Actually Shorting bitcoin

On March 5th, I published a blog post titled “Bitcoin Revisited: Why I am Still Bearish,” in which I made a case for shorting Bitcoin. Despite my prediction, the cryptocurrency has since risen by approximately 30%. However, I ultimately refrained from shorting Bitcoin due to the poor track record of the only investment vehicle available: the ProShares Short Bitcoin Strategy ETF. This fund failed to rise even when Bitcoin declined. For more information, please refer to my original post.

Recent developments have led me to reconsider my stance and open a short position in Bitcoin. Despite the uncertain nature of the investment vehicle, I now believe that the potential upside outweighs the risks.

Scenarios

1. US economy remains robust overall, inflation remains sticky, rates keep rising: The US economy remains robust overall, with persistent inflation and rising interest rates. St. Louis Federal Reserve President James Bullard has hinted at this possibility. 

Probability: 40% (self-assigned)

2. A hard landing for the US economy and equities, as forecasted by Morgan Stanley’s US chief equity strategist Mike Wilson. He predicts a downturn for US stocks and a drop of over 20% in the S&P 500 later this year. 

Probability: 45% (self-assigned)

3. An unlikely soft landing, as suggested by US Treasury Secretary Janet Yellen. She believes that supply chain bottlenecks and other factors that have pushed up inflation are beginning to resolve.

Probability: 15% (self-assigned)

Bitcoin may decline in value under scenarios 1 and 2, both of which are more likely than scenario 3. However, it may rise in value if scenario 3 occurs. 

In scenario 1, where the US economy and labor markets remain robust and inflation persists, the Federal Reserve may keep interest rates high for longer. Bitcoin does not fare well in high-interest-rate environments, as higher bond yields increase the opportunity cost of holding a non-yielding asset. Additionally, higher US bond yields may cause the US Dollar to appreciate, and Bitcoin has been negatively correlated with the US Dollar. 

In scenario 2, where there is a market downturn, Bitcoin also fares poorly. It plunged along with equity markets during drawdowns and panic periods such as the COVID-19 pandemic in March 2020, S&P 500’s 20% drawdown in early 2022, and the panic-inducing bank runs last month. During these events, the US Dollar (DXY Index) spiked, indicating that investors prefer to hold USD rather than Bitcoin during market turmoil. This suggests that Bitcoin is a risk asset and may decline in value during market downturns. Given the limited upside potential for US equities (my view) and the potential for further banking issues due to high-interest rates, Bitcoin may face challenges in the future.

In the unlikely event of a soft landing as depicted in scenario 3, Bitcoin may rally due to a depreciating US Dollar, rising equities, and falling interest rates. However, given the 11 consecutive months of worsening ISM manufacturing PMI figures, tight labour market conditions, and downgraded earnings estimates, this scenario is highly unlikely. In conclusion, scenarios 1 and 2 are more probable and would both lead to a decline in Bitcoin’s value. As a result, I have already entered short positions in Bitcoin.

BTC (white) vs. US 10Y Yield (yellow) negative correlation

BTC (white) vs. USD DXY (green) negative correlation vs. S&P 500 (blue)

Things I will be watching

April 22, Conference Board's Leading Economic Indicators, a stronger-than-expected reading could cause market participants to expect higher rates for longer, given that labour market stays intact. While a excessively weak reading could stoke concerns of an impending recession. Significant surprises on both sides could create downside pressures on Bitcoin.

April 21, S&P Global US Manufacturing PMI, I expect the figure to disappoint, which would lead to further recession fears which could cause Bitcoin to retreat further.

10-year yield, higher yield could lead to lower Bitcoin.