Michael Burry, the investor who predicted the 2008 crisis, warned this Monday (2) about a possible even greater drop in Bitcoin. According to him, the cryptocurrency could enter a “death spiral” — a vicious cycle of sales that feeds on itself.
Bitcoin has fallen 40% since its peak last October. On Tuesday (3), it was worth less than $73,000. This Thursday (5), it plummeted to $61,000, before recovering to $64,000.
What is the “death spiral”?
Burry wrote in his Substack that Bitcoin has proven to be a purely speculative asset. It did not function as a hedge against currency devaluation, unlike gold and silver.
If the cryptocurrency falls another 10%, companies like Strategy — which has the largest corporate Bitcoin reserve in the world — would be billions of dollars in the red. Capital markets would close to these companies.
Further declines would lead Bitcoin miners to bankruptcy, according to the analyst.
Why is Bitcoin falling?
Bitcoin did not react to the factors that normally drive it. The digital currency did not respond to the weakness of the dollar or geopolitical risks. Meanwhile, gold and silver hit records.
Burry stated that there is no organic reason for Bitcoin to stop falling. Adoption by companies and exchange-traded funds (ETFs — financial instruments that allow investing in Bitcoin without directly buying the currency) is not enough to sustain the price indefinitely.
Companies at risk
About 200 public companies hold Bitcoin in their cash reserves. Cryptocurrency assets must be marked to market — that is, valued at the current price — in financial reports.
If the price continues to fall, risk managers will start advising their companies to sell, Burry warned.
The correlation of Bitcoin with the S&P 500 approached 0.50. This means that the cryptocurrency is increasingly linked to the stock market. When one falls, the other tends to fall as well.
Investor outflows
Bitcoin ETFs recorded some of their largest outflows since November. Three of them occurred in the last 10 days of January.
Burry cited the decline of the cryptocurrency as partially responsible for the recent collapse of gold and silver. Corporate treasurers and speculators had to sell profitable positions in tokenized futures of these metals to reduce risks.
Tokenized futures are digital contracts based on cryptocurrency, but are not backed by real physical metals.
Companies resist, but margin is shrinking
Michael Saylor, co-founder of Strategy, said that the company is not facing immediate financial stress. There are no margin calls — requests to deposit more collateral when investments drop significantly — nor is there an expectation of forced selling of Bitcoin.
Strategy built a reserve of $2.25 billion from stock sales. This amount will cover interest payments for more than two years.
But without recovery of Bitcoin or new demand from investors, the room for maneuver is shrinking.
Scenarios for larger declines
If Bitcoin falls to $50,000, miners may go bankrupt. Tokenized metal futures would collapse without buyers, according to Burry.
He estimates that up to $1 billion in precious metals were liquidated at the end of the month due to the decline of cryptocurrencies.
Burry's story
Michael Burry's story inspired the movie 'The Big Short'. He became famous for betting against the American real estate market before the 2008 crisis.
The article Bitcoin: analyst who predicted the 2008 crisis warns of "death spiral" was first seen on BeInCrypto Brazil.