Since the beginning of the year, bitcoin and Ethereum are up 27% and 33%, respectively.
Altcoins like Solana and Avalanche have seen even bigger gains.
The entire crypto market recently crossed over $1 trillion for the first time since November 2022.
By all metrics, it seems the crypto market is finally finding its footing after spending more than a year in a brutal winter.
With all the good news coming from this asset class to start the year, what I’m going to tell you next may come as a surprise – especially from a long-term crypto bull like me.
While the long-term trajectory for bitcoin and crypto assets is very much intact… the short-term picture is a bit murkier.
And while I’m no Debbie Downer, I do want to manage your expectations for this year. I hope I’m wrong, but 2023 will, in all likelihood, continue to be a difficult year for crypto.
After the collapses of the Terra Luna stablecoin, Three Arrows Capital (3AC), Voyager Digital, and Celsius in early 2022, I warned that we’d see more shoes drop in crypto…
That’s exactly what happened.
In November, we witnessed the mother-of-all-implosions when the FTX exchange filed for bankruptcy. More than $30 billion went up in smoke.
These major centralized players’ implosions wiped out $800 billion from the crypto market in 2022.
Some people hope the worst is behind us. But as I always say, “hope” isn’t a strategy.
I rely on clear-eyed research. And my research suggests there’s still contagion left in the system. That means more buying opportunities lie ahead.
The thing to remember about a bear market is that it doesn’t happen all at once… You can get counter-trend bullish rallies that can last for months.
As a long-term holder and massive bull on bitcoin, it’s very pleasant to see prices rise, but I would caution you not to chase prices here.
Here’s why I think we may see even better buying opportunities ahead…
Three Threats Looming Over Crypto
There are three major threats facing crypto right now. If any manifest, we could see prices drop again in the short term.
The first is Grayscale Bitcoin Trust (GBTC).
GBTC allows everyday investors to gain exposure to bitcoin through a traditional investment vehicle that trades on exchanges.
GBTC trades like a closed-end fund. It can trade at a discount or premium to its underlying value.
Normally, GBTC trades at a pretty hefty premium to bitcoin. From its inception in May 2015 to February 2021, GBTC traded at an average premium of about 30–40%.
But recently, GBTC has been trading at an extreme discount to bitcoin… up to 50%.
The Digital Currency Group (DCG) is the parent company of Grayscale Investments, which administers and collects the fees from GBTC.
DCG is also the parent company of Genesis Global Trading, a crypto lending platform.
Genesis had immense exposure to 3AC and Alameda Research, founded by Sam Bankman-Fried, the CEO and founder of FTX. Genesis took in 17,443,644 shares of GBTC and lent money against it to 3AC.
When 3AC went bust, and Genesis tried to sell the GBTC it held as collateral, the discount to NAV on GBTC exploded higher.
According to reports, Genesis owes its creditors $3 billion and is essentially out of business.
My concern is this…
DCG, directly and indirectly, owns approximately 10% of the outstanding shares of GBTC… and DCG assumed $1.65 billion in liabilities from Genesis.
If it’s compelled to pay Genesis’ creditors, it may have to liquidate the entire GBTC trust to unlock the value of its stake and pay off its creditors.
If this scenario happens, it will unleash as many as 643,572 bitcoin onto the market. That’s $13.7 billion in BTC. That would be too big of a supply shock for the market to absorb cleanly.
Long story short, it would crash the price of BTC and lead to an amazing buying opportunity.
Let me be clear. I believe this is a low-probability event. But I want to make you aware it’s a possibility.
The other two threats aren’t as grave as a full-blown liquidation of GBTC. But they could lead to some short-term price weakness.
One is Mt. Gox.
If you’re unfamiliar, Mt. Gox was one of the first major bitcoin exchanges. In 2013, it handled over 70% of all worldwide bitcoin transactions.
But in February 2014, hackers stole 850,000 bitcoin from the exchange, and it declared bankruptcy.
Mt. Gox creditors have waited more than 10 years to get their coins. They were initially to receive repayment on July 31, 2023. But the court administering the assets pushed the repayment date to September 30, 2023.
At some point, the administrator will release those coins. And we’ll see some selling pressure on bitcoin. But the market should be able to tolerate this as it will not be a panic or liquidity-driven sell-off.
Finally, there’s Binance and Tether.
Binance is the world’s largest crypto exchange with a $40 billion market cap, and Tether is the world’s largest stablecoin with a market cap of $66 billion.
The U.S. Department of Justice (DOJ) is investigating Binance for possible money laundering and criminal sanctions violations… but that doesn’t necessarily mean Binance is in trouble.
Almost every major bank in America has found itself on the wrong end of a DOJ investigation.
The DOJ action looks more like a regulatory shakedown. Pay a big fine. Get compliant. And all will be forgiven.
So I’m not so concerned about Binance going under, but I am concerned about their reliance on the stablecoin Tether. It owns $3 billion in Tether.
The problem with Tether is that we have no idea what their coin is backed by… Is it a big fat lie, or are their assets backing it?
No one knows. And if we’ve learned one thing from this bear market, it’s that EVERYONE in the centralized space has lied about what they own, what it’s backed by, and how much leverage they use.
So, why should we extend the benefit of the doubt to Tether?
And what happens to Bitcoin if DCG, Binance, and Tether implode?
I think it’ll handle it fairly well, but don’t be shocked if it falls to the $9,000–12,000 range.
It wouldn’t stay there for very long, though, and I’d be a buyer… But I want to prepare you for the possibility of that outcome.
Is This a Bear Market Trap?
Look, there’s no one more bullish on crypto than me. So I’m not trying to scare you out of this asset class.
I just want you to be aware of several important, highly negative stories that need to work themselves out this year.
That’s why every time bitcoin goes up $1,000 or $2,000, people start screaming, “Oh, it’s a bull market! The bottom’s in!” I come out to manage expectations.
Let me be clear: It’s not a bull market. We’re still in the bear market, and the bottom isn’t in… Not yet.
So don’t let the bear market trap you. If you’re a trader, then enjoy the trading action.
If you’re a “hodler,” continue to hold, dollar cost average, and judiciously buy more on weakness.
In a bear market, you buy on weakness, not strength. You only buy on strength in a bull market. Please remember we are still in a bear market.
Now, there are certain interesting names out there that have been absolutely destroyed… We’re picking through them now, but we’re rational in our position sizing.
My readers have made enormous amounts of money from previous bear markets. And we did it by being rational.
You don’t have to take enormous risks – just $200–500 if you’re a smaller player and $500–1,000 per idea if you’re a bigger player.
If you want to go in small first, you can do $500 now… And if we end up with another shoe dropping, as I’ve outlined above, you can double down and get your next position.
My point is that you don’t need to be a hero here. It’s not necessary.
As far as GBTC goes, my hope – and we all know “hope” isn’t a strategy – is that if it does liquidate, we will at least have the option to take delivery of our coins.
But maybe it doesn’t get that far. Maybe it can raise some money and cut a check. Maybe somebody comes in and buys out GBTC (the actual trust)…
All of that’s up in the air.
At the end of the day, the thing I care about the most is: Are my coins safe? Do I still have an ownership or proxy ownership of my coins?
That’s what I care about the most.
Right now, I believe the coins held in the GBTC trust are safe. They’re custodied by New-York based firm Coinbase.
So I’m trusting in the strength of New York City’s financial regulators – some of the toughest in the world – that the coins are actually there.
Friends, the entire crypto space is still small enough that you don’t have to take massive bets to make massive returns as the markets improve over the next year or so.
So please bear that in mind.
Now isn’t the time to be a hero. Discretion is the better part of valor.
Let’s take it one step at a time until I’m confident we’re on the other side of this bear market.
Let the Game Come to You!
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