There’s a tremendous amount of fear in the cryptocurrency market right now…
Since reaching its all-time of high of $64,863 in April, bitcoin is down 47%. Ethereum is down 54% from its all-time high. And the altcoin market is down 58% from its highs.
If this is your first time going through this type of volatility… it can be vomit-inducing. Your first urge will be to sell your positions and get out while you can.
But that’s the worst mistake you can make. You’ll regret it for the rest of your life.
I’ve said it before and I’ll say it again: Getting mad at crypto volatility is like buying a roller-coaster ticket and getting upset by all the ups and downs you experience on the ride.
That’s the price you pay for the thrill of the ride… And in crypto, volatility is the price we pay for the thrill of making life-changing gains.
So today, I’ll tell you what’s going on in the crypto space… why this is just a blip on bitcoin’s march to $500,000… And why selling your bitcoin is the worst mistake you can make…
I want to warn you… This essay is longer than my usual Daily essays. But it’s a must-read if you want to know what’s really going on in bitcoin.
China Strikes Again
Right now, the biggest shock driving bitcoin lower is news out of China. The government has banned bitcoin mining again.
Now, this isn’t the first time China has tried to ban bitcoin. Local governments in the country have tried to shut down bitcoin mining facilities in 2017, 2018, and 2019.
But this time, China’s national government has not only banned bitcoin mining… It also prohibited Chinese financial firms and payment companies from offering financial services to crypto-related businesses.
In other words, banks in China will no longer allow fiat (paper money) payments into or out of crypto assets.
So you can’t put money in a bank and transfer it to an exchange to buy bitcoin… And you can’t sell your bitcoin on an exchange and transfer the cash to a bank. Basically, China has shut off all on – and off – ramps in the country to crypto. And of course, this is freaking people out.
This has created two short-term impediments for bitcoin’s price…
The first problem is forced selling.
Chinese miners have no choice but to sell their BTC to raise capital. So far, they’ve sold about $2 billion BTC. This is the money they will need to relocate their operations to friendlier jurisdictions in West Texas, Canada, and Russia.
Since crypto trading has been banned in mainland China, my best guess is they’re wholesaling it to offshore market makers at below-market prices.
Now, I want you to think about this logically…
Imagine you’re a market maker. And you know a cohort of people have to sell. Will you keep your bid at $60,000… $50,000… $40,000… or $30,000?
You’re going to walk your bid down. And that is exactly what’s happening right now.
The buyers in this market are smart. They know the Chinese miners are forced sellers. They won’t pay $40,000 for BTC when they know they can get it at $29,000.
I know it hurts to see bitcoin drop this low. I get it. But you need to think rationally.
If you know someone has to sell, you’re going to make low-bid offers, and that’s exactly what’s going on right now.
That brings us to the second problem…
Typically, when we see forced selling like this… buyers come in to soften that blow. Recently it’s been institutional buyers providing this backstop.
But there’s a new quirk in the market sending institutional buyers to a different bitcoin-related asset.
I’m talking about the Grayscale Bitcoin Trust (GBTC).
Wall Street Takes Advantage
GBTC allows everyday investors to gain exposure to bitcoin through a traditional investment vehicle that trades on exchanges.
Essentially, GBTC trades like a closed-end fund. It can trade at a discount or premium to its underlying value.
Normally, GBTC trades at a pretty hefty premium to bitcoin. Since its inception in May 2015 to February 2021, GBTC traded at an average premium of about 30–40%.
That’s why I’ve never formally recommended it.
But recently, GBTC has been trading at an extreme discount to bitcoin… up to 20%.
So instead of buying BTC on the spot market, institutional buyers are buying shares of GBTC.
Again, I want you to think about it logically.
If you can buy bitcoin at a 10–20% discount to spot, why wouldn’t you?
Institutional investors are betting the discount will eventually evaporate… and GBTC will again trade at a premium to the spot price of bitcoin.
Friends, that’s an excellent bet to make. And as I always say, never bet against Wall Street greed.
Long story short: The amount of buying you’d normally see by institutions in the spot market has moved to GBTC.
Once the GBTC discount disappears… they’ll go back to the spot market. And a whole new slew of demand will come back into bitcoin.
Will the U.S. Follow China?
Now, I want to take this a step further… A lot of people fear the U.S. will follow China and close its banking system to crypto, too.
This just doesn’t make sense to me.
First, the United States isn’t China. The U.S. respects property rights.
And the U.S. is not an authoritarian regime. It can’t cut off access to hundreds of billions of dollars in assets with the stroke of a pen.
Now, I know I’m repeating myself. But I need you to think rationally here…
Why would the U.S. ban access to crypto assets after the SEC recently allowed crypto exchange Coinbase to go public at a $50 billion valuation?
And why would the U.S. ban access to crypto assets after the Office of the Comptroller of the Currency – the most powerful bank regulator in the U.S. – said the entire banking system can custody them?
U.S. regulatory agencies have allowed companies like Goldman Sachs… Morgan Stanley… JPMorgan… Citi Group and others to offer bitcoin funds to their clients.
They’ve seen companies like Mass Mutual – the oldest insurance firm in the United States – add bitcoin to its balance sheet.
These financial giants have incentive to fight tooth-and-nail to keep bitcoin alive since they have skin in the game. So again, don’t bet against Wall Street.
This doesn’t mean we won’t see more regulation of crypto assets in the U.S. But that needs to be in place if you want to see crypto move from a niche asset to mass adoption.
Right now, about 150 million people use crypto. There are more than 500 million people who own stocks. And there are more than 7 billion people on the planet.
So in order for crypto to go mainstream – and I believe it will – you’re going to need a certain amount of regulation. And that’s healthy for the growth of the entire crypto ecosystem.
This Pullback Is Just a Blip on the Map
So let’s recap…
China has banned bitcoin mining again.
Chinese miners can’t access capital markets like U.S. and Canadian miners can. So they’re forced to sell. And they have to take whatever price that they can get. Market makers know this. So they walk down their bids.
Then you have the buyers.
They know prices are cheap right now. And they know they can get exposure to bitcoin at an even cheaper 15% discount through GBTC.
It’s a no-brainer. You go buy GBTC. That’s creating more weakness in bitcoin because there are fewer buyers in the spot market.
So, of course, the next question is, “How long will it take before BTC rallies?”
The honest answer is, “I don’t know.”
Nobody knows. It could be a month. It could be two months. It could be four months.
Anybody who tells you they know when is either fooling themselves or fooling you.
The better question to ask yourself is this, “Will China’s ban create a long-term valuation problem for bitcoin?”
And the definitive answer is no.
China has banned bitcoin more times than I can count. And it’s still thrived.
Now, I’m not saying this isn’t a big deal. It is.
But think about this…
China has banned Facebook… Google… and Netflix. Has that stopped those tech giants from becoming multibillion companies?
Bitcoin miners will just move to friendlier jurisdictions in the United States, Canada, and Russia. China’s loss is someone else’s gain.
Friends, I understand. It’s painful to go through these types of pullbacks. But it’s no less painful than what I went through in 2017… when China instituted a similar ban.
We saw bitcoin plunge from $19,000 to $3,100 – an 83% drop. Yet, if you had the fortitude to follow my research and see the long-term picture… you’d see it rise as high as $64,863.
And remember, over the next five years, I see bitcoin reaching a half-million dollars.
So the volatility we see from $60,000 to $30,000… or $30,000 to $60,000… will look like a blip on a map when we get to $500,000.
And when it does hit that level… so long as you stayed the course, you’ll look back and see the decision to stand pat has changed the course of your entire generational line.
The way you live your life… The way your children live their lives… The way their children will live their lives. It will have changed forever.
That’s what bitcoin can do for you… and for millions of other people.
If you have some spare long-term capital… take advantage of these prices. If not, don’t worry. This volatility won’t last forever.
I promise you… the sun will shine again. And it’ll do so much faster than you might believe.
Let the Game Come to You!
Editor, Palm Beach Daily