Summary- Bitcoin finally broke down after attacks on multiple fronts in the past week.
- JP Morgan CEO Jamie Dimon's rant revealed how dangerous Bitcoin was becoming to the markets.
- Bitcoin needed this correction to prove it could weather official pushback.
It is an understatement to say that the cryptrocurrency market has been on fire. Bitcoin (Bitcoin Investment Trust (OTC:GBTC)) made a high near $5000 earlier in the month and since then has seen a number of regulatory and public statements by prominent financiers talk the market down.
For the past few weeks it has been one action after another. The U.S. began by targeting the exchanges and the ICO – Initial Coin Offering – market earlier in the summer. The market shrugged off that news after Bitcoin first touched $3500 and blasted back to $5000.
But the death blow to the current rally came from China. First it issued a ban on all ICO’s, a stronger stance than that taken by the SEC. Then, China’s Ministry of Industry and Commerce announced a ban on third-party crypto-exchanges earlier in the week and Friday morning BTC China announced it was halting all trading as of September 30th.
This prompted a huge liquidation which saw the price of Bitcoin drop 35% in China (local trading only) in a matter of minutes.
To add to the bad news, J.P. Morgan Chase (NYSE:JPM) CEO, Jamie Dimon, famously came out on a guidance call and called Bitcoin a fraud and announced any of his traders would be fired if they owned any of it.
The market heard that and reacted with a 7-10% drop, which pushed Bitcoin below $4000.
With Bitcoin now 30% off its high thanks to regulatory push-back, the question is when will the selling end?
Dimon’s Rough Ride
Bitcoin is a sore spot for Jamie Dimon. This is the second time he’s publicly bashed it to move the price. It was this statement, however, that really caught my attention.
“You can’t have a business where people can invent a currency out of thin air and think that people who are buying it are really smart,” Dimon said. “It won’t end well.”
Anything that the market is willing to use as a medium of exchange can be considered a currency. Dimon knows full well that Bitcoin isn’t simply issued out of thin air. Certainly not now with the hashing difficulty so high it takes more than $1000 of electricity to ‘mine’ the next block.
But, what’s really troubling is how much this statement by Dimon misrepresents the current global financial system. J.P. Morgan is still in business because the Federal Reserve, in 2008, issued trillions out of thin air to bail out not only him but all the other big banks.
We live in an age of insane central bank largesse distorting the pricing system for everything, most importantly investment risk, and Dimon considers Bitcoin a fraud?
The truth is that Bitcoin was created because a few people saw this system as fraudulent. I think Dimon is complaining that the market is beginning to choose this new system versus the old one.
Moreover, part of what is driving the explosion of the ICO market and, yes, even the price of cryptocurrencies themselves, is existing tax and regulatory rules which punish people from moving profits from the crypto-space back into the ‘dollar-space,’ for lack of a better term.
The IRS declaring Bitcoin property for tax purposes back in 2014 created a real barrier to capital flowing back and forth between the two spaces. The implication of having to pay capital gains tax on every small purchase made with Bitcoin meant the profits needed to be diversified in other ways.
The draft bill introduced to the House last week, which would exempt transactions below $600, may alleviate some of that in the future. But, for now, the market is frozen.
And this is why it is so easy for these regulatory changes to create liquidity problems. First, they threaten to tax your profits. Then, outlaw diversifying through new company startup, ICO’s, and finally declare unregulated exchanges illegal.
The Breakdown
It was always known that the governments would crack down on the cryptocurrency markets. It would be done publicly in the name of consumer protection. But, in view, it is always done to protect existing interests. And regardless of that opinion, that is always the net result.
Governments around the world are broke. Their debt is unsustainable. As I've pointed out in multiple articles (like this one) Europe is functionally insolvent and the ECB rightly fears ending its QE program for fear of a lack of bids if it goes to sell.
China is dealing with the bursting of a credit bubble the size of which dwarfs anything we’ve ever seen. Capital flight from instability there is what gave Bitcoin its first surge of investment funds back in 2013-4.
From where I sit capital flight from Europe and the U.S. is what is fueling it now. A falling dollar (PowerShares DB US Dollar Bullish (NYSE:UUP)) and a politically-unstable EU are the proximate causes.
As we approach the next financial crisis Bitcoin will resume its rise. But, for now, these interventions are working as Bitcoin has dropped more than $1500 from its peak and China's market went close to bid-less on Friday morning.
They remind me of end of the gold (SPDR Gold Shares Fund (NYSE:GLD)) and silver (iShares Silver ETF (NYSE:SLV)) bull market in August of 2011. As those markets went parabolic and the financial system threatened to break once and for all, the COMEX kept raising margin requirements on futures contracts to shrink liquidity and force selling at the slightest weakness.
It’s the same thing here. Bitcoin was becoming too hot and too much attention was being paid to it. The money is irrelevant. It was the legitimacy that needed to be punctured.
That’s what these moves are about. And, to this point they have been effective.
For now, Bitcoin has support at $3000. It was the breakout point from the last correction. This is where bulls will make their first stand in the next few days. After that the August low near $2615 comes into play.
This market needed a correction. Bitcoin needs to prove itself in the face of government control and regulation. If you are invested in the space I would look to $3000 as the first chance to toe-dip back in and wait to see what happens after that.
It will take a daily reversal-style close on high volume to mark a new bottom here. But, with China’s crackdown there will be turmoil through month-end. The big question is whether sentiment turns bearish. We won’t know that until after a bottom and the first bounce.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I own some cryptocurrencies, but not Bitcoin, a few guitars, some gold and silver and a lot of goats... DIVERSIFICATION is key.