What in the **** is going on in the crypto market? What caused $8 billion worth of Bitcoin to be liquidated in one hour? In the intro of last week's newsletter, I briefly alluded to the significant pullback in Bitcoin that took place. But that was only two days into the madness. Let's look at what transpired over the entire week.
In the words of my most trusted mentor, "BUY when there is blood in the streets." Well, right now, we're in the middle of a game of thrones battle!
It turns out there was a decline in the BTC mining hash rate after a blackout in China's Xinjiang province that "caused almost half of the Bitcoin network to go offline in 48 hours," according to an article by Coinpage. As I've explained in my previous newsletters, Bitcoin is a cryptocurrency that is mined. All that means is that there are computers online solving complex problems to create more Bitcoin. To create more Bitcoin, you need very advanced computers and a lot of computing power(and a reliable electrical source). The computing power used to generate more Bitcoins is known as the 'Hash Rate.' Analysts say that the Bitcoin hash rate and Bitcoin price have "always been correlated," hence the price action after the blackout in China took place.
See Below.
Now, the question stands. If one province in China controls over 45% of the Bitcoin network, is Bitcoin truly as decentralized as we all thought? Think about it.
To add to that, the Biden Administration is planning to almost double the capital gains tax rate to 39.6% and has proposed a federal tax rate as high as 43.4% for those earning more than $1M. This announcement has caused a significant sell-off in all markets, not only in the crypto space but across all sectors. Right now, we are witnessing speculators and investors booking profits after a big rally in the Bitcoin market before Biden gets the full support of his party to pass the new tax plans. If his plan stands, America will become the most taxed country in the world!
Should you be worried about the pullback in Bitcoin? The long-term answer is no.
When new investors and speculators are in the nascent stages of adopting an asset in a particular space, such as crypto, there will be a low level of liquidity. But you have to understand, with low liquidity comes a lot of volatility - it is only normal. Promisingly, Bitcoin's volatility has seen a tremendous decline of over 32% since the bull run in 2017 and will keep declining long term as more and more institutions move in.
I was watching an interview with Ran Neuner, CEO of OnChain Capital, the other day. He views this BTC dip as minuscule when looking through the long-term scope. He said it was good that the blackout in China "showed itself so early in the life cycle of Bitcoin… Bitcoin is a relatively small $1 trillion asset by market cap. And this was exposed rather early… Over time we would just get more machines processing transactions outside of China. This is not a big concern, but we are glad this concern finally got out there, and we know about it".
I couldn't have said it any better. This is no time to panic, if anything, the opposite. Remember, you are still SO EARLY to Bitcoin. If this flash crash took place in 2030, then I would say, "it's time to hit the eject button" because we would have gone years without seeing any flaws in the system. The fact that this is happening in the early stages is a positive.
When the Bitcoin rally popped off a couple of months ago, we saw investors and speculators sell off their gold holdings in chase of the 'life-changing profits' in Bitcoin. With all the turmoil in the Bitcoin market, could this be a sign for the second leg of a gold run? Analysts say that if the spot price of Gold can creep above $1800, things can get interesting…
Let me clear a common misconception while I'm on the subject of Gold, you don't have to own gold bricks to "own" Gold. Gold has stood the test of time for thousands of years as a store of value. The best way to capitalize off a gold cycle, in my opinion, is to hold gold stocks. Alternatively, you can hold it digitally. Paxos Gold and Tether Gold are two of many digital tokens backed by physical Gold. You can also buy Gold ETF's.
Do I hold Bitcoin? Yes, Do I hold gold stocks? Yes. Am I a Bitcoin maximalist? No. Am I a Gold Bug? No. I AM someone who sees Bitcoin and Gold as two GREAT options as a store of value. I will go further into my bullish views on Gold in the weeks to come. Today's piece was simply my observations after the biggest liquidation in crypto history. I'll leave you with three words PROTECT YOUR WEALTH!
Until then,
Have a great week and stay curious
-Zo
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