Bitcoin (BTC-USD) has had an incredible run lately, up as much as six-fold since late 2020. Until recently, the cryptocurrency had continued reaching new highs, topping $60,000 in recent days before retreating to today’s price of a little more than $56,000.
With more and more mainstream adoption, bulls suggested that Bitcoin could be on a steady path toward $100,000 in the coming months.
However, that upward trajectory has now come into question. Over the weekend, BTC abruptly plunged, falling from $60,000 to as low as $52,000 in the span of a few hours.
The altcoins, by and large, fared even worse, with many dropping 20% or more on Saturday. This could just be a garden-variety correction, to be sure. However, there are key signs that this could be the start of something far worse for crypto investors.
Coinbase Direct Listing and the Future of Bitcoin
Last week, Coinbase (NASDAQ:COIN) completed its direct listing. Unlike most initial public offerings (IPOs), a direct listing generally comes with no lock-up restriction. This allows insiders to sell their stock immediately, instead of having to wait for a few months.
Coinbase’s insiders took advantage of this, dumping $4.6 billion of stock (13 million shares) in the first two days of trading. That’s not a great look in terms of their outlook for crypto prices going forward.
More broadly, it brings back echoes of December 2017. That was when bitcoin ran up to $20,000 for the first time. Why did Bitcoin roll over then? Two reasons. One is that low-quality altcoins took over, and the second is that commodities exchanges launched Bitcoin futures.
By allowing Bitcoin trading (and in particular short selling) on a regulated exchange, it made it easy for insiders to cash out. People owning BTC could sell futures on a regulated exchange, get dollars out easily, and lower their exposure. They in fact immediately did that, and BTC subsequently crashed.
The Coindesk listing could be a similar moment. You see knowledgeable insiders finally have the opportunity to turn paper wealth into cold hard cash. And they took advantage of it to a stunning degree.
Don’t be surprised if the COIN stock listing marks a clear top to crypto sentiment once we have the benefit of hindsight.
Dogecoin: Beware of the Meme
This is, on the face of it, absurd. Dogecoin wasn’t ever intended to have value as an operating functional crypto-token. It’s inherently a greater fool coin.
Dogecoin’s market value is almost entirely due to business celebrities such as Elon Musk and Mark Cuban saying: “Wouldn’t it be funny if this silly dog coin went up a lot?”
While Dogecoin in and of itself is not a big deal, it highlights a greater problem with the crypto ecosystem. Much of the underlying trading is simply due to pump and dump behavior and momentum.
It doesn’t matter whether an altcoin has a strong project roadmap or whether it’s a joke token, people are simply buying because the price is going up. That’s behavior you find in speculative manias rather than real durable growth stories.
Bitcoin ran into trouble in late 2017 when people started pumping a bunch of low-quality altcoins to the moon. Once those deflated, it caused a backlash against crypto as a whole and made a lot of novice traders bitter.
Make no mistake, when the general public gets burned on something silly like Dogecoin, they’ll pull their capital out of crypto altogether, thus harming the ecosystem.
As if the crypto community’s self-inflicted issues weren’t enough, now it has major government crackdowns to worry about. For one, the New York Attorney General recently hit crypto’s main “stablecoin,” Tether (CCC:USDT) with a scathing judgment.
“[Crypto brokerage] Bitfinex and Tether recklessly and unlawfully covered up massive financial losses to keep their scheme going and protect their bottom lines,” she said. “Tether’s claims that its virtual currency was fully backed by U.S. dollars at all times was a lie. These companies obscured the true risk investors faced and were operated by unlicensed and unregulated individuals and entities dealing in the darkest corners of the financial system.”
There are no minced words here. The attorney general made it clear. Tether engaged in bold, reckless criminal activity. And it’s not as if Tether has gone away.
In fact, Tether remains the oxygen of the crypto landscape. The majority of trades in crypto are to sell BTC or another coin to receive Tether, not dollars. Yet, what is Tether worth? Potentially zero, given the lack of transparency, lack of funding to back its currency and the operators’ history of dubious behavior.
The attorney general banned Tether from doing business in New York. Bulls shrugged it off; many use virtual private networks (VPNs) to trade crypto from unregulated domains such as Cyprus anyway. Still, losing a major financial capital is never great news.
However, that’s not all. Rumors surfaced Saturday that the Treasury Department is investigating money laundering using crypto. The U.S. also recently cracked down on Russian crypto addresses linked to election interference.
Overseas, the government of India is planning to ban all crypto ownership or trading. Other countries such as Turkey appear to be heading in a similar direction.
Some people are going to buy and hold crypto forever. In that case, the upcoming Bitcoin volatility may just be expected for a roller coaster asset such as this one.
However, for traders, there’s no reason to stay long Bitcoin here. This is arguably the single biggest constellation of red flags we’ve seen for crypto since late 2017.
Bitcoin has had a huge run already, and now a bunch of bearish catalysts have aligned at once. We should expect a sharp correction in the near term and the potential start of a brutal new bear market for Bitcoin like the one we saw in 2018.
On the date of publication, Ian Bezek did not have (either directly or indirectly) any positions in the securities mentioned in this article.
Ian Bezek has written more than 1,000 articles for InvestorPlace.com and Seeking Alpha. He also worked as a Junior Analyst for Kerrisdale Capital, a $300 million New York City-based hedge fund. You can reach him on Twitter at @irbezek.