Hayes argues that speculators and leveraged players across the market have no Bitcoin left to sell.
BitMEX co-founder and renowned crypto essayist, Arthur Hayes, thinks the worst of this year’s Bitcoin bear market has come to pass.
The former CEO believes the three major cohorts of forced Bitcoin sellers – trading firms, miners, and speculators – have already capitulated, marking the bottom of Bitcoin’s market cycle.
How Bitcoin gets dumped
As Hayes explained in a blog post titled PEDMAS on Friday, centralized lenders (CELs) begin by going bankrupt when they lend to parties that cannot pay them back, and when they face duration mismatches. The latter is when depositors expect their assets back in a short time frame, but the institutions have lent them out on a long time frame.
In order to satisfy capital calls, CELs will begin liquidating the collateral on the short-term loans they have provided to other industry players. That collateral is usually denominated in either Bitcoin or Ether – meaning both assets start facing major sell pressure. They also begin to call on miners they’ve lent to either shore up Bitcoin or their mining rigs.
The combined sell pressure causes the price of Bitcoin to fall rapidly in the lead-up to a wave of bankruptcies. For example, as both Three Arrows Capital and Alameda Research encountered trouble during this cycle, vast amounts of Bitcoin and Ether were sold across centralized and decentralized exchanges.
“All that is left now are illiquid shitcoins, private stakes in crypto companies, and locked pre-sale tokens,” wrote Hayes, with reference to Alameda’s use of Serum as collateral. “ I have comfort that these entities have little to no additional Bitcoin to sell.”
Miners go under
Hayes believes Bitcoin miners have also run out of coins to sell. Faced with a combination of rising energy prices, greater network difficulty, and a falling Bitcoin price, such firms have been forced to liquidate their Bitcoin holdings and mining equipment as they get margins called.
The first major mining bankruptcy this cycle came from Compute North in September. This was followed by news that Core Scientific, Argo Blockchain, and Iris Energy all teeter on insolvency due to an inability to make scheduled interest payments.
As with centralized lenders, miners sold off their Bitcoin well before declaring bankruptcy. Core Scientific announced that it had sold over 7000 Bitcoin after June’s price crash, leaving under 2000 left on its books. It continued to sell its remaining coins over the following months.
As miners go under and liquidate their mining rigs, network hash rate starts to fall for some time. This occurred after both June’s market crash, and the FTX/ Alameda fallout, proving Hayes’ theory that miners will downsize operations without capital to continue.
The little guy
Finally, Hayes believes speculators have run out of coins to sell. According to data from Glassnode, open interest (long/short contracts) on Bitcoin across all major centralized exchanges has fallen substantially since the start of the year.
“What remains are traders using derivatives as a hedge, and those using very low leverage,” said Hayes. “This gives us a bedrock to move higher.”
Hayes added that he expects the Federal Reserve to resume money printing as the US Treasury bill market grows dysfunctional in 2023. “Bitcoin and all other risk assets will spike higher,” he said.