The Shocking Unraveling of Bitcoin – What’s Behind the Crash?

11 days ago, we posted “Unveiling Bitcoin’s Possible -10% Plunge” (see comments section)

1) Yesterday, we warned that Bitcoin was about to break its year-to-date uptrend line, which could set prices back to 25,000/26,000.

2) We also listed the looming macro risks and described that the low realized volatility had previously been resolved with a Bitcoin crash (see comment section).

3) During late US / early Asia trading volumes, Bitcoin prices broke the critical support level at 28,000. We knew a crash (or sharp decline) could be coming, so we rushed to publish our weekly report yday at noon, earlier than usual, to provide our institutional clients and readers a timely heads-up.

4) Realized volatility had hit 18%; the last time volatility was this low, in November 2018, Bitcoin’s 30-day realized volatility spiked to >100% as prices crashed by -46%. In Bitcoin, sharp price declines have often followed low volatility periods. We are not predicting such a significant decline but expected, at least, a -13% decline (so far, prices are down -10%).

5) Back to the 25,000/26,000 level – the low so far has been 25,650, right between those target levels.

6) There is also a looming overhang of macro risks. The biggest is a potential devaluation of the Chinese Yuan, trading at the weakest level since 2007. In August 2015, when China devalued the Yuan for the last time, Bitcoin prices declined by -23% during the two weeks following the devaluation. Before a more meaningful rally started, Bitcoin finished the year +59% from the level of the devaluation.

7) During previous notes, we had shown that crypto fundamentals had remained weak and that macro carried crypto initially higher in January 2023, followed by the US bank failures in March and then by the filing of Blackrock’s Bitcoin ETF. The +75% rally in Bitcoin prices can be traced back to just those three events and narrowed down to 3 weeks.

8) But macro was increasingly risky as the 10yr Treasury yields climbed above 4.0% and China could potentially devalue the Yuan. The market was sitting on fragile support levels and yesterday, those appeared to be broken in due course (hence our rushed report).

9) This is why we have also written reports during the last few weeks, suggesting “Sell Spot [Bitcoin], buy Calls – Ditching Bitcoin for Bigger Profits” and “Bitcoin Options Offer Convexity amidst Deteriorating Fundamentals”.

10) The message was clear, investors could liquidate their Bitcoin and use a small amount of their cash to trade options as they had become cheap while the market was about to enter the risky ‘end of summer time’. It was time for capital preservation. It’s a trader’s market.

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