Will Bitcoin Investors Get Burned In January (again)?

The beginning of the New Year is historically a lousy time to be buying bitcoin.

As you can see from the arrows in the chart, bitcoin usually heads DOWN in January. Since 2011, bitcoin has had a cumulative return of MINUS 22 percent.

Only September (minus 42%) is worse than January.

Last January was a notable exception with a monthly return of 24%, but that followed the completely awful months of November and December 2019, when the price of bitcoin collapsed.

The traditional explanation for the slump is that late January/early February is the beginning of Chinese New Year, so you have the Asian version of the North America saying, “Sell in May and go away.”

It’s not just the Chinese either, many Asian cultures celebrate the Lunar New Year or spring festival including Indonesia, Malaysia, Thailand, and Vietnam,

Because the official start date of the Lunar New Year varies from year-to-year, I encourage people to read the Wikipedia article on the subject. In 2021 Chinese New Year festivities start February 12^th and end on February 26^th.

So We Can Safely Short Bitcoin, Right?

Not necessarily. Some big traders tried to bet with the trend and got their heads handed to them on a plate.

This is a screenshot of a Twitter “bot” that tracks liquidations on Bitmex, the largest overseas bitcoin derivative exchange in the world.

Investors (gamblers?) are losing ten of millions of dollars a day betting against the price of bitcoin.

There’s a huge short squeeze going on.

There are two major reasons put forward why “this time is different.”

One is the halving of bitcoin production that happened last May means that Chinese miners don’t have the same “swing” that they have in previous years. Hence the lessening of the Chinese New Year effect.

I will explain:

It estimated that two-thirds of bitcoin mining hashpower (i.e. the servers that control the bitcoin network) were based in China at beginning of 2020.

Some say that because of new regulations by the Chinese government you are going to see miners moving out of China (but I see that story every year, so I’m skeptical until it really happens).

Having said that, until May 2020, 1800 bitcoin a day were “mined” by the bitcoin network and distributed to the miners.

However, the bitcoin program cuts production of bitcoin in half roughly every four years, automatically.

So now best estimate is that perhaps Chinese miners produce at most 600 bitcoin a day, most likely less.

It has been widely speculated for years that Chinese miners working in partnership with Hong Kong bitcoin future exchanges like Bitmex manipulate the price of bitcoin to increase volatility and make even more money with derivative trading.

I wrote an article on how increasing price volatility makes easy money for crypto-traders who know how to hedge.

It is like throwing sticks of dynamite in a salmon-spawning steam: buy short contracts, dump $10 million of bitcoin in the open market, and then profit.

The sharks are still trying to swing the market their way– there’s too much money involved to just walk away – but their daily supply of ammunition got cut in off last May and now:

They are not the biggest fish in the crypto-sea.

US institutional buyers, like Grayscale Bitcoin Trust (OTC-GBTC), Square, Inc. (NASDAQ-SQ) and PayPal Holdings, Inc. (NASDAQ-PYPL), are buying up all the new supply of bitcoin and more.

Grayscale Trust in particular, is a massive whale.

As of December 30^th, it held $17 billion USD of bitcoin when the price was $29K. On December 1^st, it held $10.2 billion USD (price $19.5K).

After accounting for the 49% increase in the price of bitcoin for the month, we can calculate that Grayscale added $1.83 billion USD of bitcoin to their portfolio.

Assuming they bought the bitcoin at average price of $24K, that’s 76,250 bitcoin.

But only 900 “new” bitcoins are mined a day or 27,000 in thirty days.

Those two numbers pretty much explain why the price of bitcoin has been soaring the last quarter of 2020.

Conclusion

Will Grayscale continue to buy bitcoin in January at its current pace? If so, forget about the “January” dip.

Fortunately, the company posts the numbers on their assets accumulation nearly every day on their twitter feed.

In my opinion, if they continue accumulating during the first week of January, that’s very bullish, not just for the whole month, but for all of 2021.

But even if we see a correction in January, it’s going to be hard to stay bearish for long.

Historically, February is a strong month with a cumulative average return of 125% since 2011. March is okay with 10% return. April and May usually blow the doors off with returns of 220% and 360% (cumulative, since 2011).

But the real story is that crypto is going mainstream and in a hurry. For example, Paypal is now taking bitcoin.

Whereas banks once avoided crypto-clients like poison, financial companies like Silvergate Capital (SI – NASDAQ) (which we wrote about here) are embracing them and watching their share prices soar.

Just yesterday the US Office of the Comptroller of Currency said that banks can use digital coins to settle payments.

We will soon know if US financial institutional acceptance of bitcoin puts an end to the January blues.