Bitcoin Flat After 2nd Best News In Its History
What This Report Covers
Why we’ll never have another bull cycle quite like the last one
Another crypto company collapsed—and there are still a few more potential shoes left to drop
What the ugly state of the crypto venture capital and startup fundraising environment means for crypto’s future
Read time: 6 minutes.
Summary
Technicals: Neutral. Bitcoin’s weekly chart is still in an uptrend that started in January (bullish), however, it’s close to resistance levels and may have failed to break out above the April high (bearish).
Fundamentals: Bearish. The BlackRock ETF news is obviously bullish, but there’s some macro context that the crypto perma-bulls are leaving out. That’s the main topic of today’s report.
Sentiment: Bearish. Normie sentiment is already disinterested and bearish enough for me to be bullish, but crypto native sentiment is still too bullish based on the assumption that there will be another bull cycle just like prior cycles.
The BlackRock ETF Might Not Be Enough
BlackRock filing for a Bitcoin ETF was arguably the second best fundamental news event in the history of crypto (the best being the historic monetary debasement and economic stimulus to offset the catastrophic effects of lockdowns in 2020-21). However, since the initial pump, Bitcoin has been flat for the past three weeks.
To promote the ETF announcement, BlackRock's CEO, Larry Fink, went on national television and said that Bitcoin is a hedge against currency devaluation.
However, the US is not devaluing its currency now like it was in 2020-21. The Fed raised interest rates from 0 to 5% and is expected to keep hiking into 2024. It’s almost impossible to predict when/if it will lowering rates and printing money again.
Put another way, we don't have the problems that Bitcoin is suited to solve for right now. We might again in the future, but not right now.
There also isn’t as much artificial demand for crypto now as there was then.
Crypto banks (e.g. BlockFi, Gemini Earn/Genesis) lent their customers’ assets to hedge fund Three Arrows Capital (3AC) who piled into the Grayscale Bitcoin Trust (GBTC) arbitrage trade, which caused Grayscale to need to buy more spot Bitcoin.
3AC then pledged GBTC shares as collateral and bought more crypto. There are allegations that 3AC pledged the same collateral to multiple parties, which, if true, may be fraudulent.
Too many price forecast models are over fit to this once in a life time scenario. Crypto perma-bulls are assuming that there will be another cycle just like prior cycles. Maybe there will be, but the contrarian in me is skeptical when there’s so much conviction and consensus on one outlook.
The Prime Trust Collapse (And Other Potential Shoes Left to Drop)
Another crypto company collapsed. Prime Trust, an institutional custody provider allegedly lost the private keys to customers’ crypto, then used other customers’ funds in an attempt to buy and replace the lost crypto. It’s unknown if this was a legitimate mistake followed by bad decision making or just straight up intentional fraud.
It turns out that crypto custody is a very hard problem to solve. Proof of reserves is not enough. You need proof of keys. And even then, you still need to trust someone.
I started this newsletter because I wanted to help normies be smarter about investing in crypto. But not only has the normie market for crypto completely disappeared, I don't know if I can feel good about encouraging anyone to put money into this space. At this point, I don't trust any of crypto services.
There have been so many poorly run services (GBTC, BlockFi), failed experiments (Luna), outright scams (FTX), and grey area combinations of those (Prime Trust, Celsius) that have cost people money. It feels like the industry needs to start over from scratch, rebuild, and come back when the US starts debasing its currency again. That might take five years.
And there are still some potential shoes left to drop:
Digital Currency Group (DCG). Read Ram Ahluwalia’s Twitter thread where he calls out the similarities between DCG and Enron, including overstating risk management practices.
Binance. Multiple key executives have left recently. This is concerning.
Gemini. Can’t be in good shape because of its hole after its Earn program lent to Genesis, who lent to 3AC.
You can self-custody crypto, but people don't want self-custody. It's a pain. And you can still lose your crypto or have it stolen.
It seems like if there’s going to be demand for crypto it will be through big institutions such as BlackRock. However, even an ETF might not be enough to fuel a bull cycle like the last one.
When I first bought Bitcoin in 2015, there was hope that as more people found out about it, they would buy it. However, pretty much everyone who was even remotely likely to buy Bitcoin has now heard about it. Many of them have decided not to buy, or bought during the bull market and then sold because they lost trust in the space.
Is Crypto VC Toast?
The collapses of Prime Trust, FTX, BlockFi, and more, show that crypto venture capitalists funded a lot of shitty startups and didn’t do enough due diligence on their financial controls and risk management. Those startups are now failing.
A new report by Architect Partners shows that crypto M&A deal count and dollar volume is down significantly.
How good can crypto VC returns be given the lack of liquidity events? VCs will likely have a hard time raising their next funds.
Galaxy Research says that venture firms face a tough fundraising environment:
"When combined with the bear market in cryptoasset prices and the fact that many allocators feel burned after the spectacular blowups of several venture-backed companies in 2022, venture investors will find it difficult to raise new funds in 2023."
You can see this in the chart on crypto VC fund count and dollar amount:
Lack of VC money available means less funding for crypto startups which help create demand for crypto. Capital raised by crypto startups in H1 2023 is already down significantly—back to levels not seen since the 2019-20 bear market. The money came during the bull and then it left.
The lack of funding for crypto startups will likely have a negative impact on adoption in the future.
Conclusion
I was bullish after FTX collapsed when Bitcoin crashed to $16K. Now I’m bearish after Bitcoin doubled and the world’s largest asset manager filed for an ETF. Crypto is weird like that.
Bitcoin’s weekly chart still looks fine to me. But once in a while I get conviction based more on fundamentals and sentiment than on technicals.
I don't want to be bearish. I'm still bullish on crypto in the super long-term. I always will be. But I’m not going to run a bear newsletter in the meantime. I’ll pivot this newsletter from crypto to tech stocks unless I see:
More demand for Bitcoin in the price charts (e.g. above $35K)
The US start printing money again
More credible companies in the space