Is it Time for Crypto Investors to ‘Consciously Uncouple’ from Bitcoin?
Don’t cling to a mistake just because you spent a long time making it — Aubrey De Grey
Bitcoin, I think we need some space…
Conscious uncoupling entered our popular lexicon about a decade ago. For those who don’t know, it’s a way to break up with someone that helps preserve dignity. What does that have to do with Bitcoin? I think it’s time for savvy crypto investors to rethink their relationship with Bitcoin.
Since I’ve started investing in crypto, I have probably seen a few hundred variations on the ‘crypto prices follow the markets’ or ‘crypto prices follow Bitcoin’ idea. I most often see this when crypto prices are falling. I admit it can seem as though big moves in equities or Bitcoin are driving crypto prices. I also know the evidence supporting the idea is very weak.
Lemmings and sheeples and bears, oh my!
What the evidence does show is something entirely different tends to drive crypto prices — herd behavior. To be fair, the various theories of financial herd behavior are hardly settled science. Economic and financial researchers have been picking the idea apart for almost 100 years. However, the notion does have a certain intuitive strength. We’ve all experienced or witnessed some form of herd behavior in our fellow humans, whether that be a riot, a stampede, or a viral Tik-Tok craze.
Moreover, in crypto (and equities) markets, there are even common sayings related to herd behavior. ‘Be fearful when others are greedy, and greedy when others are fearful’ says Warren Buffet. Or, ‘the time to buy is when there is blood in the streets’ from Baron Rothschild. And, let’s not forget the ubiquitous ‘buy the dip’, which you can probably find a hundred YouTubers saying right this moment.
Those adages are contrarian in nature. The implication being, if ‘everyone’ is running for the door, the smart move is to look for other options. At their core, these sayings draw a distinction between the value investors (contrarians) and the growth investors (the herd). Or in crypto parlance, the ‘hodlrs’ and the traders (and by extension, the ‘moonbois’).
Both the hodlrs and the traders are seeking gain by buying low and selling high. They are just operating on different time horizons, and with different reasons. Hodlrs tend to take long positions on assets they think are undervalued, or oversold. In contrast, the traders tend to take short positions on assets they think other people are, or will be buying or selling.
The traders might howl a little at the characterization, but I bet you if some shitcoin starts taking a moonshot, they’ll be buying. Either way, I’d suggest this article should be read by both. If my thesis is correct, it has big implications for crypto investors.
What’s wrong with Bitcoin?
The answer is, nothing inherently. The real problem lies with Bitfinex and Tether (USDT). A 2017 research paper by Griffin and Shams revealed the little scam Bitfinex has been running. I know this has been debated to the moon, but the data speaks for itself. From the paper:
The flow is attributable to one entity, clusters below round prices, induces asymmetric autocorrelations in Bitcoin, and suggests insufficient Tether reserves before month-ends. Rather than demand from cash investors, these patterns are most consistent with the supply-based hypothesis of unbacked digital money inflating cryptocurrency prices.
What they’re saying is, for years Bitfinex created unbacked USDT out of thin air, and bought Bitcoin with it to drive up the price (usually at the end of the month). Then they’d use that as ‘backing’ for the USDT already out there. Rinse and repeat enough times and *poof* Bitcoin hits $60,000 plus.
It’s not just these researchers either. Despite what Bitfinex claims, this is what the Attorney General of New York had to say:
Tether’s claims that its virtual currency was fully backed by U.S. dollars at all times was a lie…The OAG’s investigation found that, starting no later than mid-2017, Tether had no access to banking, anywhere in the world, and so for periods of time held no reserves to back tethers in circulation at the rate of one dollar for every tether, contrary to its representations.
Bitfinex and Tether have cleaned up their act a lot (by force), but now there’s no one left to game Bitcoin prices up. This whole thing also serves as a nice example of herd behavior. Tether’s manipulation brought the herd. The herd bought up Bitcoin. Tether’s game falls apart in early 2021. Bitcoin tanks hard a month later. The herd sees opportunity and buys like crazy. Their enthusiasm runs out. Now the price is coming down and there’s no Bitfinex/Tether to boost it up again. Where do you think the herd goes from here?
It’s not you Bitcoin, it’s me…
That is why I think crypto investors need to ‘consciously uncouple’ from Bitcoin. Bitcoin is not the crypto market. It’s value is artificially inflated and it historically doesn’t correlate at all with equities. So, why on earth would we ever use it as a benchmark for crypto projects that are creating real world innovation and value?
Bitcoin could literally go to zero tomorrow and Ethereum, Solana, Polygon, NEAR, Avalanche, and hundreds of other crypto projects would be just fine. Sure, the herd will panic and run for the door. So what? Something like that would weed out the really weak projects in the downturn. But, I think the strong ones would be back up in a very short time. In fact, I think such an event would bring a lot of stability to the crypto markets.
Bitcoin is probably one of the most successful freeware proof-of-concept projects ever. It’s also fundamentally a meme coin and nothing more. It derives value from people buying it, just like Doge and Shiba. The huge difference being, the Bitcoin bubble was not speculative, it was fraud. In that sense, Doge and Shiba are probably safer than Bitcoin, at least in terms of price stability.
When there’s blood in the streets…
The point of all this is: I think sooner rather than later, Bitcoin prices are going to fundamentally decouple from the broader crypto market. I think this will happen if Bitcoin prices keep falling (which, for the reasons above, I think they will). In essence, I believe the herd will bring broad crypto market prices down right alongside Bitcoin. But, as crypto market prices rebound (because these projects have real value), while Bitcoin stays at whatever equilibrium price it finds, Bitcoin will simply stop being relevant to the herd.
I believe this will eventually bring a lot more stability to the crypto markets. I also very strongly believe the time between now and then is going to bring some of the greatest investment opportunities ever seen…if you know what you’re looking at. I hope I’m right about this, because if Bitcoin’s days really are numbered (yes, I know millions have called it before), I’m going to be buying Polygon, NEAR, Luna, BNB, and Sonar PING. Plus, it’ll help me feel better about the all the Bitcoin I deleted back in 2010.
