Bitcoin goes down — and time bombs are waiting in the market

Bitcoin is crashing, sell sell sell! BTC-USD on Coinbase was at $43,511 on Thursday 20 January, but has been skating down since, and has been knocking its head against $34,000 for much of today.



Who cashed out?

It’s not clear why this particular drop happened. The usual answer is “shenanigans” — the Bitcoin price is known not to respond much to market signals. The market is thin enough and unregulated enough that internal manipulations swamp external signals.

Kevin Werbach and Brian Feinstein of the Wharton School, University of Pennsylvania, wrote the standard study on the topic, focusing on BTC and ETH. Werbach tweeted: “Under every model, no significant impact of regulatory announcements on volume; virtually none on price.” [SSRN, PDF; Twitter]

When real markets catch a cold, Bitcoin gets COVID — as happened in March 2020, when Bitcoin crashed in lock-step with all the other markets. The regular stock market is worried about Russia invading Ukraine, but hasn’t gone down hard yet. (Or at least not on that scale.) I think the last time Bitcoin moved on real-world events was when China kicked out the crypto miners in May 2021.

You should always assume shenanigans first. Were there a lot of long margin traders who needed to be burnt? Who needed actual dollars in a hurry? That sort of question.

I’m pretty sure the root cause is that retail crypto investors mostly went home a while ago — the mass-market phase of the 2021 Bitcoin bubble seems to have run from February 2021, when Elon Musk announced that Tesla had bought bitcoins, until June 2021, shortly after Tesla sold. Crypto is suffering a supply chain shortage of greater fools.



Tether to the rescue?

Inflows of stablecoins are commonly used to help the Bitcoin price do what the whales need it to. But tethers haven’t been pumping fake dollar liquidity into the system of late. Although a billion tethers were sent across to the Binance crypto exchange around 16:30 UTC today. [Twitter]

The price of both Tether and USDC during this crash has been bobbling around $0.96 to $1.02, when both usually hold much closer to $1.00. And 3.3 billion USDC seems to have been redeemed recently — though we’ll have to wait for the next attestation to see if the redemption was in dollars or other assets.

Outdoor miners

In a more serious price crash, miners will end up having to shut down a lot of capacity, as happened in November 2018.

CoinTelegraph cites Charles Edwards of the Capriole crypto investment fund saying that Bitcoin mining’s present break-even price is around $34,000. This figures in a lot of obsolete mining rigs that were still profitable while number was up. [CoinTelegraph]

Digiconomist suggests the break-even price is around $17,000 for a current AntMiner S19 if electricity is 10c/kWh, [Twitter] and told me it would be around $8,700 at 5c/kWh, assuming 10% overheads.

Miners already can’t sell all the BTC they mine without crashing the price. Miners have been borrowing from their fellow crypto bros, such as Galaxy Digital, Silvergate and DCG, using their unsold bitcoins as collateral. [The Block, 2021] Imagine if the miners have to sell up.

Magic bean collateral

A lot of large holders are also looking at borrowing against their bitcoins.

Whales want to realise the value of their holding — but just selling them risks another crash. So the whales are now trying to borrow actual dollars from the likes of Goldman Sachs and JPMorgan, using their unsaleable holdings as collateral. Which isn’t so easy, ‘cos the banks are brighter than to sign up as the bagholders of last resort.

MicroStrategy’s Bitcoin holdings are underwater at around $30,000. The company is one of the large holders who planned to borrow actual dollars against their bitcoins.

Even if Bitcoin goes back up, MicroStrategy’s official accounts are going to stay terrible. Bitcoin is accounted as an intangible under Generally Accepted Accounting Principles (GAAP) — and if the value of an intangible goes down, it can’t go back up again. So MicroStrategy proposed using non-GAAP standards to account its Bitcoin holdings to investors, because Bitcoin is volatile as hell — but the SEC said no. I’m told commissioner Hester Peirce wanted to let this through, but the other commissioners didn’t. [Bloomberg]

And the last time bomb:

The 140,000 BTC that was left in the bankrupt Mt. Gox exchange has yet to be released to creditors. But I’m sure the creditors will exercise restraint and not rush to the markets all at once.



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16 Comments on “Bitcoin goes down — and time bombs are waiting in the market”

    1. It was a superb joke and this is a superb post.

      Certainly the Mt Gox loot (is it really five billion USD in coins?) owed to thousands of ripped-off creditors is an absolutely profound challenge to the BTC marketing system. These people have debts to pay; they are very unlikely to be HODLers and so a good chunk of five billion dollars (not Tethers; again these people need *cash*) is going to need to be found to prevent this taking the market’s heads off.


      I think we might see the exchanges come together and cut people off from transferring BTC into their exchange accounts. A “no new coin deposits” rule, even if temporary over a month or two, would allow for OFF-EXCHANGE (and therefore price-invisible) liquidation events and plan for the cash necessary to manage price stabilization.

    2. Hi David, love reading your books and blogposts keep up the great work.

      It’s shocking, the disinformation that’s out there and it’s starting to affect my friends and family members. How about an updated 2nd edition of AOTFFB with a dedicated chapter to stablecoins? Also maybe a new chapter on NFTs? Would save time having to explain these scams to loved ones, especially all the latest Tether shenanigans.

      Look forward to reading your future books, cheers.

  1. Two things….

    So we are depending on Banks being wise enough not to borrow money with bits in collateral?

    It looks like a terrible waste of (fossil?) energy. Are we really looking at people hoping to swap oil for money? Because energy is heavily subsidised.

    Maybe bits investors are just ‘living of the government tit’ now the supply chain of fools are starting to run out…

    How do we make good damn sure that the banks stay wise and don’t become bit investors?

    1. well Silvergate is a smaller bank, but it’s also one that does a huge amount of business in the crypto economy, so they have an interest in it not falling over:

      Goldman Sachs and JPMorgan are larger investments banks, and not invested in the crypto economy. They are trying very hard to do this deal in a way that doesn’t involve touching a bitcoin, e.g. some complicated financial engineering involving CME futures (which are cash bets on the Bitcoin price and don’t ever touch a bitcoin).

      1. I think the CME BTC futures are a bit more compicated than “don’t ever touch a bitcoin”). Every (almost every?) futures contract has an expiry date and whoever holds the future at that point takes delivery of the good that the future is for. Not actually sure how that works exactly with volcano/flooding/hurricane futures, but BTC is tangible enough that I would expect the BTC futures to be structured similarly to (say) oil or orange futures.

        1. There are “virtual” futures, on expiration of which the cash value of a good is exchanged instead of a good. An example of it are Moscow stock exchange futures – no physical good involved (and those mirror actual American ones). There was a problem with those in 2020 when oil futures went negative but the Moscow oil futures contract specified that the price cannot be lower than $1 (and the trade was frosen due to that) – however, the settlement still used a negative price.

          The Bitcoin futures that CME offers are “financially settled” – so the mechanism is the same.

  2. Hi David,
    this below is perhaps not a direct comment to your post.
    I’ve just finished (in one sitting) your fantastic crypto book.
    I’m wondering that despite all what you say is true (crypto mainly being a pyramid scheme, often used by crooks to exploit fools, etc. etc.), is it still perhaps, on balance, good for the world’s economy? And by good, I mean that it raises many people out of poverty, it redistributes wealth, it makes some rich (who then spend their wealth, stimulating the economy), etc.? I say “on balance” because I know (especially after reading your book) all the negative effects of this crypto madness.
    Crypto is basically printing money (like all countries do especially in these covid years), ie. it adds to the money in circulation which might just be a good thing…
    For full disclosure, my economy expertise is nigh zero!

    1. tl;dr no, there’s no evidence of any of that happening, there no evidence it’s a thing that’s going to happen, and there’s no theoretical basis to believe it’s a thing that would happen.

      Individuals can win on crypto – but individuals can win on horse races too, and that isn’t an upside of horse racing. Crypto is a casino, and the house always wins on average.

      1. one simple counterpoint of the top of my head .

        in the philipines there are now many people now working in the play to earn ecosystems like axie infinity. they earn money performing simple tasks on their phone.
        i can probably come up with more instances but we can start there.

        1. The problem there is that Axie Infinity is a reprehensible scam, and really obviously so. It’s exploitative nonsense, and the actual business is taking the money from desperate people so they can be allowed to join.

          I commend Dan Olson’s explanation:

          And this essay:

          If this is the lines you’re thinking on for use cases of crypto, your lines of thought are bad.

        2. “Play to earn” is a disaster for actual gaming. It amplifies the boring, annoying and tedious aspects of games to such a level that in the end, no one plays the game because they enjoy it anymore.

          People invest in Axie Affinity not because they want to play it, but because they think they can make money out of it off the back of people in developing countries.

          These people in the Philippines aren’t enjoying themselves. They’re spending hours grinding a boring, meaningless game they don’t care about for rich westerners to make what amounts to minimum wage (or less) in their country.

          Play to earn lavishly wastes human labor that should be used in a more productive way in the same way crypto wastes energy, both yielding exactly zero value.

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