This is What the Bottom for Bitcoin Looks Like Right Now

I'm sorry.

Photo by Kanchanara on Unsplash

I failed you as a financial literacy writer.

There was one risk to Bitcoin and Ethereum that I never talked about: “leverage investing.”

Trading with leverage is using borrowed funds from an exchange to invest with. If you buy with leverage, you are using borrowed funds to put on a larger position in the hopes of exponential gains. If you sell, you are selling the borrowed funds in hopes of buying back later at a lower price and pocketing the difference.

Leverage isn’t all bad, but too much of it across a market can be very dangerous.

Unfortunately, the crypto markets are rife with leverage.

The stock and crypto markets will break inflation

There’s a saying about leverage taught to me by financial analyst Michael Gayed, “Overconfidence leads to leverage, leverage leads to crashes.”

Trading with leverage is like driving with the pedal to the metal while it’s raining outside. It’s only safe if the economy is close to ideal conditions. If the entire system is levered then everything is at risk.

So, when you have people treating investing like video games —with stocks like GameStop, Dogecoin, and AMC taking off last year—we should have known that 1) There was too much money in the system and inflation was coming 2) The markets were building a house of cards based entirely on leverage.

When you take out leverage there’s something called being “margin called” meaning if your trade falls too far everything is sold and you now have to pay the exchange back.

Being “margin called” is why people kill themselves in investing.

Bybit was a famous crypto-leverage investing website where you could leverage a trade 1-to-25. This meant for every dollar you provide you get $25 back. With $4,000 you were already trading with $100,000.

It sounds like a dream come true… unless the markets crashed of course and you owed Bybit $100,000.

Why crypto is fucked

1-to-25 leverage trading in crypto wasn’t the norm.

1-to-100 was.

This kind of absurd leverage trading is the primary reason why crypto is so volatile.

“You get this crowd factor — everybody’s liquidation price tends to be somewhat near everyone else’s-- when you hit that, all of these automatic sell orders come in, and the price just cascades down,” Brian Kelly, CEO of BKCM talking about crypto leverage trading.

Cryptocurrency, even Bitcoin and Ethereum, is filled with a lot of uneducated speculation that is levering up way beyond their means.

It doesn’t mean that blockchain, Bitcoin, and Ethereum are dead.

But it does mean that crypto will always be hurt most when crashes and recessions come. The crypto markets aren’t built on stable money—heck even the stablecoins aren’t built on stable money—and this is what scares me above all.

Bitcoin is not going to solve everything tomorrow. Crypto is a long-term play.

This is what a lot of investors, especially those investing with leverage, don’t seem to understand. Until then many of us need to learn how to assess risk properly. Bitcoin and Ethereum are still new assets finding their value. They are the safest in the space, but nothing is crypto guaranteed. This is why you need to do your own research in this space. If not, you will get fucked.

Things will get worse

“The best thing to do right now is to go through pain. This is decades of a mismanaged economy. We decided that debt didn’t matter, we kept a lot of zombie companies around, and it resulted in all the wrong kinds of behavior for what you want to see in an efficient economy.”

—Michael Gayed in an interview with Real Vision Finance

We have to go through economic pain in the short term.

There’s no other way around this. The craziest narrative I’ve seen online is that this recession hasn’t even really started yet—and they’re right. Here’s why:

• Even as the stock/crypto markets deflate supply chain disruptions and the war in Ukraine will cause inflation to still run hot

• A food catastrophe is coming and the US is going to see less stock on the shelves, while other countries outright starve

• The cost of living will continue to go through the roof and consumer behavior will change. Already fewer people are deciding to go out to the movies due to prioritizing other purchases. Consumer behavior will continue to change in ways we cannot expect.

The ethos of American politicians is to promise more, and even if taxes are increased they aren’t used to pay down prior debts. More taxes is always just a justification to take on more debt.

This has to change. Or else we’ll soon learn that democracy and capitalism cannot coexist.

Here are some books about crypto you should read:

• “Out of the Ether: The Amazing Story of Ethereum and the $55 Million Heist that Almost Destroyed It All” by Matthew Leising

• Falling Down the Bitcoin Rabbit-Hole by Gigi

• The Infinite Machine by Camila Russo