Imagine you’re vacationing at your remote cabin in the woods. And a blizzard strikes without warning.
You’re snowed in with no way out.
Worse, you’ve used up all your fuel. There’s no firewood left. And the temperature’s rapidly dropping.
The only thing left to burn is an antique chair given to you by your late grandmother.
Maybe the chair is worth a lot of money. But the sentimental value is priceless to you.
You have a choice: Burn the chair for warmth… or freeze to death.
If you burn the chair, you lose something of great value to you. But you survive to fight another day.
I know it’s a terrifying scenario. But it illustrates exactly what’s happening in the crypto market right now…
A Different Catalyst Is Pushing Crypto Lower
How does this harrowing story of survival apply to crypto?
It’s similar to the choice many bitcoin holders have faced over the past month.
And they’re choosing to burn the furniture…
For instance, last week, we saw investors dump more than 550,000 bitcoin below $20,000 per coin.
To put that in context, 550,000 bitcoin trading at $20,000 would be worth $11 billion. Seven months ago, that same number of bitcoin was worth about $31.3 billion.
These people are bitcoin believers. They didn’t want to sell… But they had to. Their survival depended on it.
That makes this sell-off different from any I’ve seen before.
Unlike previous bitcoin sell-offs, the current sell-off has nothing to do with the validity of the bitcoin.
It has nothing to do with government bans, exchange hacks, or forks in the system.
Instead, what we’re seeing is a greed-driven leveraged liquidation event.
What do I mean by that?
When bitcoin experienced massive drops in the past, it was because people feared the underlying asset itself wouldn’t survive. For example…
In 2014, it was the implosion of Mt. Gox.
Mt. Gox was one of the first major bitcoin exchanges. In 2013, it handled over 70% of all worldwide bitcoin transactions. In February 2014, hackers stole 850,000 bitcoin from the exchange. Mt. Gox declared bankruptcy.
People feared that bitcoin would hit the market all at once and destroy its value. And it did take a big hit. BTC plunged from a high of $1,400 to a low of $175 after the hack.
In 2017, China threatened to ban bitcoin.
Bitcoin fell 21% off the news. Since then, it’s rebounded by as much as 1,694%.
In 2018, it was the so-called Nerd War.
That’s when two factions of bitcoin developers waged a battle over which direction the cryptocurrency should go.
The schism led to several forks of the bitcoin blockchain… and new rivals like Bitcoin Cash (BCH) and Bitcoin Unlimited (BTU) emerged.
There was a massive loss of confidence in the market. And we saw bitcoin drop from as high as $6,434 to as low as $5,358.
The current sell-off is much different from those in the past. Investors aren’t worried about bitcoin going extinct.
Instead, some are letting greed get the best of them…
A Subprime Crypto Crisis
First, you need to understand that the collapse in bitcoin and Ethereum’s prices have nothing to do with the underlying protocols.
No one’s saying there’s a problem with bitcoin or Ethereum’s code.
Or with their use cases.
Or with mining bitcoin or Ethereum’s future supply.
The problem is that BTC and ETH are widely used as collateral for loans across the entire crypto ecosystem… Think about it this way:
In traditional finance, Wall Street firms hold U.S. Treasuries and borrow against them because they’re widely considered the most secure assets in all of finance.
That is why Treasuries are the monetary base layer for the entire traditional financial system.
In the crypto world, bitcoin and Ethereum fill the same role.
This is great for the adoption and staying power of these tokens…
But if people borrow too much money against even the best collateral and use it to buy the equivalent of subprime assets… it opens the door to massive margin call selling later.
Remember the liquidity crisis we went through during the Great Financial Crisis between ’08 and ’09?
Leading up to it, when the market peaked in 2007, the S&P 500 price-to-earnings (P/E) ratio was only 17 times earnings… Just a hair above its average P/E ratio of 15. Nothing outrageous or overvalued.
But people got too greedy. There was too much leverage in the system… And much of it involved bad assets like subprime loans.
When the subprime loans unraveled firms, it forced firms to sell their premier assets to cover their margin calls. They didn’t want to sell their blue-chip stocks and Treasuries – but they had no choice.
They either had to meet the margin call or face total financial ruin.
This is exactly what’s happening in crypto right now.
Greedy traders, hedge funds, and centralized lending firms used their BTC and ETH positions to secure enormous loans to buy low-quality crypto assets.
They used 10–20 times leverage on their positions… They used this leverage to buy the functional equivalent of subprime assets.
In this case, it was highly speculative decentralized finance projects offering outrageous yields upwards of 100%.
As these subpar assets collapsed, it set off a cascading series of margin calls. So just like in 2008–09, leveraged traders had to either come up with more collateral (money) or sell out of their positions.
The problem was and still is there was no more money to be had. And so that’s why we’ve seen so many forced liquidations of BTC and ETH.
They made the same mistake Wall Street made during the Great Financial Crisis when firms pledged blue-chip assets to buy high-yielding subprime assets.
Buy More on Weakness or Do Nothing… But Don’t Sell
To my knowledge, this is the first time we’ve seen a crypto crash of this magnitude caused by something other than people losing faith in bitcoin or Ethereum.
The closest instance was the pandemic flash crash we saw in March 2020. That’s when BTC dropped 50% overnight due to liquidations.
That was a much smaller event that bitcoin bounced back from in just 47 days. This is much larger and much more widespread.
In the March 2020 crash, crypto saw over $700 million in liquidations… This June, crypto saw over $1 billion in liquidations as Bitcoin sank below the $25,000 level.
Let me repeat: We’re facing an overleveraged greed problem, not a problem with the underlying protocols of bitcoin or Ethereum.
That means this sell-off is temporary and not the start of a systemic loss of faith in these assets.
The Great Financial Crisis taught us that an overleveraged market eventually self-corrects. But it does not happen overnight.
That’s why I do not believe we have seen the last of these overleveraged blowups…
Just like in 2008 – when the market would rally and then sell off again when another firm blew up – I believe we’ll continue to see more fallout in the crypto market.
As I write, the market is rallying, and that’s great to see; but the pain isn’t over. Be prepared for more liquidations and price drops to come.
You cannot panic if that happens.
Instead, you need to view it as an opportunity…
I have buy orders stacked up far beneath the current market prices… And I’ve been using the recent lows to buy more bitcoin and Ether.
If you’re not able to do that, that’s OK… You don’t have to do anything at all.
Don’t let the price action scare you into panic selling your premier assets like BTC and ETH.
If you find yourself getting swayed, turn off the computer. Go out and enjoy your summer…
Because unlike those greedy overleveraged buyers, you don’t need to burn grandma’s furniture to stay alive…
If you’ve followed our strategy of investing small amounts you can afford to lose, then you have enough firewood to weather this storm.
We’ve seen these types of violent sell-offs before… And just like before, bitcoin, Ethereum, and the broad market will recover to new all-time highs.
We just have to give it time.
Let the Game Come to You!