Bitcoin had been down about 25% from it’s all-time highs reached earlier this year before falling another 7% so far today. Today’s drop started Sunday evening NY time and is largely being attributed to higher interest rates in Japan, large and leveraged sellers, and the possibility the US Federal Reserve won’t cut rates this month. A few quick bullet points on the situation:
1) Bitcoin has always been volatile
Bitcoin has had multiple 90% drawdowns. Here at DKI, we bought Bitcoin at $15k, enjoyed the run up to $64k, and stayed calm as it fell more than 75% to end up back at $15k. I just bought more. My thesis on Bitcoin is simple. First, every major government is going to overspend and continue to destroy the purchasing power of their increasingly worthless fiat currencies. Second, increasing governmental and institutional adoption will create buying pressure. Both of these are still in effect and will be in effect for years to come. Both of these reasons benefit from the fixed-supply nature of Bitcoin combined with a dis-inflationary issuance schedule.
If you can stay calm and ignore the volatility, the reasons to own Bitcoin are unchanged. That doesn’t mean the dollar price of Bitcoin can’t go much lower; but rather, that if you have time and patience, you should do very well long-term.
2) But Long-Term Holders Are Selling!
I’ll admit that it can be a little jarring to see that long-term holders have been doing much of the selling recently. Before we judge, let’s put ourselves in their shoes. Let’s imagine that you had the foresight to buy 10,000 BTC back when it was trading at $1. Many of these large initial holders may not have even paid the dollar and just mined it themselves back when you could do it with a good CPU or a decent GPU. Then, that stake becomes worth $1B. It’s life-changing multi-generational money (even after taxes). My negative opinion on the dollar and all fiat has been expressed hundreds of times on this blog and in dozens of interviews. But let’s be honest: Wouldn’t we all sell at least some of our Bitcoin position and ensure we were financially secure for the rest of our lives? In their position, I’d take a few hundred million off the table.
In the end, this is a good thing as it reduces concentration of the maximum 21MM coins. Most of us would trade some short-term volatility for more long-term diversification of holders.
3) Recent Big Drawdowns Have Been at Night
Every one of the recent big declines have come at night in the US and often during illiquid Sunday nights. While Bitcoin is an asset that trades 24 hours a day, there is more volume when NY is open for business. Much of that is due to the massive Bitcoin ETFs approved in April of last year. I don’t know why so many of these big sales take place during the less-liquid hours, but it does explain some of the recent downward volatility.
4) The System is Deleveraging
From what I’ve read, a lot of the recent sales were caused by too much leverage in the system. People borrow money to buy Bitcoin. When the price of Bitcoin falls, the collateral of these borrowers becomes worth less. They either need to come up with more cash or sell some Bitcoin to meet margin calls. When they sell, it causes the price of Bitcoin to fall creating more forced selling. I’m not against leverage, but it does create additional volatility because selling creates the need for more selling. Having some of this leverage cleared out of the system isn’t a bad thing for us either.
It can be difficult to see positions swing by as much as Bitcoin does. I’ve spent decades practicing calm, but lately, it’s not always fun looking at my daily returns. Still, having feelings doesn’t create a need to act on them. If Bitcoin falls more, I’ll buy more. I don’t think there is anything wrong with the system. Fiat debasement is being driven by Congressional overspending. So, while lower rates from the Fed would help our Bitcoin positions today, it doesn’t really matter to the thesis. The dollar will continue to lose purchasing power and fear of that loss will continue to drive people (including massive pension funds) to gold and Bitcoin.
All Bitcoin hodlers have seen these big drawdowns before. I have no reason to sell now.
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