Bitcoin Boom, Bitcoin Bust… Here’s What You Need to Know

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Tuesday was a monumental day in the history of currency.

Yesterday, the Central American nation of El Salvador became the first sovereign state to adopt Bitcoin as “legal tender.”

That’s right. Bitcoin now stands toe-to-toe with the U.S. dollar as one of the nation’s official currencies.

Want to buy a home in El Salvador? Buy a sandwich? Hire a babysitter? Pay your taxes?

Citizens and visitors can use Bitcoin.

This is naturally a bullish development for the world’s largest cryptocurrency by market capitalization and transactions. But does it create a buying opportunity?

Despite the development, Bitcoin fell by nearly 3% before the bell Tuesday morning, signaling a “fade” opportunity for many people looking to sell on the news.

There could be more pain coming.

Why It’s Time to Urge Caution On Bitcoin

As I always say, I prefer to follow technical indicators to identify buying and selling opportunities. The news to me is largely noise. So I start with what the signals say before I dig deeper under the hood.

For four months, Bitcoin has stood squarely in the Red Zone of TradeSmith Finance. That alone is reason for me to exercise extreme caution around the cryptocurrency space. Despite the recent short-term run, BTC has remained in a side-trend. With momentum sideways, it’s very hard to have confidence in a sustained flow of institutional and retail capital into the space.

Without that Green Zone signal, I’m not putting any new capital into the cryptocurrency.

But I will conduct further research to assess the situation.

There are three major storylines that I’m watching around Bitcoin right now. And all of them concern me. Let’s dive into these headlines and explore their future impact on the space.

The El Salvador Head Fake?

The big Bitcoin headline this week is naturally the Bitcoin adoption in El Salvador.

This decision is quite a gamble by the nation’s president, Nayib Bukele.

The 40-year-old populist enjoys widespread support as he aims to reshape an impoverished nation that has experienced a big drop in homicides since he took over.

El Salvador is a nation that generates significant income from remittances. In fact, about 25% of its GDP comes from payments sent from people who work outside its borders. The general thesis is that Bitcoin could cut down on cross-border transaction costs and fuel a boom in foreign investment in Bitcoin mining and the broader economy.

However, there are extreme risks in this effort. First, Bitcoin is historically volatile, so while the nation would benefit from big gains in BTC, it could face disastrous consequences from a significant decline in the price.

Regulatory crackdowns by China and the United States could fuel sharp downturns, which would only hurt El Salvador’s balance sheet. There is plenty of evidence of price drops in the 25% to 30% range…

The nation’s debt is already in junk status.

What’s worse than junk? We could find out.

But there’s another issue at play. What if this move is all a ruse? The Los Angeles Times speculated on Monday that Bitcoin is an effort for Bukele to sidestep the nation’s constitution and seek reelection in 2024. This is all coming as Bukele aims to remove disloyal judges and prosecutors, violate the constitution, and implement antidemocratic practices similar to those of Hugh Chavez in Venezuela.

If that is the case, Bitcoin won’t save the nation. If El Salvador follows Venezuela in any way, it would likely fuel an exodus of capital over time. And it could stain the luster of BTC in the process.

Unlocking the Wallets

While the political winds blow in Central America, a major story slipped under the radar this past weekend. Business Insider profiled a father-son programming team that could have discovered the Holy Grail in Bitcoin.

Chris and Charlie Brooks run a company called Crypto Asset Recovery in New Hampshire.

If the name doesn’t tell you their goal, let me explain.

Since Bitcoin’s inception in 2010, many investors have lost their complete investment in the cryptocurrency because they misplaced or forgot their password to their crypto wallets. Without the password, those coins are lost forever…

According to a CryptoVantage survey of 1,000 American crypto owners, 40% say they have lost their wallet passwords. The average loss: $2,134.

According to Chainalysis, roughly 20% of the 18.5 million existing Bitcoins are not in rotation because users have lost their passwords.

But the Business Insider article suggests that this father and son are on the verge of unlocking upwards of $4.7 billion in lost Bitcoin. They estimate that roughly 68,110 to 92,855 Bitcoin are recoverable. If they continue their research, that figure could increase significantly.

Why does this matter? Because early adopters would likely exit the market once they got their hands back on their lost Bitcoin. Any increase in supply would put pressure on prices. Imagine someone who bought 1,000 Bitcoin for under $20 years ago. They’d be sitting on a fortune.

Now would be the time to cash out. And a wave of supply would hit a market that is already facing sideways momentum. This is a recipe for a downturn.

John Paulson’s Warning

Of course, there’s no bigger argument against Bitcoin than the obvious point that the coin itself has no utility. If you look at the universe of other cryptocurrencies in the world, most have some value as a payment or blockchain technology.

Bitcoin itself doesn’t have a specific function. And this is why famous hedge fund manager John Paulson called Bitcoin a “worthless bubble.”

In a recent interview for “Bloomberg Wealth with David Rubenstein,” Paulson worried about excessive speculation in the crypto space.

Paulson is famous for a massive bet against the housing market during the onset of the Great Financial Crisis. He bet against subprime mortgage bonds and the instruments that sank the economy in 2008-09.

Now he’s worried again about similar speculative activity.

“I would say that cryptocurrencies are a bubble,” he said. “I would describe them as a limited supply of nothing. So to the extent there’s more demand than the limited supply, the price would go up. But to the extent the demand falls, then the price would go down. There’s no intrinsic value to any of the cryptocurrencies except that there’s a limited amount.”

He continued, “Cryptocurrencies, regardless of where they’re trading today, will eventually prove to be worthless. Once the exuberance wears off, or liquidity dries up, they will go to zero. I wouldn’t recommend anyone invest in cryptocurrencies.”

The words were harsh, but they’re reflective of the bearish sentiment that continues to build in this space.

As I noted, I’m listening to what the market is telling me. But I’m sticking with the signals from TradeSmith Finance. With BTC in the Red Zone, I’m steering clear. I recommend that you exercise similar caution right now.

I’ll be back to talk more about a different commodity that is red-hot right now.