Here in March 2021, Bitcoin's dollar price is almost five times what it was six months ago, and life is good. Yet as my YouTube, Twitter, and podcast feeds overflow with ads for services offering to lend me dollars against my Bitcoin holdings so that I can keep riding the rocket to the moon and avoid paying capital gains taxes, I can't help thinking about the next Bitcoin bear market. 

Don't get me wrong. Thanks in part to the efforts of uber-bullish friends like Bitcoin T.I.N.A., Preston Pysh, and Croesus BTC, I have high expectations for Bitcoin. I will be shocked if we don't see $100,000 this year, and I won't be surprised to see $250,000. I am not the guy in 2017 telling you to sell Bitcoin at $5,000 before it goes to $20,000. 

But as these fiat figures fly by, I can't help thinking about the anatomy of the next bear market for Bitcoin. Could this cycle be the "escape velocity" paradigm shift we've been waiting for? Will we never again see Bitcoin's price drop by 75%? Is it different this time?

Maybe. But that's not my base case scenario. More likely is something like the following.

After consolidating in the $40,000-$50,000 range throughout March, we start seeing Q1 corporate earnings reports coming out in April, and it becomes clear that more companies are adding Bitcoin to their balance sheets. This carries Bitcoin's price to the high five figures (in USD), and after one more significant correction or consolidation, we hit $100,000 by the end of May.

Now the retail FOMO really kicks in, and we see a classic parabolic upward move, possibly above $200,000 in July or August.  For Bitcoiners, it's summertime and the living's easy.  

But then something happens. Maybe it's a hack or theft at a sizable crypto exchange. Maybe it's some serious government FUD (China, U.S., Europe, India, or some combination thereof) as the "big bosses" start to come to their senses about crypto. Maybe it's just a bear market in stocks that results in a "risk-off" movement which drags down a Bitcoin market that is over-extended on most technical trading indicators. Or maybe it's a blow-up in DeFi land that causes a generalized panic in the overall crypto market.

Now the OGs who have large stashes are remembering 2013 and 2017. They've seen this movie before—twice before, in fact. They know what Bitcoin's four-year market cycle around the halving looks like, and they suspect this one will be no different. So they start selling in droves.

Now the weak-handed retail holders realize they were late to the trade. They’re reading scary headlines, and even they start to learn about Bitcoin's four-year cycles. They panic and start to fold out.

At this point, the leverage comes into play. Plebs who borrowed against their Bitcoin to buy houses, Bitcoin entrepreneurs who took out bitcoin-backed loans to fund their businesses, and class-of-2021 average-guys-turned-professional-leveraged-day-traders all start to get liquidated. The carnage compounds over months.

I keep hearing that the Bitcoin crash of March 2020 was a credible stress-test of the Bitcoin/crypto lending system and we should take solace in the fact that crypto-collateralized borrowers weren't liquidated en masse.

Dream on. That downturn was both short-lived and less severe than true bear markets in the past. Moreover, in March 2020, BlockFi was an interesting but small startup whose reputation and market positioning could have been mortally wounded had it liquidated its clients. In contrast, the BlockFi of summer 2021 will be one to two orders of magnitude larger, will be the 800-pound gorilla in crypto lending, and will realize that if prices fall 40% from the peak, then they're likely to fall another 40%. Like they always do in the bear market that follows the price peak in the year after the halving.

Ditto DeFi. In March 2020 the amount of leverage embedded in DeFi protocols was negligible. By summer 2021 it could be enormous. When combined with one or two other bearish factors, the DeFi tail could actually wag the Bitcoin dog.

As prices fall, the plebs and entrepreneurs will hope and pray that the usual bear market won't happen. So they'll try to wait it out. But they'll have to make the interest payments on those loans (and those interest rates could be rising) in a period in which their businesses have seen their revenues shrivel as fair-weather retail speculators flee the scene. Some will make it through the winter, but others will get liquidated at the worst possible time.

I sincerely hope none of this plays out. I would much prefer to see a steady march upward. But for readers who will have made fortunes as Bitcoin breaks to six-figure prices, just remember that you can still blow it. Don't be the proverbial man who drowns in the river that was only five feet deep "on average."

Be robust. Gird yourself for tougher times in Bitcoin. On the road to long-term financial freedom, unlevered cold storage and self-custody are your allies. Hold them close. You may need them.

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