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Bitcoin: The Trojan Horses Have Broke Out (Cryptocurrency: BTC-USD)

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In my October 2021 article, Bitcoin: You’ve Been Warned, I said that some of the Bitcoin (BTC-USD) influencers may not have been the gods they were touted to be. Then the coin suffers a different one Two of the most prominent investors have fled the downturn. This is my updated outlook.

The Trojan horses have stormed out of the Bitcoin paddock

In October 2021, when Bitcoin was trading at $66,000, I warned of an imminent downturn for the second time. The first time saw a 50% pullback, but the second time is still down 65% despite the July rally and the outlook for BTC is pretty bleak.

In my article during that bubbly October, one of the issues I saw with BTC was the weight placed on prominent influencers. At the time, I doubted their true intentions in the world’s most valuable cryptocurrency, and this has now been confirmed nine months later.

When I wrote this I said:

Many of the professional investors who tout Bitcoin as the future could be leading investors into this trap as well. Elon Musk has already shown this year that he can change his stance on accepting coins for Tesla (TSLA) vehicles. That announcement helped fuel the rally in early 2021 before Musk changed his mind about energy consumption. He has since clarified that they will likely accept it and the company is up $1 billion on BTC holdings of $1.5 billion, but he might change his mind yet again for a more energy efficient coin.

The big news recently was that Musk’s EV company had now sold 75% of its stake in the coin. The reason given was that supply chain issues had increased the need for short-term cash. Tesla is certainly facing some headwinds, but it might just be an opportune time to exit BTC investing. The 25% token holding could be a speculative attempt to breakeven on the investment.

“We are certainly open to increasing our bitcoin holdings in the future, so this should not be taken as a judgment on bitcoin. It’s just that we were concerned about the company’s overall liquidity,” Musk said on a conference call.

Investors should consider for themselves whether the decision is a judgment on Bitcoin. Personally, I don’t see Tesla buying Bitcoin in 2022, and I’d say the chances of that happening in 2023 are in the low single digits.

The next prominent Bitcoin influencer to come under pressure is MicroStrategy (MSTR) CEO Michael Saylor. Saylor is stepping down as the software company’s CEO after his bets on BTC have cost the company $1 billion so far.

Saylor transitions to the role of Executive Chairman, handing over the reins of the company to Phong Le.

“I believe splitting the roles of Chairman and CEO will allow us to better track both of our corporate strategies of acquiring and holding Bitcoin and growing our business analytics software business. As executive chairman, I will be able to focus more on our bitcoin acquisition strategy and related initiatives to advance bitcoin, while as CEO, Phong will be given authority to oversee all company operations,” Saylor said in a statement.

This is an apparent end to the Bitcoin debacle at MicroStrategy, and investors may have been hyped by the 2021 rally and thought they had a genius at the helm. Now that losses are mounting and the takeover is once again a distant dream, shareholders will be furious, and there’s a good chance they forced the move. Ultimately, MicroStrategy is a software company and the CEO has spent all his time running around roadshows promoting Bitcoin. If Bitcoin continues to pressure the company later, there could even be potential lawsuits against the company and its former CEO.

The common theme at Tesla and MicroStrategy is that we have two charismatic CEOs making big speculative bets on cryptocurrencies other people’s money. Unfortunately for many investors, they bought in for $50,000 to $60,000 based on the wisdom of these “gurus.”

In Saylor’s case, I have a feeling he has no choice but to stick with the bullish theme. Abandoning the BTC balance sheet strategy would further devastate MSTR’s holdings and share price.

Saylor said in a recent interview that he’s “as enthusiastic as ever” and is now comparing BTC to Manhattan real estate.

Do you need to move the asset for it to have value? Absolutely not. For example, Manhattan property does not have to be relocated for it to have value. In fact, you’d prefer Manhattan to be built on granite or slate that doesn’t move for hundreds or millions of years. It makes the property more valuable. Bitcoin is that.”

I recently wrote a book, heavily influenced by investment psychology and behavioral investing, called The Stock Market is Easy. There are so many comments related to this story in terms of bias and gurus. Here we have a CEO who is diversifying his company into speculative balance sheet security, and he has done so on such a large scale that it threatens the entire company. In the book I said:

Don’t get married to a position and don’t get bogged down in investments when the weather changes around you. Complex thinking requires effort. Your brain will want to take the easy route. By making an effort and overriding the brain’s comfort path, you can ease the stock market.

Investors should be wary of the gurus and pundits and consider their rationale for their move higher. As Warren Buffett once said, “Never ask a barber if you need a haircut.”

Bitcoin has staged a weak rally off the lows

The recent rally has done more damage to the cryptocurrency market than investors realise. Institutions started to dip their toe in the water and considered copying the steps taken by Tesla and MicroStrategy, but it’s likely no CEO will risk following that strategy right now.

Bitcoin

BTCUSD (M) (Trade View)

On a monthly basis, the price of BTC-USD has broken down to find support at the previous key resistance level from the late November highs of $20,000. The coin has surged to $25,000 but has faced resistance there on a weekly basis. A $20 break will target $12.5K.

BTC investors should be aware that the coin is a trading vehicle that follows standard technical analysis rules. Many think it’s some mythical creature that could ‘monden’ at any moment, but that’s not what we’re seeing in the price action. Private money is now heavily long with many in losing positions above the $50,000 mark. This period reminds me of the 2018-2020 phase when a price crash spooked institutional money.

The decentralized finance market has also sucked the wind out of Bitcoin’s sails after the failure of DeFi darlings like LUNA (LUNA-USD). The current total value locked (TVL) in crypto is $87.7 billion, according to DefiLlama, down from around $260 billion at the end of 2021.

crypto

TVL crypto (Deflama)

Aside from crypto developers, there is no real incentive to invest in these projects when government bond rates are skyrocketing and good dividends are available from the recent market sell-off. Again, institutions cannot invest in these projects due to the problems at Terra Luna, and it will be an uphill battle to restore genuine trust.

Added to this this week was the International Monetary Fund, which warned that other projects could fail.

“We could see further sell-offs, both in crypto assets and in risky asset markets like stocks. There could be further failures in some coin offerings — particularly some of the algorithmic stablecoins that have been hit the hardest, and there are others that could fail,” the group said.

The current outlook for cryptocurrency regulation

Ironically, further regulation could improve the outlook for cryptocurrencies. With a better overview of the coins and projects that are on the market, there could be more opportunities for professional investors to get involved. There are currently 20,000 crypto projects listed on CoinMarketCap and there should be a sector purge by regulators. That defies the purpose of decentralized finance, but the current sector is like the Wild West, as SEC Chairman Gary Gensler once said.

We saw more evidence of this this week with news that the Securities and Exchange Commission had arrested 11 people over a massive $300 million crypto Ponzi scheme. Forsage promoters persuaded millions of investors worldwide to get involved and recruit others.

“Forsage is a fraudulent pyramid scheme that is being widely implemented and aggressively marketed to investors,” said the SEC’s Carolyn Welshhans. “Fraudsters cannot circumvent federal securities laws by focusing their systems on smart contracts and blockchains.”

According to FT:

The SEC accused Forsage’s operators of raising as much as $300 million from at least January 2020 unregistered securities offering.”

That’s an interesting choice of words considering that Ripple’s XRP (XRP-USD) and Binance exchange’s BNB (BNB-USD) token have both been under the SEC’s microscope because they are securities, and we could see a crackdown expect. As I’ve said in previous posts, this lack of confidence in crypto and upcoming regulation only brings us closer to central bank digital currencies or a Treasury-issued digital dollar, and the majority of crypto projects are likely to fade away.

A recent Institutional Investor article on CBDCs noted that Janet Yellen wants clear cryptocurrency rules by the end of the year. Regarding the recent turmoil in the crypto market, they said:

“According to the Fed, a CBDC would offer sanctuary from this chaotic state by providing a form of digital money that is a direct liability of the Fed and is firmly pegged to the US dollar and the government, as opposed to an offshore flash -in-the-pan startup that can lie, cheat, steal, implode, or pull a midnight runner.”

This type of offering would appeal to institutional investors, and current banking heavyweights might even offer products with higher interest rates that would render DeFi projects worthless. Ultimately, money is all about trust, and I feel like Bitcoin and the cryptocurrency market are now on a steep climb to regain what was once solid.

Conclusion

In closing, I would like to say that I have been a cryptocurrency advocate since 2018. I have advised my Marketplace newsletter subscribers to buy at $8,000-$9,000 in 2020 before the strong uptrend rang the bells of speculative excess. I believe there is a future for cryptocurrency projects running alongside the upcoming CBDCs, but I don’t think Bitcoin will be a winner. Regardless, investors should take this opportunity at BTC to learn a real lesson about the experts and gurus in the field. Many of them are optimistic about other people’s money, while others are now in such deep trouble that the only way forward is through more optimistic calls.

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