Bitcoin is in a bear market. What's driving the sell-off?

Key Concepts

• Bitcoin Price Decline: Bitcoin has fallen below $100,000, officially entering a bear market after a 20% drop from its early October all-time high.
• Market Risk Aversion: A broad sweep of risk aversion across markets is impacting cryptocurrencies.
• Liquidations: Approximately $19 billion in liquidations have occurred, contributing to a significant drop in the total cryptocurrency market cap.
• Supply and Demand Imbalance: An increase in new crypto instruments (ETFs, digital asset treasury companies, IPOs) and tokens has outpaced demand, leading to market strain.
• Real-World Adoption vs. Asset Performance: Despite increasing real-world use and adoption of blockchain technology by major companies, the crypto asset class is struggling.
• Altcoin Performance: Many altcoins, including Layer 1 protocols like Avalanche, are experiencing a disconnect between increasing on-chain activity and declining token prices.
• Institutional Interest in Bitcoin: Institutions are increasingly viewing Bitcoin as a digital gold or store of value and a portfolio diversifier.
• Michael Saylor's Bitcoin Outlook: Michael Saylor believes 99% of Bitcoin will be mined by 2035 and predicts Bitcoin will surpass gold as an asset class by then.
• ETF Outflows: Significant daily outflows from Bitcoin ETFs are a contributing factor to the current market weakness.
• Marginal Buyers: A lack of new marginal buyers is identified as a key reason for continued range-bound and weak price action.
• Key Support Levels: The $93,000 level for Bitcoin is identified as a critical support, below which an "air pocket" is anticipated.
• Macroeconomic Factors: Government shutdowns and the Federal Reserve's stance on interest rate cuts are influencing market sentiment and liquidity.
• Crypto as a Risk Asset: The correlation between Bitcoin/crypto and risk assets like the NASDAQ is highlighted, with crypto bearing the brunt of risk-off sentiment.
• MicroStrategy's Strategy: MicroStrategy is offering various ways to invest in Bitcoin, including direct Bitcoin purchases, its stock (MSTR) for amplified performance with higher volatility, and a new digital asset credit called "Stretch" for yield generation and volatility smoothing.

Current Market Conditions and Bitcoin's Decline

Bitcoin has fallen below $100,000, trading around $96,000, and has officially entered a bear market due to a 20% decline from its early October all-time high. This downturn is occurring amidst a general "risk aversion" across financial markets. The crypto market is under significant strain, with approximately $19 billion in liquidations contributing to a loss of over a trillion dollars from the total market capitalization of all cryptocurrencies, according to CoinGecko data.

Market Healing and Supply/Demand Dynamics

John Woo, President of Avala Labs, suggests that the crypto market is still in a process of healing. He attributes the current struggles to a significant increase in the supply of new instruments for accessing the crypto asset class over the past six months to a year. These include ETFs, digital asset treasury companies, and IPOs of companies like Circle, Figure, and Gemini. This influx of new securities, coupled with a proliferation of new tokens, has created an imbalance where demand has not kept pace with the increased supply.

The Paradox of Adoption and Asset Performance

Ironically, this market struggle is occurring simultaneously with a surge in real-world use and adoption of blockchain technology. Major institutions like JP Morgan and BlackRock, along with numerous industries, are leveraging blockchain to streamline their processes. This presents a paradox: as adoption grows, the asset class itself is experiencing difficulties.

Altcoin Performance and Disconnect with On-Chain Activity

The discussion then shifts to altcoins, particularly Layer 1 protocols. John Woo highlights that for Avalanche, a Layer 1 protocol developed by Avala Labs, there is a significant disconnect between the increasing on-chain activity and partnerships focused on real-world use cases, and the declining price of the AVAX token. He reiterates that the meta-level issue of too many new tokens, DAOs, ETFs, and public companies is contributing to this, but his day-to-day interactions with brands and "Trafi" (Wall Street) show a consistent increase in engagement and activity.

Michael Saylor's Bitcoin Outlook and Institutional Perspective

The conversation references Michael Saylor's view on Bitcoin, who describes the current period as a "digital gold rush." Saylor projects that by 2035, 99% of all Bitcoin will have been mined, with the remaining 1% taking over a hundred years to be mined. He confidently predicts that Bitcoin will surpass gold as an asset class by 2035.

Differentiating Crypto Assets: Bitcoin vs. Altcoins

John Woo clarifies that while Bitcoin is increasingly viewed as digital gold or a store of value, other crypto assets have distinct use cases. He cites examples of Avalanche's involvement in helping the State of Wyoming build a stablecoin and New Jersey tokenize land and house registries on the Avalanche blockchain. He emphasizes that each altcoin must be evaluated based on its specific use case and product-market fit. He acknowledges that while he considers Avalanche an altcoin, he believes there are too many altcoins currently, and only a select few (perhaps 20-25) will prove truly useful, with Avalanche likely being one of them. He distinguishes these from "meme coins" that lack purpose.

Recent Selling Drivers and Market Indicators

Enz, a market analyst, discusses the recent bout of selling. She notes that the October 10th liquidation event spooked investors, and long-term holders ("whales") have been selling at highs without stepping in at lows. A significant factor is ETF outflows, with the previous day seeing the largest daily outflows since their inception. The absence of "marginal buyers" is identified as a key driver of continued range-bound and weak price action.

Key Support Levels and Potential Downside

10X Research is monitoring the $93,000 level for Bitcoin, warning that a break below this point could lead to an "air pocket," indicating a sharp decline.

Macroeconomic Headwinds and Fed Policy Uncertainty

Sean Ferrell of Funstrad, a Bitcoin bull, has adopted a more cautious tone due to several macroeconomic factors. The expected liquidity from government stimulus is delayed, potentially by another month or two, due to a longer-than-anticipated government shutdown. Furthermore, the Federal Reserve's stance on interest rate cuts is uncertain, with a "coin flip" scenario (50/50 odds). A lack of a dovish Fed policy is seen as detrimental to asset prices, including crypto, in the near term.

Crypto as a Risk Asset and Correlation with Equities

The debate about whether Bitcoin is a risk asset is ongoing. The current market sentiment suggests it behaves like one, correlating with assets like the NASDAQ. When there is a "risk off" environment, crypto tends to bear a significant portion of the brunt. While strong Bitcoin performance can be constructive for equities, the current weakness in equities does not bode well for crypto. Fund managers holding ETFs with declining underlying assets may be pressured to trim positions. The expected "Christmas rally" might not materialize if the Fed does not adopt a more dovish stance soon.

MicroStrategy's Product Offerings and Michael Saylor's Nuanced Approach

Julie discusses her conversation with Michael Saylor, the CEO of MicroStrategy, a prominent Bitcoin bull. Despite Bitcoin dipping below $100,000, Saylor publicly stated that Strategy had not cut its Bitcoin holdings, attributing any movement to wallet transfers and confirming their usual Monday Bitcoin buying plans.

MicroStrategy is now offering a more diversified approach to investing in Bitcoin, acknowledging that its stock (MSTR) is not for everyone. Saylor explained that for "max performance," investors can take on "max volatility" by investing in MSTR, which has averaged 75% annual returns over the last five years, potentially outperforming Bitcoin. For those seeking to avoid counterparty risk, buying Bitcoin directly is recommended, as it has averaged 50% annual returns over five years with no counterparty risk.

Additionally, MicroStrategy has introduced a new product called "Stretch," a digital asset credit offering a 10.5% yield, designed to smooth out Bitcoin's volatility. This indicates a more sophisticated product suite for Bitcoin bulls looking to engage with the asset in different ways. However, it's noted that year-to-date, MicroStrategy's stock is down 33%, and investing directly in Bitcoin would have been more profitable. The year-end performance for Bitcoin remains unpredictable.