Back in December 2017 I did a valuation attempt of Bitcoin on this sub and got around 5K with some grossly optimistic assumptions. Its taken a long time but finally gone down below that.You've probably heard many people tell you it would eventually happen back in December 2017 and to reduce expose to crypto (including me), but when you're hyped up on 20% gains every week its hard to be cautious or engage in defensive measures. To many the last quarter of 2017 and into early 2018 was like a beach party with coke and Victoria Secret models. Who wants to listen to someone tell you about how you're gonna crash hard with a headache the next morning?With this latest crash, Bitcoin's price is back to roughly mid October 2017, which is roughly when the mainstream mania started. Many on this sub entered after October 2017 and hence are now left holding heavy bags. Many are down 80% or even 90%. Here is the current losses from ATH for the top cryptos:AssetLoss from ATHBTC-77%XRP- 88%ETH-90%BCH-95%XLM-79%EOS-83%LTC-91%ADA-96%XMR-85%TRN-96%Who do we blame?At a time like this its easy to get angry, to look at someone to blame. Whether Roger Ver and the hash wars, whether BAAKT delay, whether whales or SEC or institutions, everyone has their favorite boogeyman. No one thing is the reason why the market is down 80%.The reality is that Bitcoin (and all other crypto by extension) was ovevalued even by grossly overoptimistic measures. Its not BAKKT or the whales trying to get your coins for cheap. The same people who were buying at near peak bubble thinking they were getting into the chance of a lifetime are prone to look for someone to blame for their losses, when it was their irrational behavior that lead to the gross overvaluation of all cryptocurrency.Is it over yet?The $6K consolidation was likely a result of the market coiling tighter and tighter around the mining breakeven point for some of the smaller miners. The big firms in China are profitable mining below 6K, but many smaller ones in the US and Europe aren't. You can actually see the total hash rate going down. Once it broke it was a big fall straight down.Bitcoin is mined at 12.5 BTC. per block at 10 minute blocks, which comes out to around 1800 BTC every day. This 1800 BTC has to be absorbed by every day, which means the following at different price levels:Price LevelDaily net buying needed to absorb mined coins6000$10.8 million/day4500$8.1 million/day3000$5.4 million/dayAt the current price, at least theoretically $8.4 million in demand is needed to cover the mining output. Of course the miners don't immediately dump it all, but it shows why miners have an incentive to keep the price high and try to incite FOMO with a BGD.I can also see that after this latest drop, the "but the dip" sentiment had substantially gone down, at least compared to the other fast drops in price. This is especially discouraging those who were waiting for the "November bull run", which never came. Its clear to more people now that this probably isn't just downward correction that will reverse, but a multiyear bear market. This is why the bounce has been so weak compared to earlier in the year.The weakness of the bounce says it all, people are no longer optimistic that BAKKT or ETF or any other catalyst will lead to a bull run that they can cash out quick. It may be a period of stagnation followed by further drops as big holders take profits.I also think that the FED tightening with rate hikes is leading to a lot more volatility not only in stocks, but crypto as well. Right now asset deflation seems to be a global macro risk as cheap credit dries up, and Bitcoin surely isn't immune from this.My personal view is that at this point we may see further declines, but calling what's going to happen next is always dangerous. A whale (especially a big mining operation) with a series of large orders to clear out the order book on Bitfinex could give us a BGD out of nowhere at any time and take us back to 6K, it would be interesting to see how the market reacts to something like that. But I'm not betting on it leading to any sustained rally past 10K. Quite the opposite.So what's a crypto shrimp to do? I'll split my thoughts into two, for those who are still in the green and those in the loss.If you're still in the greenIf you're still in profit, this is a great time to consider how much more downward selling you can take and also how you can hedge downward risk.If you're someone who purchased when Bitcoin was below $1000, you should calculate your compounded annual ROI and decide if that return is good enough for you. For equities, the long term average is about 10% per year, 20-30% in a good bull market.Its your decision, but taking out profits that exceed principal and reinvesting the principal is not at all a bad idea.Another important thing is to think about how you can hedge the risk of downward movement. This is where derivative exchanges are very useful, although you do need to do some research on how derivatives work and how to not get liquidated. If you have substantial holdings, the effort to learn this is worth it.The basic idea is that you can buy short contracts that increase in value as Bitcoin goes down, proportional to the amount of leverage you put to finance the contract. If managed correctly, you can protect your entire stack with a portion as leverage. Its something commonly done by miners, who short Bitcoin with derivatives to hedge their holdings.If you're in the lossThe untold reality is that HODL is a meme told to newbies to prevent panic selling during a downturn while the smart money cashes out in a more orderly fashion. But does that mean you shouldn't hold if you're already down massively?Well that depends on your own life situation, how much you've invested, but also how bad your losses are if you don't need the money for the next few years.Mathematically, whether it drops to 4.5K or 3K from the reference of 6K is highly meaningful, its a drop of 25% or 50%. But if your reference starting point is much higher, then it really doesn't matter all that much. A drop from 17K to 4.5K is a 74% loss while down to 3K it would be 82%, massive losses either way. In that sense if this is money you don't need, it makes sense to simply have it stored in a wallet and forget about it for a few years. Who cares if it drops further after a certain point if you don't plan to take it out for a while? Its like in equities markets where people with massive losses don't sell, but instead move the loss position into their retirement fund where they don't plan to take it out for a long time and thus are giving it time to rebound back.This is also a good learning opportunity.A good thing to do during catastrophic losses is to honestly access why you got suckered into buying high in the first place. Most people here are young, and this is a valuable lesson in why you shouldn't follow the herd. Everyone is a genius in a bull market, everyone is chasing the next hype.Take the time to understand the fundamental reasons why an asset has value and what factors would drive its rise once the hype dies down. Crypto tends to attract people looking for a get-rich-quick-without-effort crowd, but it takes some mental effort to realize when the value is completely detached from an optimists expectations of the future. What makes Bitcoin valuable, what makes some of the other cryptoassets valuable? If those fundamentals in some way changes, so should your opinion.Its also a great opportunity to try and understand crypto at a more detailed level and even help in its adoption by using it. I don't mean this in the "I'm in it for the tech" sense, everyone wants a profit. The irony of it all is that people demand that they get rich because of the hard work of buying a bunch of crypto in an exchange and transferring it to their wallet, without any understanding what they're buying into. I've always recommended this video to explain how Bitcoin (and other cryptocurrencies) actually work.Also don't be angry. Don't look to blame. Look to learn and improve next time you invest.
Submitted November 23, 2018 at 01:46AM
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