Original author: VNTGPRN
Original translation: Block unicorn
“Are we in a bear market now?” Overall, I think yes. Every altcoin is down 40% or more (with a few exceptions). With Bitcoin down 23% as of this writing and 30% off its previous local low, things are not looking good right now. This time around, every new altcoin or meme coin that made millionaires has fallen so badly that selling on every rally is almost justified given Bitcoin weakness and the broader macro and liquidity backdrop. Don’t worry though. As long as you don’t get yourself burned by being overly long on every 5% pullback, there will always be new opportunities. Also, I will say that I have no way of knowing for sure where Bitcoin will go next. I’m a trader who just knows what price I want to buy and sell at and then let the market do the rest. I want to speculate on what a Bitcoin bear market would look like given that we are now in the ETF traditional finance era. That’s the purpose of this article.
Again, I have no idea whats going to happen next. I know I want to buy in the low 70s for a bounce, and I know I want to sell at resistance in the 88-90s. All I can do is make a contingency plan.
Scenario 1: Apathy and fatigue
This bear market will most likely be worse than the last one. I don’t mean in terms of price, I mean it could take years of volatility to bottom out. I think a 75% correction in one year is far less painful than a 50% correction in three years. Imagine you were an investor in the 70s trying to buy the SP during stagflation. While there were plenty of opportunities, it took 7 years to make new highs (1973-1980). Also, the second downtrend in the 70s took 2 years to complete a 50% correction. The first correction also took nearly 2 years to complete a 38% decline (November 1968 to June 1970). Also remember that this was a period of stagflation, which is high inflation and low or negative growth. In real terms, that 50% correction was much worse than it appeared. I’ll talk more about stagflation later because I think it’s a worst-case scenario for the broader economy.
Seven years of extremely brutal price action.
A continuous decline in the past two years.
I would say this drop was largely predictable, and may not be noticeable to crypto natives who trade 90% of the time in niche instruments with low liquidity requirements, but for those who are watching US trade policy (tariffs), US domestic policy (DOGE, mass deportations), and valuations of big tech companies, they have been quietly exiting risk since November. I think this is the initial correction as these big pools of money are exiting the market. This has shifted the market to a defensive posture, causing people to hedge their positions at the slightest hint of downside risk, and with the adoption of various financial products for Bitcoin by traditional finance (CME futures, Ibit options, etc.), there is a lot of liquidity to buy and sell various hedging instruments.
In my opinion, I can see a scenario unfolding that would be absolutely devastating for crypto natives chasing green candlesticks. Everyone knows how bad the Bitcoin bear market has been. The 75% drop so far has been normalized, which is one of the reasons why people don’t even want to participate in it. Despite its outperformance on a risk-adjusted return basis, the volatility is too much for many. However, there are now liquid markets to hedge this volatility and downside risk. Enter IBIT options. The painful slow-fall scenario could stem from the options market, and mechanically it would unfold like this. Larger players buy puts to hedge their spot exposure. Puts become very expensive, so market makers are happy to sell them. Market makers need to hedge their short put positions by selling spot and remaining delta neutral, or adjust other positions. Many of these market makers will close short positions, buy spot, or adjust positions to restore delta neutrality as they approach option expiration. Assuming a low liquidity environment (bear market), this could lead to one of two things happening.
1. Spot buying pressure and short liquidation from market makers slows down any downside movement near option expiration, causing prices to fall very slowly toward their targets over several months, with a lot of choppy movement and volatility near option expiration.
or
2. Buying pressure and short liquidation from market makers near option expiration is enough to drive prices higher, and when these puts expire, market makers close their short positions to restore delta neutrality. Volatility increases near option expiration, and everyone loses money except those who sold puts at a high premium. This cycle continues until sellers overwhelm any passive buying, or more marginal sellers enter the market by abandoning their positions.
Of course, this assumes a lot of things. As I said, this is not my base case scenario, but it is certainly something to be aware of. Additionally, if put premiums are extremely high, it could be a sign that people are afraid of a falling market, and if sellers overwhelm the buying from market makers, the spot price could still fall. Hedging pressure from market makers is only one factor - it does not operate in a vacuum. Additionally, if implied volatility rises significantly (pushing up those expensive premiums), market makers may use other instruments (such as futures or offsetting calls) to hedge, diluting the direct impact on the spot price.
Then again, this is the worst case scenario in my opinion, as every minor bounce is a glimmer of hope for many who still believe this is a bull market.
Regarding stagflation, it is a central bankers worst nightmare. It is a failure of the dual mandate of stable prices and balanced labor markets. High inflation and low growth is once again the worst case scenario for the overall economy and absolutely disastrous for financial markets. The only thing I can see that would do well during stagflation is probably gold, and even then, would you feel comfortable chasing it higher? Right now, there are early signs that stagflation is brewing. Core PCE has been revised upward. GDP estimates are softening (to be fair, this has a lot to do with government layoffs) and many market commentators are shouting about stagflation as the new hot topic bait. I dont think its likely to happen yet. I want to see more data to confirm this, because Im not willing to build a multi-year thesis based on a few soft/hot indicators. I would also add that if you were a central banker, would you be willing to fail miserably on both aspects of the dual mandate? Or would you sacrifice one to save the other? These central bankers have proven time and again that they would rather accept high inflation than face a disastrous deflationary spiral that threatens the foundations of the financial system. So, will they take the risk? Maybe they are too slow to respond to the worsening economy. This is something I dont know, but Im not willing to experience either. Therefore, I consider this a possibility and will take action once I have enough confirmation.
Scenario 2: This time is no different
This is probably the better of the two bear market scenarios. Every crypto cycle ends the same way. Bitcoin peaks, and in the frenzy of Bitcoin peaking, people increase leveraged exposure. Smart money exits and people start getting liquidated, leading to a big pullback from the all-time high. Bitcoin slowly falls, with occasional rallies, but gets rejected on retests and ends up going further lower. An exchange or large fund or both collapses, leading to the final capitulation, a 70-80% drop from the all-time high, everyone declares the asset class dead, and during a brief consolidation at the bottom, people who sold near the top start to set the bottom.
I say this is the best scenario because it provides a lot of opportunities. You get a once-in-a-generation entry again. You have a chance to succeed quickly again. In this case, I think it will last 14 months at most.
I think the odds are lower though. My reasoning is that the market is much more mature, liquidity is much higher, and many large holders hold a lot of supply and are not using much leverage at all. In more mature markets, extreme pricing efficiencies like an 80% pullback aren’t a big deal because people have liquid options to hedge their exposure. Again, something catastrophic, crypto-specific would have to happen for us to get there, which is possible, but it’s a 50/50 chance at the moment. That said, altcoins could easily pull back 50-60% again here. Who are the marginal buyers of altcoins in this environment? Traditional finance is moving to risk aversion, crypto natives are exhausted, liquidity in crypto markets is fragmented, and everyone is waiting to see if Bitcoin will pull back another 20%. The only argument in favor of “this time is different” is that altcoins aren’t having a true altcoin season, but why would that be? There are hundreds of new altcoins, none of which offer new utility. Furthermore, they don’t need to hold value to offer that utility, and in many cases function better when they’re cheap. I think in this scenario, capital will continue to rotate between various altcoins in a PVP type market, with no sector clearly outperforming the others, and the entire altcoin system will fall 90% from its all-time high. The only argument I can see for altcoins to rise in the near term is a major positive catalyst in the form of traditional financial adoption (RWA, stablecoins, etc.), but such a thing will take months or even years to fully establish.
I want to end this chapter on a positive note. However, I also want to reiterate that with each failed rally, this scenario becomes increasingly unlikely. I am neutral to slightly bearish in the medium term, having said that, I am often wrong but I make sure to keep most of my money when I am wrong so that I can get outsized returns when I am right.
Scenario 3: This is a pullback similar to the summer of 2021
I think its highly unlikely, but again, Im just a trader. I dont know anything except what I want to buy or sell, at what price, and how much. Given the environment were in, the best you can expect is that Bitcoin will do very little and just trade sideways for the next few months. I dont even think the most bullish headlines right now will drive a sustained rally. Every rally has been met with a big sell-off. Until the liquidity environment becomes easier for risk assets, until theres more certainty on trade policy, and until economic data shows modest growth and slowing inflation, your primary goal should be to preserve your capital.
I will state again that my view in the medium term is neutral with a slight bias to bearish. My base case assumption is that we will not hit all-time highs until the economic and geopolitical uncertainties are largely resolved. However, you do not make and keep money in the financial markets by predicting. You make and keep money by preparing for every scenario and adjusting your positions based on those events. From a trading perspective, if you plan to go long, remember to lock in profits on every rally. It is a great traders market right now and you can still make money from this market as long as you are patient and disciplined. Dont chase the rally and dont be greedy. If you want to go short, be careful. Bitcoin has fallen nearly 30% and altcoins have fallen over 50%.
Ill be the first to tell you that youll make more money by staying optimistic. Theres more upside to be had by being long in financial markets. However, this is one of those times where you should be prepared for further downside. There are more things that can go wrong here, and even though a lot has gone right, prices still havent responded favorably for any extended period of time.
