Subprime Crypto

Aside from Middle East war, and earnings season, this week's seminal event is the "Bitcoin Halving" which is set to take place between April 19th and April 20th.

Before I discuss Bitcoin halving, let's revisit my weekend post in which I said that bulls have been alternating between greed and fear as it relates to the escalating Middle East war. Last Wednesday (4/10) was a fear day. Thursday was a greed day. Friday was a fear day. And then this morning bulls for some reason decided that Iran's weekend retaliation was no big deal, so the S&P futures started the day up 60 points above the Friday lows. But then this afternoon, back came Middle East worries again. The futures straight line crashed 100 points intra-day, closing on the lows.

Amazing.

But what's even more amazing is that financial media pundits have been there every step of the way informing us from one moment to the next that the risk is here, now it's gone, now it's here again. Now it's gone. You get the idea. These buffoons are now getting whipsawed on an hourly basis and each time they reverse their own narrative like a bunch of chimps at a circus.

Which gets us back to Bitcoin halving...

In a matter of a few days, the Bitcoin algorithm will automatically adjust to make it twice as difficult to create aka. "mine" each new Bitcoin. Which means that many marginal Bitcoin mining "rigs" will be forced out of business. This will collapse Bitcoin liquidity until such time as the price of Bitcoin rises enough to offset the new cost.

"Around April 20, the halving will cut the amount of Bitcoin that "miners" can earn each day for validating transactions to 450 from 900 now. Based on Bitcoin's current price, it could spell revenue losses of around $10 billion a year for the industry as a whole"

“The nascent AI industry is drawing in massive amounts of capital, which is making it harder for miners to secure favorable electricity rates with utility companies.

“The artificial intelligence crowd is willing to pay three or four times what Bitcoin miners were paying last year” for electricity"

So Bitcoin miners are competing with AI data centers for electricity to power their massive computational black holes. So why not make it twice as expensive to mine each Bitcoin?

The critical assumption among Bitcoiners is that Bitcoin ALWAYS rises after a halving event. However this time speculators have piled into Bitcoin on an unprecedented scale ahead of this event, more so than at any other halving. I am of course referring to the creation of eleven new spot Bitcoin ETFs that were approved by the SEC in January. In other words, we've never seen this level of front-running before, which has created a one-sided trade just as liquidity is about to collapse. The thing about low liquidity is that yes it makes it easy to manipulate the price higher, because there is less volume. However, on the downside it also makes it easier to create momentum in that direction as well. Each trade - being fewer in number - has more outsized effect on price. Low liquidity works both ways.

Here we see that the last two halving events preceded a big surge in volume and the Bitcoin top. Whereas this time, the volume (and price) surge has preceded the halving event.

The entire rationale for buying Bitcoin and other Crypto currencies is because newfound acolytes of the Austrian School of Economics don't trust "fiat currencies" which can be expanded at the whim of central banks.

They prefer to own non-yielding Crypto currencies that proliferate like rabbits with zero yield and zero barrier to entry. Shit coins as they are often called.

No fiat currency has been more diluted than the Japanese Yen. This week we learned that Yen shorts are the highest since 2007. Which is interesting because that is the same year when global stock markets peaked and crashed into the Global Financial Crisis. What we see from this chart is that the Yen bottomed in 2007.

In this chart I show the Yen against the $USD, whereas I usually show the $USD versus the Yen (trending higher). I believe that both Bitcoiners AND Yen shorts are going to learn a lesson in one-sided markets very soon.

Now, there's another related risk that I haven't discussed recently - Which is called a "Blockchain death spiral". The way Bitcoin works is that if the mining volume "hashrate" falls below a certain level then the algorithm automatically adjusts the difficulty level lower again making it easier to mine new Bitcoins. So even if Bitcoin difficulty doubles this week, it will likely go lower over the coming weeks. However, difficulty is only adjusted every two weeks. Which means that it will take two weeks for difficulty to come down.

Now picture a global RISK OFF event taking place while Bitcoin volume is collapsed. Because that's what is mostly likely to occur.