The case for an imminent and massive Bitcoin price collapse

On the other side of the hype, traders have good reason to fear the impending Bitcoin sell-off.

Bitcoin has broken US$10,000 for the first time this year and is currently changing hands at about $10,100. Excluding brief dips above and below the threshold, this is Bitcoin's fourth foray above $10,000.

But it's tougher to say whether this will be the last. Maybe, after a brief moment of exuberance, it will sink back out of sight below $10,000, never to return. Every previous journey above $10,000 has been followed by a return trip, and there are certainly plenty of people who expect each return journey to be the last.

Or maybe, as some are suggesting, this is going to be the start of a massive rush to the six-figure range.

Bitcoin just hit $10,000.

I still think that Bitcoin will hit $100,000 by end of December 2021.

Fixed supply. Increasing demand. Time will tell. #Bitcoin

— Pomp 🌪 (@APompliano) February 9, 2020

Of course, there have also been plenty of bullish cheerleaders every other time Bitcoin cracked $10,000, and they haven't been right either.

Will history repeat, or is this time different? What if anything makes this trip above $10,000 different to the previous ones? And if Bitcoin is about to go to the moon for real, why is there such a compelling case for an imminent price drop?

The world is not anymore the way it used to be, mmh mmh, no no no." - Carlos Matos from Bitconnect

The number of unique Bitcoin addresses making outgoing transactions within a 24-hour period isn't doing anything especially exciting at the moment. It's still significantly lower than when Bitcoin hit 2019 highs of around $14,000 in July 2019, and it's much lower than it was when Bitcoin hit its all-time highs at the end of 2017.

But even though it's not doing anything right now, observations from the 2017 and 2019 peaks still show one potential reason why Bitcoin prices could collapse back under $10,000.

The graph below shows Bitcoin addresses with outgoing transactions as a dotted line, compared to Bitcoin prices as the solid line.

Source

It's not especially exciting, but one trend it does highlight is how many tens of thousands of addresses spin to life and start making outgoing transactions whenever prices experience a solid run.

It's tempting to interpret that activity as new people entering the space, but anecdotally, new entrants tend not to make many outgoing transactions and so wouldn't register too much in these numbers. Plus, the chart only shows unique addresses rather than just transaction count. So the same address making many transactions, as you would get from an exchange wallet filling new customer orders, shouldn't make a huge difference to those numbers either.

As such, we can speculate that all the outgoing-transaction activity is from people opening their Bitcoin wallets to sell hard and fast whenever prices get nice and high. There are billions of dollars floating around in thousands of old Bitcoin addresses, so there's a lot of potential selling pressure looming like a tidal wave over the market at any given time.

But wait I'm gonna go to the banks, I'm gonna get my Bitcoins, I'm gonna actually put it into dollars, here they are right on the table! - Carlos Matos

It looks quite a lot like those tidal waves emerge and sink the markets whenever Bitcoin prices experience a big rise. It's not just your old-school Silk Road drug dealer money either. Bitcoin miners have a considerable incentive to sell as much as they can, or need to, whenever a good opportunity presents itself.

This is especially true if they've been mining at a loss in the hopes of a price rise and have debts to pay off. For example, we know that the Hut8 Bitcoin mining corporation is borrowing millions at 9.85% per annum. But we really only know that because it's publicly listed, while most other mining outfits are much more opaque.

Whenever miners take on debt loads to finance their mining, that's money that's theoretically going to be repaid from selling Bitcoin at a later date. Intuitively, it seems likely that other miners are taking on debt as well.

Think about it from their perspective: if you believe Bitcoin prices will rise 20% in the coming year, it makes sense to take on loans at 10% if it means you don't have to sell your Bitcoin right now and can instead sell at a higher price later.

And if you wake up every day thinking Bitcoin will be worth more tomorrow than today, that's a good reason not to sell.

Of course, the entire business of Bitcoin mining is contingent on a belief that Bitcoin prices will continue rising. As such, it's reasonable to assume that there are large bags and a huge amount of debt floating around the mining industry and that mining firms (and many others) will be trying to time the top of the market before dumping their Bitcoin.

The impending halving may have exacerbated this. Not only is it traditionally believed to herald a price rise, but it also spells uncertainty for most miners, which could mean they've recently been accumulating larger Bitcoin bags than usual.

And in the end, even if prices don't rise, outstanding debts mean many miners will have to sell their holdings anyway.

One way or another, it has to enter the market, and that's a lot of money for the markets to absorb. At prices of $10,100, miners are collectively earning an average of more than $18 million per day, or about half a billion dollars a month. All that money is potential selling pressure that's building up day in and day out.

Can the market bear this much selling pressure? Participants will of course (hopefully) be going through OTC desks instead of just slapping down a $20 million market sell order, but that pressure always makes its way to the open market one way or another.

How much selling pressure can the markets bear, then?

While Bitcoin's liquidity, as measured by the bid and ask spread, stagnated quite hard at the tail end of 2019, we can say with hindsight and more recent data from Bitcoinity that it seems to have improved in the new year. The bid-ask spreads vary by exchange, but Coinbase, Bitfinex and Kraken have all seen their spreads tighten substantially since last year.

So that's good news. The bad news is it's still not enough, suggests one Bitcoin whale and self-identified starving dolphin.

I'm all in for a good old BTC parabolic but I'd like to cash out in the end. But it's not possible if the price is pumped up by overleveraged players in the face of low liquidity and weak fiat inflow. That's why I think this attempt to reignite retail FOMO is irresponsible. https://t.co/d4a5KrPFJ1

— Joe007 [I identify as starving dolphin] (@J0E007) February 9, 2020

To recap, one can argue that there's a huge wave of selling pressure waiting in the wings, and once it all hits the market, there simply won't be enough buyers to catch it. The result is that once everyone agrees this particular run has gone as far as it can, it will all collapse extremely fast.

This is arguably what happened with Bitcoin's $20,000 peak, and then with its later $14,000 peak of 2019. The sheer speed and viciousness of the collapse in both of those cases is a testament to Bitcoin's liquidity issues, and there's every reason to believe that the same thing will happen the next time Bitcoin is believed to have peaked.

And now we're at $10,000. Someone who's of the opinion that Bitcoin is mostly driven by manipulation, and that the name of the game is to lure in retail speculators and then dump on them, the pattern would look like subsequently lower highs as each artificial pump gets less and less effective.

In that case, $10,000 would be within the expected downward trend of each subsequent pump, and it would mean that this could indeed be the last time Bitcoin is graced with a five-figure price tag. In that case, Bitcoin could be around its 2020 peak already.

No one is saying that's exactly what's happening, but the liquidity issues are real, and manipulation is a major part of the cryptocurrency markets and its impact probably shouldn't be discounted. Regardless of whether it's coordinated, there are still good reasons to fear the sell-off.

Many technical analysts also find this rise unconvincing, pointing at a lack of conviction in the market movements.

But there are also arguments on the flip side and no shortage of optimistic-sounding arguments from people pointing to signs of real investor activity as the driving force behind this breakout.

Choose your poison wisely.

What am I gonna do?" - Carlos Matos

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Disclosure: The author holds BNB and BTC at the time of writing.

Picture: Shutterstock