Bitcoin: From Harmless Sideshow to Global Threat
In the beginning, Bitcoin was a harmless sideshow for computer geeks, drug dealers, and hardcore libertarians.
Fourteen years later, it’s a threat to the global financial system.
You may not see it that way. Most people don’t.
Most see Bitcoin, worth nearly $400 billion, as just a silly fake internet money that people buy with the hopes of selling later for a profit.
But it may well be the second shoe to drop as the global economic picture continues to unravel.
And it’s taking inspiration from an unlikely, but painfully familiar event… The 2008 Bear Stearns blowup, and the financial crisis and recession that followed.
However, I’m not writing today to tell you to run away from the coming crisis and stuff cash in your mattress.
Call me crazy, but I’m telling you to run toward it.
Because I believe it’s the best trading opportunity we’ll see for years.
Is Bitcoin the New Bear Stearns?
Bear Stearns caused so much chaos in 2008 for the same reason crypto has caused chaos in 2022: Fractional reserve lending.
If you’re not familiar, here’s how that works…
You probably deposit your extra cash at the bank. But you should know that all your cash isn’t actually at the bank.
Banks assume all their depositors won’t demand their money back at the same time. So, they loan most of it out and keep a small amount in reserve.
Generally, bankers hold less than 10% of cash in reserve. That lets them make tons of money lending out the remaining 90+%.
Stockbrokers and fund managers do the same. They lend out the securities we own, assuming most people won’t try to liquidate their portfolios at once.
It’s not hard to understand why this model doesn’t always work. It assumes that there will never be a mass desire to withdraw assets.
This works fine in bull markets. But it almost always breaks in bear markets. And when it breaks, it breaks spectacularly.
In 2008, it helped push the global economy off a cliff. Firms like Bear Stearns had lent out 97% of the money they had. So a 3.5% move against them was catastrophic. Other firms had similar problems. Many of them lost client funds.
By 2010, there were new regulations put on financial firms to prevent that problem. So far, they seem to have helped.
But flying under the radar at the same time… was Bitcoin.
Hardly anyone was thinking about Bitcoin then, especially not the government.
It was just two years old. Its market cap was just over $1 million. No one worried it could someday cause a financial crisis in the exact same way.
But now, it’s ready to.
As Bitcoin grew, early adopters made tons of money. Late arrivals saw this, and also wanted to make tons of money.
So they brought the ideas of borrowing and leverage to the crypto markets. These ideas sound new and different because the lending is handled by computers instead of people, but they’re ultimately the same as what brought down Bear Stearns.
“Smart contracts eliminate risk!” proponents argued. “Crypto always goes up so there won’t be margin calls!” claimed bulls.
They were wrong. In the past few months, smart contracts failed to protect capital as Bitcoin prices plunged. Lenders blew up. And about $1 trillion in wealth has evaporated.
Now, we need to analyze Bitcoin the way we viewed subprime mortgages in 2008. We need to focus on risks. And recent events show risks are high.
The latest Bitcoin crash awaited traders as they woke up on August 19. They discovered Bitcoin fell about 9% overnight.
A look at intraday data showed the crash occurred about 11:45 p.m. Pacific time. The chart below shows 15-minute bars.
(Click here to view larger image.)
Bitcoin fell from $22,770 to $21,240 in 15 minutes, starting at 11:45 p.m. Pacific. That would be just before markets opened in Europe. It was about 4 p.m. in South Korea.
Based on the time, it’s likely the sellers were in Asia. And the sell-off matches recent news about Three Arrows Capital, a Singapore-based hedge fund in bankruptcy.
3AC owes an estimated $3.5 billion to 27 different companies, including Blockchain.com and other industry giants. It’s likely that this big move in Bitcoin was a forced liquidation of a large position. And more liquidations are very likely coming.
In 2008, Bear Stearns led the collapse of the subprime market. The firm failed in March. Lehman Brothers failed about six months later.
The recent crash tells us that the crisis in crypto isn’t over. It’s likely Three Arrows Capital was the Bear Stearns moment for crypto. Crypto’s Lehman Brothers is lurking out there, ready to kick the market while it’s down.
Bargain hunters will be tempted by the low prices to come. But traders understand low prices can go lower.
This might all sound like a signal to sell whatever crypto you have and never look back.
I endorse that first idea, but not the second.
These massive swings in Bitcoin’s price are the asset’s only positive quality. It makes trading it absurdly profitable, if you know how to trade it well.
And I’ve devised a system that trades it so well, it beat the long-term performance by a factor of 5 while slashing the risk by 80%.
As Bitcoin continues to make violent moves on forced liquidations and panic-buying from the believers, we can capture huge profits from these moves without even touching the stuff.
Tomorrow at 1 p.m. ET, I’m rebroadcasting my recent presentation on how to profit on Bitcoin. You’ll learn everything you need to know to profit even if it falls 50% from here.
You can access the presentation at this link.
I hope you decide to join. It could be the most important piece of research I’ve ever put out.
And if it saves even one person from getting blown up, it’s worth every second of work I put into it.
Michael Carr, CMT, CFTe
Editor, True Options Masters