Why Investing in Bitcoin is Tricky

The technology behind bitcoin is promising. If it manages to fulfill its potential, it may forever change the world. Investing in bitcoin should be a simple proposition then. Buy as much as you can and wait until its price skyrockets. Those who truly believe in bitcoin’s promise don’t even plan to sell their bitcoin. If it does fulfill it’s destiny, selling it may never make sense.

Investing in the world’s top digital asset is only simple on paper, however. And contrary to popular belief, not only small retail investors get it wrong.

Bitcoin coin in a pile

El Salvador’s Bitcoin Woes

El Salvador has made bitcoin legal tender and has invested some of its assets in the king crypto. Firebrand President Nayib Bukele embarked on a bitcoin shopping spree during a time when the cryptocurrency traded for more than double its current price.

According to reportedly run out of steam as well. The majority of the population stopped using it, and those who still use it do not use it for its intended purpose.

The question is whether these problems will eventually drive President Bukele to capitulate and sell his nation’s bitcoin reserves at a lower-than-acquisition price. 

Corporate Adopters Feeling the Squeeze

Michael Saylor’s Microstrategy would make a much bigger splash in the market than El Salvador if it were to sell its accumulated bitcoin reserves.

Unlike El Salvador, Michael Saylor bet more than $4 billion on bitcoin, and some of that money came from loans. Thus far, Microstrategy’s bitcoin position has accrued unrealized losses totaling more than $1 billion, and the pain may not be over.

The question is whether Saylor will be forced to fold, faced with a possible margin call. Saylor is no stranger to monumental losses. In 1999, his company lost $11 billion in stock value in a single day due to a revenue misreporting fiasco.

This time, however, it looks like Saylor and his team drew up contingency plans and structured the balance sheet of the company in such a manner that it allows them to continue to hold bitcoin through price drops even more substantial than the current one.

According to one of Saylor’s tweets, Microstrategy will continue to hold bitcoin even if the price dips below $3,562. What’s more, Saylor seems to be ready and willing to buy the dip once again.

Why the Bitcoin Price Is Dropping Again

To what does the crypto community owe its current trials and tribulations? Economic circumstances have been aligning to create a perfect storm in the crypto markets for a while. Beginning with the war in Ukraine and ending with a series of macroeconomic countermoves by the Fed meant to counteract spiraling inflation, many factors contributed to the current problems. The crypto-sphere panicked and overreacted, exasperating its problems.

Crypto firms began freezing funds and blocking transfers, while others laid off thousands of employees, leading to a wave of panic that self-fulfilled the long-standing threat of another crypto winter.

To rein in rising inflation, the Federal Reserve hiked its interest rates significantly. The move represents the Fed’s most aggressive effort in this sense since 1994.

Officials downgraded their economic outlook for 2022 at the same time.

Crypto-lending firms like Celsius and BlockFi led the way in layoffs and panic measures, sending fear rippling through the community.

  • BlockFi took advantage of low fiat borrowing costs to expand its business from 150 employees to more than 850. In a sudden move, the company waived 20 percent of its workforce, looking to reduce operating costs as its clients began to diversify away from the assets they deemed risky.
  • Celsius, another crypto lending firm, locked up the assets under its management, totaling more than $12 billion. The blocking of all transfers, swaps, and withdrawals raised fears of contagion, prompting some firms to issue statements denying their exposure to the crypto lender. The main selling point of DeFi lending platforms were the higher returns they offered on deposits, without the safeguard a legacy bank would have in place.
  • Coinbase, one of the world’s premier cryptocurrency exchanges, extended a pause in hiring and initially considered looking into cutting the job offers it featured. As the panic spread in the crypto industry, however, the exchange decided to rid itself of around 18 percent of its workforce, cutting 1,100 jobs in the US.

The worst of the crypto selloff may be yet to come. Historically, during pullbacks, the price of the top crypto would register losses of around 80 percent. Even with the latest seemingly catastrophic drops, we are not quite there yet.

Many industry leaders fear a wider economic recession at the tail end of a decade of economic growth. The market is rife with uncertainty, and hiring costs have skyrocketed due to positive economic circumstances. Following the meltdown, crypto exchanges can no longer afford to expose themselves to these risks. With their expansion plans on hold, exchanges don’t need as many workers as they thought they would need half a year ago.

Opportunity amid the Doom

Market turmoil usually hides opportunities for those willing to adopt a contrarian approach and defy public sentiment. Even now, amid collapsing cryptocurrency prices, some are spotting more or less obvious opportunities.

Those, who believe in the long-term promise of bitcoin, the only decentralized and censorship-resistant crypto that offers unparalleled trust-minimization on a global scale, will likely see this crypto winter as a great buying opportunity.

Savvier traders who don’t shy away from dubious crypto schemes, like the TerraUST and Luna setup, the implosion of which triggered the current crisis, may find opportunities in arbitrage.

stETH represents the ETH staked on the ETH blockchain. It is also one of DeFi’s most popular collateral assets. Following the collapse of the Luna construct, the token started deteriorating. Its dropping value may have been among the root causes of Celsius’ controversial reactions.

A cheaper stETH represents a great opportunity for some, as the token will become redeemable for ETH one-on-one, following the ETH merge that marks the move of the blockchain from the proof-of-work consensus mechanism to proof-of-stake.

From the perspective of bitcoin investors, the problem is that despite not being involved in any of the shady crypto schemes, bitcoin is exposed to the fallout they generate.

During the last crypto winter of 2017, the meltdown following the ICO craze brought the markets crashing down. ICOs mostly took place on the ETH network. Until it decouples its value proposition from the antics of its clones and various stablecoins, bitcoin will remain vulnerable and highly volatile. As such, it will continue to be a risky and tricky investment vehicle.