I’ve always said that bitcoin’s true use-case for investors was as a speculative barometer, whose price is a pure function of risk-taking appetite tied to the amount of liquidity in markets, and the viral but disastrously misinformed notion of never-ending government stimulus.
Today, with bitcoin trading as a worse-performing version of the Nasdaq 100, it’s no longer a theory. It is mathematical truth. It’s message is clear: risk assets are holding on for dear life. If bitcoin breaks down, so will stocks, but the best stocks have a chance to come back. If bitcoin breaks the line that connects its higher-lows from the past 18 months, I think it’s toast.
It makes perfect sense that bitcoin would be one of the last Covid bubbles to pop as the Federal Reserve tightens the economy. SPACs, cloud stocks, Netflix
Bitcoin is tethered to a multitude of myths, of which everyone has their personal favorite. But money talks louder. The 30-day correlation between bitcoin and the Nasdaq is currently 0.92 and has been getting tighter the more hawkish the Fed gets:
Bitcoin is offering no portfolio diversification, doing the opposite of gold (which is up on the year), and losing more than the stock market since their respective peaks. As the highest-beta risk asset available to investors, it went up more than everything else during the Covid stimulus era, and a violation of its uptrend will make it painfully clear to HODLrs that they’ve been sold a lie.
Bitcoin was never supposed to get to this level. It was fizzling out in 2018 when the Fed was barely tightening and couldn’t make new highs until policymakers dumped the Covid rescue package onto the market, injecting enormous amounts of cash and seemingly corroborating the most important crypto myth that central banks exist purely to pump asset prices. That myth has been unraveling for a year: bonds figured it out first, as they usually do, and now stocks are too. Crypto is the slowest to come to terms with reality and will pay the harshest price for doing so.
We’ve had global sanctions, geopolitical upheaval, the hottest inflation in a generation, and a bitcoin ETF. There is nothing left to the story but the end. If bitcoin breaks that almost two-year long support line, the first stop will be $30,000, which will likely provide a bounce. The long-term technical target is more obviously a return to its breakout point at $20,000. But if we get there, it means Elon Musk and Michael Saylor will both be down on their corporate bitcoin investments. When a cult’s prophets are proven wrong, sentiment can sour fast. There may be support levels below $20,000, but getting to that level would be so damaging to the bitcoin narrative that it will likely be irreparable. More likely, a crash now would begin a descent that eventually tests the lows from 2018 where there was some decent equilibrium for almost five months (around $3,000).
If the break doesn’t happen, I’ve misunderstood the driving forces of this asset. As I’ve always maintained, if bitcoin can rally in a rising-rate environment, I’ll drop my bearish bias. But so far, it’s playing out precisely as expected.