Where the current cycle is headed

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Steve Sokolowski
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Where the current cycle is headed

Post by Steve Sokolowski » Fri Dec 18, 2020 4:32 pm

While cryptocurrency's current bull market was arguably proved when the bitcoin price crossed $13,800 a few months ago, I thought that it's still not too late to offer some thoughts on the current cycle.


Corporate buying may affect the downtrend

It seems like every few days there comes another announcement from a corporation that is buying bitcoins. One of the largest buyers was MicroStrategy, a company with a profitable business that decided that buying bitcoins would be more profitable, but there are several others. MicroStrategy obtained money to buy bitcoins by taking on $650m of corporate debt.

Public companies that take out loans to buy cryptocurrency, and even those that list that they are buying cryptocurrency in their legally required disclosures, are less likely to sell their holdings than are individual investors or mutual funds. There are many legal documents required to give notice, and companies have to have boards vote on changes of strategy, and other regulations greatly slow down the process of changing positions.

Therefore, I'm guessing that we may see a reduction in the ferocity of corrections during this cycle. These companies are starting to input more money than individual investors, they don't panic sell like individual investors do, and they don't get margin called on 100x leverage like individual investors do. If I were buying coins (which I don't; the pool only decides when to sell to pay expenses), I don't think that the "wait for a crash" strategy is going to work much this cycle. Rather than pullbacks, it's more likely there will be sudden rises that quickly fall down to a level between the start and the top, and that repeat a month later.


The next cycle, if there is one, will be governments buying

With corporations leading this cycle, the next cycle, if there is one, will involve governments buying in when policymakers realize that they need to allocate some of their treasuries to bitcoins. The dynamics will be similar - it will become risker for the entities (this time corporations, next time governments) to not own coins than to own them.

This idea implies that this is the second-to-last cycle before prices stabilize. If you don't think that governments will buy in, or if (like me) you aren't certain enough to justify losing such a huge amount of money on it, then this is the last cycle worth investing in.


GBTC

The Greyscale Bitcoin Investment Trust (GBTC) is becoming a money-sucking monster that is dramatically accelerating this cycle. It may be one of the reasons why prices are rising more quickly than last time.

One share of the trust started out representing 0.001 bitcoins, but the company takes bitcoins as "maintenance fees" every year, so shares are worth slightly less now. Even so, the trust's share price usually hovers about 20% or 30% above market value. People who can't buy bitcoins directly use the trust to include them in their stock portfolio, and some use the trust to avoid taxes, which are two reasons why GBTC maintains its premium. The government allows the premium to be maintained because it has yet to approve an ETF (and, as I have said repeatedly throughout the years, it will not do so before the stock market itself is based on blockchain technology.)

The fact that the government is unlikely to approve an ETF keeps the premium alive, and because the premium exists, the fund continues to suck in money. People can send bitcoins to the trust at market rate, get shares in return, and then redeem the shares six months later for the premium value. If they take out an equivalent short position against the bitcoin price, they neither gain nor lose money on the bitcoin price's change over those six months. However, they do end up earning the premium value at the end of the period. If you're willing to lock up your money for 6 months, you trust that Greyscale is a reputable company, and you don't believe an ETF will come about in that time, you can earn 30% almost risk-free, or something like 75% APY after compounding. Even if the premium goes down because ETFs are allowed, there will still be some premium, and the premium is not going to drop below zero and cost you money.

As long as the SEC continues to deny ETF applications, and the tax loopholes remain, GBTC is going to be the primary entity responsible for a massive bubble, just like Mt. Gox was with the second 2013 bubble. Its existence is probably already primarily responsible for the price rises to date. There is also an Ethereum Trust and a Litecoin Trust as well that work under similar dynamics.

The interesting part is that it's difficult to see how GBTC ends up causing a crash, because its funds are locked up for 6 months. It just keeps going up and up, or holding stable. It's not like all the investors in GBTC can suddenly withdraw their coins and sell them in a sudden fire sale.


IPOs and companies

Coinbase announced an IPO just recently, but I've never understood why people would invest in IPOs of companies involved in the cryptocurrency industry. The same goes for Square and PayPal, two companies that have been around for a while but have recently allowed people to buy "paper coins" that cannot be transferred out.

Coinbase is hugely dependent on exchange volume for their revenues. History has shown that exchange volume is highly correlated with the price of coins. It makes no sense to add additional risks - like theft, poor management, the diversity issues that caused 5% of its employees to quit - to the risk of cryptocurrency prices falling. Not only that, but stocks have to be managed by a broker, which adds the usual account closure risk from banks, which has happened to me three times.

I'm avoiding these stocks like the coronavirus. One of the conundrums with doing business in this industry is that it often makes more sense to buy coins than to actually do any work. There's no reason to invest in cryptocurrency stocks when coins offer the same reward with no additional risks.


The top

In a previous article, I stated that I was planning an exit during this bubble, when bitcoins were worth $50,000 or $60,000. I chose those price levels because waiting any longer would be equivalent to expecting that the bitcoin price will rise above the entire M1 money supply of the United States, despite bitcoins being accepted by far fewer merchants than dollars are.

However, I've raised my targets this year because the M1 money supply has also changed. In 2020 alone, M1 has risen by 68% - and that's even before the next $900b is paid out in free checks to every American in this next stimulus round. Since M1 is likely to have doubled before the end of this year, that means that the price target should also double. There's just a lot more money around. Since round numbers will have a lot of sell orders, perhaps this bubble reaches $99,000 or so, and I'll be out at $80,000 unless it looks like momentum has stalled before then.


Litecoins

While most of the attention is on bitcoins, our business has been paying employees in cash, so that we can retain more and more blocks of litecoins.

Litecoins are almost humorous because there seems to be a constant air of condescension around them. People say that they aren't used for anything, or that they're "just a copy" of bitcoin, or that their technology is backward.

But they are a cheap and fast way to get money from exchange to exchange if you want to arbitrage, they're the best way to pay people for everyday commerce, the fact that they're just a copy of bitcoin simply means that all the bitcoin software is compatible with litecoin, litecoin blocks are faster, and all the technological development that supposedly makes bitcoin better consists of unnecessary stuff that few are using. Litecoins continue to remain valuable simply because they are there to take load off the bitcoin network.

Yet, while bitcoins have reached an all-time high, litecoins are somehow worth a quarter of their high? The numbers just don't compute. When PayPal offers "paper coin" trading, they will offer four coins - BTC, BCH, ETH, and LTC. Which one of those will be the most attractive to less knowledgeable investors because the lowest price allows them to buy the most coins? And PayPal isn't selling the new networks that some mistakenly will be the biggest winners, like NEO and EOS.

There's far more upside to litecoins than bitcoins. People who say that they are dead are wrong just like the people who said litecoins were dead when they fell from $50 to $2, or from $400 to $20.


Bitcoin Cash

I still don't know what to make of Bitcoin Cash. The coin is clearly superior to bitcoin in almost every way - less complex, cheaper, more reliable, etc. I use the coin all the time to buy stuff, but its ratio to BTC continues the long decline that has been occurring for many years.

It's been said that one should not invest in things he doesn't understand, and there's obviously something I'm missing here. It may be the same thing I was missing as to why there was so much outrage in 2016 that Michael Marquadt split the community over what at the time seemed like an obvious choice to expand the blocksize. There are still Core members who make posts attacking me every time I mention Bitcoin Cash, and the extreme feelings about not expanding the blocksize never made sense to me.

I suspect that the decline in Bitcoin Cash is caused by whatever I'm not understanding about why these people are so insistent about keeping the blocksize small. Until I can get a better comprehension of what market participants see about exactly what is going on here, I'm staying away from Bitcoin Cash. I expect it will go up, just not as much as other coins will.


{b}Negative articles[/b]

I used to think that the presence of any type of mainstream news article was a good way to determine if the top of the cycle was nearing. Recently, I heard a better idea from Jim Cramer one night on CNBC while making dinner. He said that for prices to go up, there need to remain bears to turn into bulls.

Therefore, people who confident in an asset and are looking to buy should look around and listen to how many people are saying negative things about it. People who are saying positive things have often already purchased the asset, while people who are saying negative things have clearly not. The negative people are the source of new money that will raise prices. The price of the asset rises when people change their minds from negative to positive. Therefore, when there are few people remaining on the negative side, there is no more money to come in even if people wanted to, and that's the time to sell.

This time around, I'm going to pay closer attention to some of the most negative people towards cryptocurrencies. Once more and more of those people come around, that's when the cycle is nearing its peak.


Celebrate this time

Since cryptocurrency businesses and owners spend most of their time in a perpetual slump as prices either crash or stagnate, the sixth or quarter of the time that coin prices are actually rising significantly is a time to be cherished and appreciated. Enjoy the time now - next year, we'll be back in the negativity and sadness that always comes when a new cycle begins.
MrDavid1
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Joined: Sat Dec 19, 2020 2:46 pm

Re: Where the current cycle is headed

Post by MrDavid1 » Sat Dec 19, 2020 2:56 pm

You are not missing anything about Bitcoin Cash. Your assessment is correct.

As you pointed out, BCH is basically identical to BTC except it is simpler (no segwit), works in a very straightforward manner (no need to decide to use Lightning), is cheap 24/7 (unlike BTC which is cheap usually for a window of time every 3 days or once a week during bull runs).

Thats it.

Why the price might be depressed is basically as you also mentioned - constant attacks by people who control the major forums of Bitcoin. If Bitcoin Cash was an irrelevant "shit" coin project - why is it under constant attack? Why dont we see the same attack against Bitcoin Gold or Bitcoin Diamond?

It is because Bitcoin Cash is on the right track and can absolutely challenge BTC when the mainstream decides it wants to actually start using cryptocurrencies for payments (as peer to peer cash) instead of hodling and hoping for the next user to pay them more than what they paid in.

One of the reasons often given on why the attacks on Bitcoin Cash is that BCH users claim BCH is Bitcoin. I think BCH will be Bitcoin when the crypto community decides to call it that. The exchanges, the users, etc. This will be reflected in the price when BCH is 10x the price of BTC and has the higher hashrate, etc.

Until then Bitcoin Cash is not Bitcoin - however, Bitcoin Cash definitely is a "better" bitcoin than BTC is.
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Steve Sokolowski
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Re: Where the current cycle is headed

Post by Steve Sokolowski » Sun Dec 20, 2020 6:53 am

MrDavid1 wrote:
Sat Dec 19, 2020 2:56 pm
You are not missing anything about Bitcoin Cash. Your assessment is correct.

As you pointed out, BCH is basically identical to BTC except it is simpler (no segwit), works in a very straightforward manner (no need to decide to use Lightning), is cheap 24/7 (unlike BTC which is cheap usually for a window of time every 3 days or once a week during bull runs).

Thats it.

Why the price might be depressed is basically as you also mentioned - constant attacks by people who control the major forums of Bitcoin. If Bitcoin Cash was an irrelevant "shit" coin project - why is it under constant attack? Why dont we see the same attack against Bitcoin Gold or Bitcoin Diamond?

It is because Bitcoin Cash is on the right track and can absolutely challenge BTC when the mainstream decides it wants to actually start using cryptocurrencies for payments (as peer to peer cash) instead of hodling and hoping for the next user to pay them more than what they paid in.

One of the reasons often given on why the attacks on Bitcoin Cash is that BCH users claim BCH is Bitcoin. I think BCH will be Bitcoin when the crypto community decides to call it that. The exchanges, the users, etc. This will be reflected in the price when BCH is 10x the price of BTC and has the higher hashrate, etc.

Until then Bitcoin Cash is not Bitcoin - however, Bitcoin Cash definitely is a "better" bitcoin than BTC is.
I think what still doesn't make sense to me is why these people are so ridiculously over-the-top in their opposition to Bitcoin Cash. Other than war, I can't recall any other situation where a group of people spends so much time disparaging the other group for something so small that happened years ago.

The Core went their way in 2017, and the Bitcoin Cash Node developers went their own way, and that was that. The reason I suspect I'm missing something is because it just doesn't make sense to me that the Core developers would care about what happens to a project they no longer have anything to do with, and which has arguably lost to them, if you use price as the way to evaluate the two projects. There is so much energy put towards their disagreement that it's almost absurd - why is that?

This reminds me of when you hear something on the news that doesn't quite make sense, like when Trump ordered someone to do something and the reason doesn't seem to match with the order. Then, years later you find that the reason Trump did that was because of something really bad. My observation is that Bitcoin vs. Bitcoin Cash is a similar situation - the given reason for the dispute does not seem to explain all the actions of at least one of the parties.
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