Why Bitcoin Will Bust And Go To Zero

But Maybe It Won't

Bitcoin has been around since the crash of 2008. The Satoshi white paper was supposed to unleash a wave of innovation and so far it has only unleashed a wave of speculation.

The Byzantine General’s Problem is solved by Bitcoin. That’s one of the core concepts that gives the idea hope which led to rampant speculation.

I have thought a lot about this and I want to be really clear about it. A lot of VCs who are always in the limelight are calling for regulation of crypto. These VCs deserve to be in the limelight. They are great investors, smart people, and have very successful track records. I think the opposite. There is no need for the government to wade in and regulate cryptocurrency. There is little doubt the government will screw the market up even more, and set the terms that determine winners and losers. I will explain why I don’t think regulation is meaningful in this blog post and if it’s too long to read, go to the bottom.

I don’t care that crypto has crashed. The price isn’t meaningful when you are looking at the macro market for crypto. I see people tweet about “market cap” numbers and while they are impressive they don’t mean a thing at this point. It just means a bunch of tokens have been created. The FTX fraud ought to disabuse anyone of using or thinking market cap statistics are meaningful.

Personally, I was bullish cryptocurrency and have written about it on this Substack blog, and on my old blog at Points And Figures. I have personally invested in crypto focused companies in both my angel and my venture fund portfolio. But, it’s awfully hard to make a bullish case given the extent of the fraud in cryptos, and more importantly, the fact no one has built anything meaningful yet. It’s all hype.

Can anyone name one product that creates demand for crypto that that is used widely by consumers or any industry? Until someone does, it’s hard to be a bull.

That isn’t the reason to be bearish Bitcoin though. The reason is deeper and is logical. When you look at liquid markets, especially markets like futures markets, there are always natural sellers and natural buyers.

Speculators are absolutely necessary for liquid markets, but they are what economists and market structure researchers term as “indifferent”. They don’t care about where the product goes or the underlying trends driving the product. They only want movement so they can profit from the movement.

For stocks, investors will naturally be attracted to a company and want to invest for return. Employees of that company who get options as renumeration for their labor are natural sellers of the stock. Hence, there is a market. This is a simple example, but hopefully you see the logic. The company exists, it issues stock, and immediately there is a two sided market with demand from buyers and demand from sellers. You don’t necessarily need speculators.

For futures, there are producers of a product and users of a product. That enables a market with a bid and an offer price. Farmers grow wheat and bread manufacturers need wheat. Farmers are natural sellers, bread manufacturers natural buyers. There is a market there since there is a clear supply and demand curve with a price!

When we look at Bitcoin, the natural sellers are the miners of Bitcoin, and holders of Bitcoin. We know there are plenty of speculators. Initially, we don’t need them to make a market.

Who are the natural buyers?

No one. No one needs Bitcoin. No one needs Ethereum. No one needs any cryptocurrency because as I said above, nothing has been built that anyone uses.

It’s a one-sided market with only natural sellers. Hence, when the speculative fever finally cools, Bitcoin will go to zero. The entire market will implode on itself if no one builds anything of value that someone uses everyday where they need Bitcoin to make it work.

There are two places to look to see if the market is breaking down and speculative fever is going away. The first is CME and their Bitcoin contract. Look at average daily volume and look at open interest. If I were in this market every day, I’d be building a statistical model around both to see if there was a more than one standard deviation move one way or another in volume or open interest to test the “health” of the market. If the retail investor really backs off, or if the HFT traders back off, the market becomes a small circle jerk with people trying to pick each other’s pockets. The other is one of my investments, Bitnomial. Bitnomial’s BTC contract is different than CME because you get delivery of the physical good. CME’s is cash settled so it will have more volume, and since it’s settled in US dollars, open interest should remain steady until expiration. Watch deliveries at Bitnomial. If they go up, that’s a healthy sign. If they stay steady, or go down, that’s not a bullish case for Bitcoin.

Coaches who have been around the block will tell you about lots of different athletes that had “potential” but it was never fulfilled because the kid didn’t work hard enough. “They didn’t live up to their potential.”, they will say.

That’s cryptocurrency in a nutshell today. Potential, but potential unfulfilled.