Let’s Just Say He’s Bearish on Cryptocurrency

Last week, our Chief Research Officer, Justice Clark Litle, offered his strong conviction about the future of Bitcoin and other cryptocurrencies in Decoder.

Let’s take a look at what he had to say…

We will say a lot more about crypto soon – but for now, we will say our level of bearishness in respect to crypto, Bitcoin included, is off the charts. In our view, it looks highly likely that all crypto assets will be annihilated by the asteroid that is coming. It will be a mass extinction event. Bitcoin will survive after another massive crash. We don’t know what else will.

Justice always tells us how he feels.

And that’s precisely what you want out of a financial expert.

Today, let’s take a look at the state of Bitcoin and other cryptocurrencies.

A shakeout is coming. But with every impending crash comes a significant opportunity.

Bitcoin Has Been Cut in Half

There are plenty of people who believe that Bitcoin is the currency of the future. I explained this week that the Winklevoss brothers believe that the technology behind cryptocurrency will dramatically alter the perception of money.

However, Bitcoin flew way too close to the sun yet again this year. The world’s largest cryptocurrency by market cap pushed just shy of $65,000 in April 2021.

Since then, the value has been cut by roughly 50%. Earlier this week, Bitcoin fell under $30,000 for the first time since January 2021.

This is a reminder that investors using TradeSmith’s tools would have been informed about how to use a trailing stop on Bitcoin. TradeSmith would have told you that Bitcoin stopped out at $50,381.89 and recommended that you sell your holdings. This would have protected the bulk of your gains from the massive rally that transpired at the start of the year.

What’s been pulling Bitcoin down from record highs?

There hasn’t been a lot of good news. First, Elon Musk is no longer pumping up Dogecoin and the rest of the crypto universe. Remember that Tesla bought a large amount of Bitcoin earlier this year, and then sold near the height of the mania.

Overbought conditions fueled a sell-off. Remember, Bitcoin gained more than 1,000% from the bottom of March 2020. Profit taking was inevitable.

We’re also witnessing additional crackdowns by regulators. For example, New Jersey’s Attorney General recently filed a cease and desist order against a cryptocurrency services firm called BlockFi. Last week, the company’s CEO confirmed that the state of New Jersey wants the company to stop providing interest-bearing accounts for cryptocurrency.

The final thing to consider is the bull and bear sentiment in the broader financial markets. We have seen a strong decline in market momentum, and Monday’s sell-off was the worst one-day performance for the Dow Jones since October 2020.

China Continues to Rattle Cryptocurrency

The other big driver of Bitcoin’s sell-off has been the Chinese government.

The nation is once again cracking down on cryptocurrency trading and mining. China has been the top destination for cryptocurrency mining, but large-scale operations have essentially shut down. In addition, criticism over energy consumption in mining and the environmental impact has also generated negative headlines across the globe.

China has been far more aggressive in its regulations around cryptocurrency than the U.S. government. For example, China’s central bank has ordered domestic financial and fintech firms not to provide any cryptocurrency services to their customers.

This trend is not anything new. China initially banned cryptocurrency exchanges in 2017 from operating within its borders. This had pushed most operators offshore into unregulated territory. And any exchanges that had operated in Hong Kong are now facing additional pressure after China’s ongoing crackdown on the region.

Bans of cryptocurrency exchanges have increasingly become more popular than regulatory oversight from global governments. The United Kingdom banned Binance, the world’s biggest cryptocurrency exchange, last month. Japan, Thailand, and several other nations have issued warnings around Binance and remain concerned about potential illegal activity on the platform.

Sell-off or Rebound

As Justice predicts, we’re going to see a continued sell-off in Bitcoin and other cryptocurrencies. Worthless digital currencies like Dogecoin might collapse and disappear forever. But Bitcoin – given its massive reach and influence – should endure.

With that in mind, I’ve been paying very close attention to what is happening in the options markets. This week, we saw a significant level of buying out-of-the-money put options on Bitcoin at strike prices of $20,000 and $22,000 for Dec. 31, 2021. Remember, an investor will buy a put to obtain the right, but not the obligation, to sell Bitcoin should it fall under those strike prices.

So, if Bitcoin falls to $15,000, that put owner would have the right to sell Bitcoin at the strike prices of $20,000 or $22,000 (depending on the contract).

If you’re sitting on the sidelines right now wondering when to buy Bitcoin, the answer isn’t right now. As I noted, Crypto by TradeSmith told us to sell BTC/USD just above $50,000 due to the trailing stop.

We will be looking for Bitcoin to bottom out and then show positive momentum before reentering the position. It’s very important to follow the rules. Whether you’re a fan of Bitcoin or other projects like Litecoin or Polkadot, be sure to use our signals to determine buy and sell opportunities.