Bitcoin is in a bear market. So what should hodlers do now?

Having fallen 10% overnight and 40% from its highs, bitcoin is now firmly in bear market territory. Dominic Frisby looks at where it might go next.

Bitcoin is in a bear market. Let’s not beat about the bush, or try to spin it. The price is falling – it fell 10% just while I was asleep last night and it’s already almost 40% off its highs.

If it looks like a duck, swims like a duck, and quacks like a duck, then it probably is a duck. It’s a bear market.

So what happens next? How long does it go on for? Where does it fall to? And, most importantly, what do we do?

Bitcoin is on the slide. But what do you do about it?

Bitcoin, as we know, is a highly speculative asset. It is not only a new technology, but a new technology that is money. A more “bubbly” asset has never been designed.

It thus evokes all the emotions that come with a speculative mania. In fact, it heightens them to the “nth” degree. Massive FOMO (fear of missing out) on the way up, as well as elation, exhilaration and delusion.

When it goes into a bear market, the opposite happens, with equal emotional intensity. I don’t know what the opposite to FOMO is – GMOOTT, maybe (get me out of this thing). There will be denial (hence all the arguing, especially with Elon Musk), fear, capitulation and despair.

Just as many lose perspective on the way up – “it’s going to a million dollars!” – so will many lose perspective on the way down – “it’s finished, bitcoin is over!”

Lots of bad decisions are going to get made. In fact, many bad decisions have already been made – buying near the top. Now it’s about damage limitation; do you sell now, take a loss and buy back lower? Easy to say, hard to do.

The particularly hard thing to do is the buying back lower bit. Bitcoin goes to $30,000. Do you buy now? “No, I think it’s going to $20,000”. It goes to $20,000. At this point pessimism is so pronounced that it is very, very difficult to persuade yourself to buy. So you don’t. Then bitcoin reverses and before you know it, it’s back above $40,000, and you’ve lost your position.

So do you “hodl”? This is the tried and tested practice of holding no matter what. It’s been the most effective bitcoin trading strategy since its inception 12 years ago; perhaps it will be again. Who knows? But hodling is very hard too. It takes extraordinary will power to hold through two years of bear market.

How much further could bitcoin fall? Here are the key technical levels

Just before I went to bed last night bitcoin was sitting around $43,500. It fell $5,000 in the time I was asleep – that’s over 10%.

Shortly before shuteye, I was posting on Twitter that if $42,000 doesn’t hold, then $30,000 comes into play. Technical analysis 101 says that’s the next line of support.

After $30,000, then $20,000 comes into play. $20,000 is the old high from 2017 – a monumental price point. It would be very typical of bitcoin to come back to that level, touch it and then resume normal business – to kiss $20,000 goodbye.

I’m not saying that will happen, because I don’t know. I’m just speculating (and with words, not money). Heck, I wouldn’t rule out going all the way back to $12,000. But bitcoin could just as easily turn up and rally from here. You know what it’s like.

The bull market was tired. Bear markets in bitcoin are normal. They are as vicious as the bull markets are epic, they are part of the territory and that is where we are now.

The Financial Times will be all over it, so will the BBC and The Economist. There’ll be stories about lost fortunes. Many of the scams will be exposed. There will be calls for greater government intervention and regulation. But all the while the tech will evolve and improve.

I would say we have moved on from the “denial” phase and are now in the “fear” stage. We still have “capitulation” and “despair” to go. That is also when we reach peak gloating from “nocoiners”.

This bull market hasn’t been quite as epic as previous bitcoin bull markets, so the corresponding bear market probably won’t see the usual 85%-90% correction (I think there have been five of these so far). But a bear market is still a bear market.

Bitcoin isn’t over. It will come back. But when it starts feeling like it’s over, that’s the time to be buying. Ultimately, if you are selling your bitcoin for fiat currency, you are exchanging a superior asset for an inferior one. It’s usually better to hold quality assets, even in bear markets.

This isn’t about Elon Musk – this is about the return of real assets

By the way, despite the fact that many will blame Elon Musk’s recent tweets for these falls in price, there is a bigger force at play here. Bitcoin is a new technology. It has been behaving like a tech stock. Bitcoin and the Nasdaq have been tracking each other for some time.

For some 13 years – since 2008 – tech stocks, digital assets in other words, have been dramatically outperforming commodities (real stuff). That is another bull market that is over. It has reversed. Real stuff is outperforming again, and I rather suspect it is going to do so for a good few years yet.

My goodness me, this is a reversal that is overdue. Tech trashed commodities from the late 1980s to 2000; between 2000 and 2002 commodities had their day; from 2002 to 2008 the two range-traded. Tech has led since 2008 and it will lead again. The scalability of digital is phenomenal.

But for now, real stuff is retracing some of the huge ground that has been lost. That should continue for a few years yet is my view. Here’s the ratio of the Nasdaq versus the CRB commodities index over the last five years. It has clearly turned up; Covid marked the bottom.

Nasdaq index vs CRB commodities index

Bitcoin’s slide is part of that rotation from digital into real stuff.

For now the negative narratives are taking over. If the price continues to fall, they will get even more pronounced. A little bit of upward price action, however, and the overwhelming bullish bitcoin story will take over once again.

I’m hodling bitcoin. But I’m hodling lots of real stuff too.

Daylight Robbery – How Tax Shaped The Past And Will Change The Future is now out in paperback at Amazon and all good bookstores with the audiobook, read by Dominic, on Audible and elsewhere.

Recommended

Kieran Heinemann: the history of shareholder capitalism
Investment strategy

Kieran Heinemann: the history of shareholder capitalism

Merryn talks to Kieran Heinemann, author of Playing the Market: Retail Investment and Speculation in Twentieth-Century Britain, about the history of t…
17 Sep 2021
Cryptocurrency roundup: litecoin blunder, cardano update and bitcoin mining in Laos
Bitcoin & crypto

Cryptocurrency roundup: litecoin blunder, cardano update and bitcoin mining in Laos

Saloni Sardana looks at the week’s biggest stories in the world of cryptocurrencies.
17 Sep 2021
Why it pays to face up to your investment mistakes
Investment strategy

Why it pays to face up to your investment mistakes

Buying stocks can be a complicated business. But selling stocks can be tricky, too – even if you sell for the right reasons. Max King explains how to …
17 Sep 2021
With the right political will, inflation can be defeated
Inflation

With the right political will, inflation can be defeated

Governments and central banks can easily control inflation, says Merryn Somerset Webb – they just need the will.
17 Sep 2021

Most Popular

The times may be changing, but don’t change how you invest
Small cap stocks

The times may be changing, but don’t change how you invest

We are living in strange times. But the basics of investing remain the same: buy fairly-priced stocks that can provide an income. And there are few be…
13 Sep 2021
Two shipping funds to buy for steady income
Investment trusts

Two shipping funds to buy for steady income

Returns from owning ships are volatile, but these two investment trusts are trying to make the sector less risky.
7 Sep 2021
Should investors be worried about stagflation?
US Economy

Should investors be worried about stagflation?

The latest US employment data has raised the ugly spectre of “stagflation” – weak growth and high inflation. John Stepek looks at what’s going on and …
6 Sep 2021