go for investors and the price drops to a minimal level. Inexperienced investors who rode the wave will keep their hands off the stock market in the future due to the negative experience. The downturn affects the real economy and is often followed by a recession.
Bitcoin: a new paradigm
Before we can even talk about a possible Bitcoin collapse, it is important to look at how it all began. Because a speculative bubble does not form without a reason. A guiding idea, or paradigm, exists at its origin every time.
Bitcoin still has teething problems, such as its immense power consumption. However, the blockchain of the currency needs it to maintain its integrity. Furthermore, it is simply not possible to use the currency as a means of payment. If you buy a sports car today with 1 BTC, you can only buy a toaster tomorrow with the same amount – or vice versa. Bitcoin’s teething problems have already been neatly solved by various other cryptocurrencies. But due to the popularity of the parent currency, these are receiving less attention.
The solution to many problems
Contrary to the disadvantages, Bitcoin nevertheless offers more advantages from today’s perspective. The digital currency and its blockchain function completely democratically. Everybody can propose a new code. If then at least 50% of all miners install the code on their mining computers, the new algorithm is considered accepted.
Especially with the limited number of 21 million BTC, the technology hits a nerve. The Corona crisis led central banks to print money en masse to prop up the economy. Consequently, we will probably suffer from its effects, and massive inflation is to be expected. Bitcoin provides healing for such action, because it is not possible to circulate more than the set cap.
Despite globalization, the effort for international transactions is stuck in the Stone Age. Bitcoin or other cryptocurrencies promise to remedy this situation as well. A transaction thus costs only a fraction of conventional transaction means.
Investors had discovered these advantages. After Musk’s tweets about the cryptocurrency, the boom finally swept over into euphoria.
Who is the biggest fool in the country?
A speculative bubble forms when the traded price of one or more assets does not correspond to their fundamental / intrinsic value. The discrepancy arises when investors imitate other people such as neighbors, family members and friends. Often these acquaintances have made quick money and brag about their (still unrealized) gains. Consequently, more people get into the investments, which pushes the price further up. The price change makes the newcomers feel vindicated, who then invest even more money. In addition, further newcomers are acquired consciously or unconsciously. A herd instinct arises in which individuals act in a socially driven manner and rely less on their own perceptions.
Investors who do not know exactly what the company does or what the cryptocurrency even means, act much more emotionally driven. Since they made their investment only on the basis of recommendations and experiences of others, they act only on the basis of external information and influences even after the investment is made. However, they have no idea what the real value of the share or the company is. Evil tongues may claim that they do not really care. The inexperienced investors assume that they will find another person who will buy the overpriced asset from them at an even higher price. This type of trading is based on the Greater Fool theory. Each investor assumes that there will be a greater fool willing to pay even more for the asset.
If investors buy an asset merely with this in mind, Elon Musk may end up coughing once and either the entire cryptocurrency market or the Tesla stock price will be shaken up: Hello speculative bubble.
Elon Musk and his Twitter escapades
Musk has frequently made headlines because the Tesla or even the Bitcoin price was changed enormously after some of his tweets. That is why he is repeatedly accused of market manipulation. Whether Elon Musk manipulates the market on purpose is not part of this article. However, I would like to show how much money he moves through such small, meaningless information.
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Musk’s latest «coughing»
Since Elon Musk does not draw a salary, but only holds shares, among others, he does not pay any taxes. Yes, the richest man in the world pays no income taxes 🤯. Taxes are incurred for him only when he sells his securities. But now this poor guy is kind enough to offer to sell 10% of his shares so that he can finally pay taxes on the liquidated securities, how gracious 🙏🏻. And that’s even at an all-time high. He initiated a vote on Twitter about the action and thus let us participate in the decision – man of honor. (Sarcasm off)
Much is made lately of unrealized gains being a means of tax avoidance, so I propose selling 10% of my Tesla stock.— Elon Musk (@elonmusk) November 6, 2021
Do you support this?
The assumption is that Musk has to pay taxes anyway because of stock options. And for paying these taxes he needs cash. Here you can read an article from Forbes, which describes this aspect in detail: Why Elon Musk May Want To Sell 10% Of His Tesla Stock—And Why He May Have To
Musk submitted the tweet on a Saturday. That is, on a day when the stock markets were closed. As a result, the share price fell by 5% in pre-market trading. The share price then, as expected, suffered losses in the days that followed.
It has always been the case that statements by influential people have moved the markets. But this has never been as extreme as it is today. Elon Musk in particular has the opportunity to change the Bitcoin price massively into the positive or negative via social media with a single word.
Thoughts of a fool leading to the bitcoin collapse
What do you think goes through investors’ minds when they decide to dump the stock based on a statement like this made by Musk?
- «The statement indicates a foreseeable significant change in the company’s strategy, which could lead to a drop in sales. I prefer to sell the stock before the company loses value.»
- «Selling so many shares will cause the share price to fall. In addition, many investors will sell their assets because of Musk’s statement. I’d rather sell now before I take a bigger loss.»
Statement 1 refers to the company value or the fundamental value of the share. The second statement, in turn, refers only to the share price itself. Since Musk’s tweet does not refer to the company’s performance at all, I have to assume that the sellers in this specific example are acting with the attitude from statement 2. They prefer to sell their shares because they probably got in earlier and have the opportunity to find a greater fool who will still buy the share from them at a good price.
And what other fool is jumping on the bandwagon?
Besides the sellers who want to save themselves from the price slide, there are buyers who are willing to buy the shares from them. So what do you think is going through the minds of these «greater» fools who get in at $980 and $920 after the price drops?
- «Now I finally have the opportunity to get into the undervalued company.»
- «The price was already 20% higher once and it will certainly exceed this value again.»
The same patterns can be seen in both statements. Statement 1 refers to the fundamental value and statement 2 only to the share price itself.
The more people end up falling for the Greater Fool theory, the more they inflate the bubble. And if they didn’t make their investment based on a conviction in value and company or technology, they won’t be convinced to find a greater fool in the event of bad news and a significant price slide.
Bitcoin and the astrology of the stockbrokers
In these times of euphoria, one increasingly comes across articles that predict immense price jumps. For example, an article from the swiss news portal watson.ch (german): Chart-Analyst: «Ich glaube, dass Bitcoin auf 90’000 Dollar steigt.» (Chart analyst: «I think bitcoin will go to $90,000.»)
In the article, a chart analyst describes which Bitcoin price he expects based on the previous course. The most dangerous thing about it is that the expert makes the analysis completely detached from any fundamental value. The article encourages inexperienced investors to enter the high-risk asset class before the price actually reaches $90,000 as «predicted».
Reading through the comments, one experiences entertainment and horror at the same time. Sarkasmusdetektor has inspired me accordingly for the title of this chapter.
However, the majority of commenters continue to fuel the euphoria. One user writes that $90,000 will only be a joke one day. The other predicts a value of 1 million US dollars in 5-6 years. Victims of the Greater Fool theory at its best.
This behavior shows what kind of herd instinct we are in. Both the commentators and the «experts» who spout such nonsense are getting each other worked up. I don’t rule out at all that the Bitcoin collapse will come later and the currency will reach a value of $90,000 first. We are too much in this euphoric phase. But I would love to get answers from the parties to the following questions.
- What benefit to Bitcoin does this value represent?
- Where does Pacman think the value of 1 million US dollars will come from?
- Does Pacman even understand what he is buying?
If the answers simply boil down to the value going up because surely «more people will buy cryptocurrencies», then that confirms my thesis. And I dare to doubt that the answers would be different.
What is the fundamental value of Bitcoin?
However, after my boastful statements and the Spongebob meme, I now have to point out why I don’t think the digital currency will reach $1 million in value in the next few years, and that a Bitcoin collapse is more realistic for now.
I always stress the importance of looking at fundamental value, and that it becomes a problem when investors trade an asset above its value. This is why the million dollar question arises: What is the real value of 1 BTC?
Certainly, there is no one who can really capture this value accurately. But to get to the bottom of it, let’s summarize the advantages of the digital currency once again.
- Bitcoin’s algorithm is democratically chosen.
- Due to the limited number inflation is not possible.
- The underlying blockchain is decentralized and independent of banks.
- Transaction fees are minimized.
Upon closer examination, one realizes that these points are primarily positive characteristics for a currency and not necessarily for a store of value. A currency should enable trade, facilitate transactions and support the economy.
And yet, there are various other advantages that make Bitcoin attractive as an investment as well. I have written a detailed report about this: The Real Value of Bitcoin: Between Hype and Utility
Bitcoin vs. Gold
One could argue that it is precisely the resistance to inflation that makes Bitcoin a value investment. That is why experts often compare the cryptocurrency with gold.
I by no means rule out the possibility that Bitcoin or another cryptocurrency may one day achieve a status similar to that of gold. Ultimately, an object has the value it receives from the people. The significant difference, however, is that the acceptance and value of gold evolved over centuries. Gold and its value has thus become ingrained in our culture and our thinking. We encounter it in everyday life, in jewelry, smartphones and computers. And finally, it was originally only a means of payment. The problem with Bitcoin is that investors want to skip a massive step in this development.
Thus my opinion on the million dollar question is, that Bitcoin is massively overvalued and should first establish itself as a normal currency before we can talk about a gold status.
The bitcoin collapse and the end of an era
Often the bubble bursts with an inconspicuous event such as the bankruptcy of a company. The first insiders then sell their shares to save themselves. Others see the resulting slide in the share price as an opportunity to get on the train at a reasonable price. Unfortunately, the final destination of this train does not look so bright. The good news turns more and more into bad news and the euphoria turns into panic and disgust over the following months.
If you think you can ride the wave now and will be able to sell fast enough then: Forget it, retail investors don’t stand a chance. Emotions are too much in the way. When the price drops a bit, everyone thinks: «It will recover again». And we resist selling at a lower price. So we hope for recovery while the price keeps dropping. And if you even have the chance to realize what’s happening, you’re in the middle of it.
The search for the needle in the haystack
Figuring out which prick of the needle will burst the bubble is akin to looking for a needle in a haystack. In my opinion, there are some developments to keep an eye on.
The specter of inflation is haunting us. Especially this month, we keep hearing that the U.S. Federal Reserve might raise interest rates. Inflation would mean that investors would have to pull the previously cheap money out of the market, which would lead to a price correction.
Contrary to inflation, however, I see the risk for a Bitcoin collapse initially much more with the elephant in China: Evergrande. The second largest real estate company in China is deep in debt with 300 billion US dollars. For comparison: Lehman Brothers, which is considered the cause of the real estate crisis in 2007, had a debt mountain of about 600 billion US dollars.
Tether + Evergrande = Bitcoin collapse
The stablecoin Tether can be considered the blood of the whole crypto market. Due to its property of always fairly accurately reflecting a value of $1, the stablecoin is suitable as an intermediate currency.
Thereby, investors can trade Bitcoin and other cryptocurrencies against Tether and invest the USDT received elsewhere in cryptocurrency products. The goal is to not leave the cryptocosmos or blockchain when switching and thus save fees. At the moment, Tether’s market capitalization ranks 4th behind Bitcoin, Ethereum and Binance Coin.
However, the 24-hour trading volume makes it obvious why it embodies the «blood» of the cryptocosmos: Approximately $68 billion has been traded by investors in Tether over the past 24 hours. That is about 2.5 times the volume of the second-ranked currency Bitcoin.
Binance, the heart of the whole cryptocosmos, is pumping the Tether blood straight into its arteries. The trading platform has done a lot to make the stablecoin so established in the first place.
And what is the problem with Tether?
Tether has increasingly made negative headlines in the past. Originally, in 2014, Tether had described the coverage of the stablecoin on its website (tether.to) as follows.
This statement means that for every USDT, one US dollar is deposited and the currency is thus 100% backed. Unfortunately, the state of New York found out that the stablecoin was only 74% backed. As a result, New York settled with Tether for a fine of $18 million. In addition, the state mandated that Tether deliver quarterly reports on their coverage. Subsequent reports, however, have been relatively shady.
In the meantime, Tether has adjusted its coverage, which the website now describes as follows.
The statement indicates that Tether is only minimally covered by cash. Larger parts of the coverage are other assets, as well as loans, which Tether grants to companies. The loans are in the billions of dollars. And before Evergrande was so deep in the crisis, Tether had stated that they were granting loans to various Chinese companies. After the bad news about Evergrande emerged, Tether reacted quickly and, without anyone asking, claimed that they had not issued any bonds to Evergrande.
Alex Welch, spokesman for Tether
One article describes this fact with the statement: «This is a bit like serving a houseguest a sandwich and loudly assuring them that it is absolutely NOT made from diseased horsemeat.» – Evergrande and China’s Looming Risk to Tether
How is Tether supposed to cause the Bitcoin collapse?
Actually, it’s relatively simple. Let’s assume that Tether really does have debtors in China and, in the worst case, has even extended loans to Evergrande. If Evergrande were to fall and trigger a real estate crisis in China, Tether’s demise would probably be sealed.
It cannot be assumed that the Chinese companies would ever repay the bonds worth billions. The lack of coverage would cause Tether to lose its value, as there would likely be panic selling of the stablecoin if investors got wind of this fact. And a massive sale would cause the price of the original $1 currency to plummet.
And the demise of the most traded cryptocurrency would accordingly lead to a Bitcoin collapse.
- The Tether controversy, explained (Article, published: 2021/08/16)
- Tether Denies Holding Evergrande’s Commercial Paper as Reserve for Stablecoin USDT (Article, published: 2021/09/15)
- Evergrande and China’s Looming Risk to Tether (Article, published 2021/09/17)
- BEWARE!!! Binance & Tether Will Pop The Bitcoin Bubble! (Youtube Video, published: 2021/10/12)
- China’s Evergrande crisis could drag down Tether and other cryptocurrencies: CNBC After Hours (Video on CNBC, published: 2021/09/21)
Bitcoin collapse: My forecast
Granted, the last paragraph consists of the words «would» and «would have». But that shows that it’s not at all clear whether Tether will collapse. My opinion, on the other hand, is clear: If Tether doesn’t bring about the Bitcoin collapse, another needle will.
I am aware that many experts give their opinions for a possible market development. And at the risk of making a complete fool of myself with my statement, I dare to do it anyway. As the whole price development of the last years is based on a lot of emotions, my forecast is also just a feeling, which is based on the facts described above. Although I think that such a statement should be superfluous, I emphasize here again that I exclude any liability for losses, which someone makes on the basis of these statements (Do your own research!).
The two phases until the abhorrence
I expect a massive price correction next year in 2022. Usually, this happens in two phases. As described above, investors often see an initial correction as an opportunity to get in cheaply once again – inexperienced newcomers who want to get into the Greater Fool game. This behavior drives the price up in the meantime, which other investors see as an opportunity. Because they missed the first price correction, they can still get rid of their assets at a slightly higher price. Gradually, the investors lose their appetite and the prices plunge further down. However, this Bitcoin collapse will probably not happen within a few days, but will last for weeks or months. In the overall view, as in the following chart, a drop over months looks then like a crash.
As a comparison, let’s look at the NASDAQ index during the Dotcom bubble (1994 – 2005) and the Bitcoin price up to today’s date.
The following chart shows the Bitcoin price from 2015 to today, November 2021. A first correction has already arrived. Namely, the price plunged massively when China banned Bitcoin mining. I cannot predict whether this will be the aforementioned dip, or whether the price will shoot up again. However, there is a certain similarity between the two curves.
To make sure that you don’t label me as an astrologer of the stock market, I have to note that this comparison alone is of course not meaningful. As already mentioned, it is possible that the price will still reach the $90,000 mark based on the chart analyst.
Bitcoin collapse by 90%
For Bitcoin, I estimate a possible price loss of 80% to 90%. What sounds extremely drastic has actually already happened. Between December 2017 and December 2018, the Bitcoin price suffered a loss of 85%.
Dogecoin and other shitcoins minus 99.99%
What started out funny will end sadly. Originally, I found the whole thing entertaining as well. But Dogecoin is designed in such a way that it can’t even hold its value. Every minute, 10,000 pieces of the shitcoin are pumped into the system with no cap, which equates to an approximate inflation of 5%. If Bitcoin were to fall, such useless coins would certainly be the first pawns.
Gamestop minus 80%
Gamestop makes my heart bleed a little. As already mentioned in my article Short Selling? Long Buying? Finally a Simple Explanation about the Gamestop short squeeze, I found the actions of the Reddit users incredibly powerful. Unfortunately, the fight became more hype and the price stayed at the high level. And that even after the big hedge funds liquidated their short positions.
Considering that a Gamestop share had a value of $10 before the short squeeze and is now at $225, one sees great potential downside. Presumably, the share is also extremely above its fundamental value.
My further strategy despite a likely Bitcoin collapse
About two months ago, I was talking to a 60-year-old friend. She asked me how she can sell her cryptocurrency again. She had bought it on Coinbase a few months ago and now wants to realize her profit of about 50%. I didn’t even know how she had managed to do that. Anyway, I went straight home after that and sold about 50% of my cryptocurrency holdings. In researching for this article, I then came across a quote that reminded me of this experience.
In 1929, the great stock market crash occurred.
Translated from german: https://hauskauf-blog.de/die-5-phasen-einer-spekulationsblase
In the weeks that followed, I continued feathering my own nest. Since one should always have a plan B, I will probably never sell everything. In addition, I will continue to try out various trading strategies and publish them in this blog. The timing of the Bitcoin collapse is too unclear for me to sit down and twiddle my thumbs right now. I am avoiding Tether where possible and trying to switch to other stablecoins like USDC and BUSD.
And so investing becomes like dancing with the devil. You never know when he will be gracious and when he will stab you in the back. But you should be prepared for both.