BTC = 0 Is A Possibility

My warnings on Tether and cryptocurrencies in general have come to pass. $2-4K was my original downside target but I have now came to the conclusion that 0 is not as implausible as it sounds.

I have always seen bitcoin as a series of bubbles, each built on a new crop of buyers. The most recent buying climax coincided with the crescendo of financial media coverage just prior to the launching of CBOE/CME futures. That was the tell-tale sign. Without that level of sustained or ever increasing coverage it’s hard to attract new buyers. Bitcoin may be the largest bubble in human history, but its demise is/will be exactly the same as all others — by running out of buyers.

Bitcoin miners must extract fiat from the system to pay on-going expenses. This Bloomberg article dated Jan 9, 2018 provides a nice breakdown of mining costs in China: from about $3869 to $6925 per coin depending on electricity rates ($0.03-0.13). It implies a fixed cost of $2952, and electricity costs of $917-3973 per coin. It goes without saying that Chinese miners are not the marginal producers globally.

Overnight, bitcoin price dropped to $7540 on GDAX, and has rebounded to a range of $8400-9100. I believe the decline is likely to resume after some consolidation at this level. It may even attempt to bounce but former support has turned into resistance. The next support is likely to be around $5000, at which point BTC price will have come below the running cost of marginal miners, putting them out of business. As hash power declines, the difficulty should re-adjust; however, it also opens up the possibility of a nefarious actor acquiring hash power on the cheap and mounting a 51% attack on the whole network. Trust in the system would have long eroded before reaching that point.

My previous downside target was based on price action alone and did not include this dynamic of ever increasing mining costs. When the whole network consisted of a bunch of PCs in dorm rooms, it was OK for the price to linger. Such is night and day from the current reality of industrialized mining. Bitcoin has become a bubble that, if not inflating, will quickly implode upon itself.

Bitcoin has been a great trading vehicle. Whatever the technical merits of blockchain, it does not rise to the level of the internet. Pretty much all the promises of internet made during the DotCom era came true eventually, but the bubble still collapsed. To-date, the real benefits of the blockchain have been largely ethereal (pun intended). I still roam around Bitcointalk and Reddit forums to observe the human drama. Little by little, the sentiment is turning. It will be a hard lesson for many people. The only consolation: most of the riches weren’t there in the first place.

Disclosure

My full crypto trading record can be found here. I do not currently have, nor plan to start in the near future, any positions in cryptocurrencies, long or short. I currently hold a small number of $OSTK puts.