Bitcoin Revisited: Why I am Still Bearish

The Case for Shorting Bitcoin

Rising Carry Cost

Bitcoin’s carry cost has risen sharply over the last year as the yields on US 10-year treasuries shot ever higher. However, while yields have risen by over 340 basis points since July 2020, Bitcoin has also appreciated by 102%. All else being equal a rise in carry cost should lead to a lower price. This is one reason that supports a price correction going forward. Moreover, yields may go higher.

Going back to Bridgewater’s view of sticky inflation going forward, yields on risk-free assets are expected to remain high if not climb even higher. The Federal Reserve has also said that they are willing to keep rates higher for longer to bring inflation down to its target of 2%.

The only conceivable scenario where the Fed eases rates this year is if the market enters a deep recession. Goldman Sachs believes this scenario is unlikely, moreover, even if the economy is hit with a big recession, it is just another catalyst for Bitcoin prices to nosedive, as it had during the covid-19 crash in early 2020.

Waning Retail Interest

“The successful investor tries to beat the gun by estimating what investment situations are most susceptible to public castle-building and then buying before the crowd.”

- Burton Malkiel (A Random Walk Down Wallstreet)

The castle where Bitcoin’s value has been built is crumbling. The value of Bitcoin is heavily influenced by retail interest and thus its price momentum (Exhibit 7). 

We see that not only are the Bitcoin price and Google search interest positively correlated, but the trend in Google search interest also tends to lead to the trend in price. The search interest spiked before Bitcoin’s rally in November 2020. When it dropped in July last year, Bitcoin’s price followed suit three months later. The same could be observed in the rally of 2019. Therefore, if we were to believe this relationship to hold going forward, the price should begin to fall as the search interest has already started to wane. 

Gloomy Macroeconomics Going Forward

Rising inflation and interest rates have hit businesses and consumers hard. US housing affordability is currently lower than they were in the GFC. Many economists think a US recession in 2023 or 2024 is likely (Exhibit 8). Moreover, as Bridgewater has elucidated, wage growth would have to be suppressed to bring inflation down to 2%. Tellingly, real disposable income has already begun to fall (Exhibit 9). 

Regulations Ramping Up Around the World

Regulation has already begun to tighten in the past few years, but they expected to go further and faster due to the numerous crypto debacles last year. Below is a timeline of material crypto regulations over the past few years:

Late 2021: China blanket ban crypto mining and trading

Dec 2022: Citing the FTX collapse, the Canadian Securities Administrators — an umbrella group of securities regulators across Canada — banned crypto leverage and margin trading to protect investors.

Reacting to the FTX collapse, the U.K.’s HM Treasury issued guidelines for the Financial Conduct Authority to monitor the operations and advertising of crypto companies in the country. 

Bitcoin Offers Little to No Value Long Term

I believe that Bitcoin has zero value because it neither serves as a medium of exchange nor a store of value, nor does it generate cash flow. My views are closely aligned with those shared by Nassim Nicholas Taleb which he elaborated on in this whitepaper. This paper shows that Bitcoin is not a safe haven currency, does not solve agency issues concerning payments but instead creates more issues, is not a payment system, is not a digital currency, and is not similar to gold at all. 

He shared that:

“the fundamental flaw and contradiction at the base of most cryptocurrencies are, as we saw, that the originators, miners, and maintainers of the system currently make their money from the inflation of their currencies rather than just from the volume of underlying transactions in them.”

It is obvious that most retail buyers of Bitcoin are buying it for speculative reasons, not because they believe in the future of global payments by examining the top posts in the r/Bitcoin subreddit.

Three out of the top five posts celebrate the rise in Bitcoin value. One celebrates Tesla’s adoption of Bitcoin, however, a few months after the posts, Tesla stopped accepting Bitcoin payments citing concerns about Bitcoin’s carbon footprint.  The last one exposes the community’s ignorance which is not a good sign.

With retail investors holding an increasing percentage of bitcoin relative to total supply, (about 17% according to recent public blockchain data curated by analytics firm Glassnode) the ignorance of retail investors and the growing lack of interest could potentially lead to a decline in the cryptocurrency's popularity and eventual demise.

Why it is not possible for me to take on a short position

The only assessable vehicle that allows me to take on a short position on Bitcoin without requiring me to go to the futures market is the ProShares Short Bitcoin Strategy ETF (BITI). However, its value is not inverse that of Bitcoin because it sells Bitcoin futures instead and it aims to generate the inverse of Bitcoin’s day change. BITI actually dropped along with Bitcoin in late 2022 (Exhibit 11). Given its past performance it is clearly a no go. 

Yet it is also not possible for me to trade Bitcoin futures as one CME Bitcoin Future has a margin requirement of $133,000. Even CME’s Micro Bitcoin Futures with the contract size of 0.1 BTC ($22411 as of 5 Mar. 23) and Margin requirement of $2500+ is too big of a sizing for me.