The Michael Burry crypto crash scare follows close on the heels of his hedge fund, Scion Asset Management, dumping its holdings weighted down with tech stocks such as Meta (META), Apple (AAPL), and Alphabet (GOOG). Furthermore, with "Big Short" Burry recently exiting the stock market, what does this mean for crypto? If you're unfamiliar with the movie "The Big Short", Michael Burry is the investor who got famous by shorting the 2008 housing bubble when the conventional wisdom was still fully invested in the boom's continuation. Because he successfully shorted ahead of the crash, people are paying attention to what he has to say now.
The Michael Burry Crypto Crash
According to Yahoo Finance, a disclosure recently filed with the SEC, Burry's hedge fund, Scion Asset Management, unloaded approximately $292 million worth of tech stock shares. All that remains is a small position in a private prison company. Furthermore, this particular stock is Geo Group Inc (GEO), the world's second-largest private prison company.
Notably, on Twitter, Burry predicted that "winter is coming" for the global economy. So, naturally, he would want to dump higher-risk assets at the fringes and put his money in security facilities.
Economic Factors to Consider
The Michael Burry crypto crash starts with a "winter is coming" premise despite the recent rally in stocks and crypto. To confirm his hypothesis, Burry points to several factors, such as the US consumer credit rates. While its historical average hovers around $28 billion a month, it has been rising by $40 billion per month. That's one of the red flags.
That number is not surprising, with some consumers going into credit card debt to pay for food and gasoline. On top of that, business conditions are projecting a weak job market. These factors combined mean less money coming in and more going out for the average household. Moreover, events such as the Fed's interest rate hikes have also prompted the Michael Burry crypto crash adherents to take a bearish outlook on financial markets.
Burry's 2008 Prediction
Since Michael Burry successfully forecasted the real estate bubble when other big banks and investors were going "all in", his predictions carry more weight than the average investor. Furthermore, he has "skin in the game" by liquidating positions. By taking action, the Michael Burry crypto crash prediction is a far cry from someone tweeting "FUD" to get a reaction. They can delete the tweet and pretend they never said anything if they're wrong. In the case of Burry's hedge fund, if he's wrong in pulling money out of the markets, his clients will lose tons. Moreover, skin in the game is a relevant indicator of how committed someone is to their position.
Regardless if Burry's prediction comes true, we are in a bear market. That's why understanding crypto crashes and learning how to invest during a crypto bear market is vital. Read more on these subjects at our blog at Moralis Academy!
Burry's Prediction Record
Besides calling the 2008 housing bubble, the Michael Burry crypto crash prediction follows others with various accuracy levels. For example, in March 2021, Burry tweeted that Bitcoin is a "speculative bubble" and predicted it would crash. Soon after, Bitcoin's price tanked from approximately $59,000 in March to about $34,000 by May.
In addition, Burry tweeted that Bitcoin's value was tracking with US tech stocks. To demonstrate, he showed a chart that tracked Bitcoin's price as it peaked in November 2021 until it dropped to approximately $21,000 in the spring of 2022. Furthermore, by comparing Bitcoin's price movements with tech stocks, he concluded that the world's top cryptocurrency was just another of the Nasdaq 100's risk assets.
Burry also warned that central banks could further handicap Bitcoin's success since they perceive it as a threat to their currencies. Also, he's fond of comparing the crypto boom to other bubbles, such as the dot-com bubble and housing markets. As an "uber bear", he's warning retail buyers to steer clear of crypto because he believes the "mother of all crashes" is coming.
Analyzing some of these predictions, the one in June 2021 came true. However, time frames are a crucial component of forecasts. Assets (particularly volatile ones) will crash one day in the future. So, predicting that a market will crater isn't that much of a stretch as any high-flying asset will regress to the mean at some point. That's why the best market forecasters will include a time frame with their predictions. In the case of the June forecast, traders who ignored Burry made a lot of money hanging onto Bitcoin until it peaked in November 2021. By that time, it rallied to over $67,000 before fulfilling Burry's hypothesis.
So, even though Burry's prediction eventually came true, investors who jumped the gun in June left a lot of chicken on the bone. Those who ignored him and held out until November would have doubled their money.
Bitcoin's Correlation to Tech Stocks
So, Burry's June 2021 crash prediction eventually came true. At the time of this writing, Bitcoin's price is $21,420. Additionally, few people would argue that Bitcoin's price is still tied to the stock market (particularly tech stocks). Thus, since Burry dumped his stock positions, his actions could be a precursor that prices in the crypto sector could drop further.
However, listening to only one person's forecast is never good. The news media thrives on experts making predictions, especially when they take a strong position that provokes a reaction. So, investors shouldn't flinch at every piece of "FUD" circulating through the news cycle.
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If possible, it's better to balance any so-called expert's opinion with one's own research. But, since many people don't want to research or don't know how, let's look at some other viewpoints to get a more balanced perspective. We'll start with the "mega bears" first.
Experts on the Bear Side
Investment manager, Jim Chanos, took a shot at crypto in a recent Bloomberg podcast, claiming that tokens have failed to replace dollar bills and act as portfolio hedges. As chief of Kynikos Associates, he also compared crypto to a Ponzi scheme and accused the industry of ripping off its customers. He even went so far as to call cryptocurrency a "predatory junkyard" that sprung up as a new way to fleece retail investors.
Another naysayer is economist Paul Krugman. In a recent New York Times article, he said the crypto crash was inevitable, just like any other Ponzi scheme that runs out of new suckers. These are strong words coming from a distinguished professor of economics. He says crypto has "gone from the Big Short to the Big Scam".
Experts on the Bull Side
In a recent interview with Fortune magazine, Mark Cuban warned that a crypto crash would squeeze the bad businesses out. Cuban compared some crypto firms to weak companies in the traditional world floating in easy money without real business prospects. Thus, they are destined to disappear.
However, the tech billionaire still foresees a bright future for crypto companies that can offer game-changing apps. He believes these firms will succeed in acquiring customers and will shake off the adverse effects of interest-rate hikes this year. But such revelations are nothing new. Mark Cuban always maintained that a handful of crypto projects would be wildly successful while most would fail. Moreover, he believes that projects such as Bitcoin, Ethereum, and others will spring out of this bear market, like the Web2 companies that emerged from the dot-com crash to become giants in the industry.
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Mike Novogratz suggested the crash in crypto prices could help eliminate some of the excessive leverage flooding the industry. He believes big players borrowing money from everywhere will create a "daisy-chain" effect across the ecosystem. Easy money is still burning through the system, and these fires will continue to burn until they run out of oxygen.
Novogratz also believes the ecosystem needs time to recover. Confidence is low, and it will take time to reconnect the pieces after everything's fallen apart. On the other hand, Novogratz predicted the price of Bitcoin will explode once the Federal Reserve stops hiking interest rates.
During a recent Yahoo Finance interview, Suze Orman advised crypto buyers to exercise caution in the space. Best known as a personal finance personality, Orman suggests that investors keep no more than 5% of their portfolio in crypto and only invest what they can afford to lose.
Even for mainstay cryptos such as Bitcoin and Ethereum, she advises investors to be careful with all the unknowns. But at least she did recognize that blockchain technology could be revolutionary and that the improvements coming to Ethereum could send its price rocketing.
Balancing the Perspectives
Extremists exist at both ends of the spectrum. If you cruise the "Twitterverse" long enough, you're sure to run across your fair share of "moon boys" who will leap on any uptick in the market as a sign that we're out of the bear market and going full-on bull.
On the other side are crypto bashers such as Krugman and Chanos, who are more in line with the Michael Burry crypto crash narrative. Seeing otherwise intelligent people speaking so glibly and dismissively of crypto is always unsettling, as is the tired Ponzi scheme allegations.
Enough with the Ponzi Scheme Analogy
People abuse the term "Ponzi scheme" so frequently that it has lost its original meaning. Besides, how many Ponzi schemes exist in the present-day financial system? Crooks, scammers, and Ponzi schemers have always been around and always will be as long as people trade financial instruments. Crypto didn't invent the Ponzi scheme, and just because scammers exist in the space, it isn't an indictment on the whole industry. At the inception of the stock market, bucket shops were ripping people off left and right. Likewise, crypto is still in its infancy. As long as people look to get rich quickly, scammers will always be waiting to fleece them.
More likely, many high-profile critics view cryptocurrencies and blockchain technology as a threat to their positions of power and influence inside the status quo financial system. Hence the harsh, outlandish critiques aimed at people who only scan article headlines.
Countering Bearish Sentiment
Some experts remain unfazed by the Michael Burry crypto crash prediction despite his successful call in 2008. That's because it's next to impossible to predict the exact time and scale of market crashes. Further, there is always something bearish on the horizon.
Other people responded to Burry with unflattering comments on the Yahoo Finance page:
"He bought Facebook for 300+ and shorted Tesla and Apple. If you did the opposite, you have done very well."
"This guy always thinks all equities are going to fail. Thankfully, he's usually wrong."
However, Burry's bearish sentiment is not entirely without merit. His concerns over macro factors like worsening business conditions and problems with the housing and consumer credit markets carry some weight. Moreover, a lot of the data supports his conclusions.
The Michael Burry Crypto Crash - Conclusion
To sum up, several business publications like Yahoo Finance and Markets Insider quoted multiple tweets from Burry to draw correlations between negative predictions for tech stocks and the crypto markets. In another tweet about the stock market's third quarter, Burry stated: "Can't shake that silly pre-Enron, pre-9/11, pre-WorldCom feeling". If his hunch is correct, the recent rise in Bitcoin prices could be little more than a bear market rally ready to flip and crush some of the more impetuous.
The problem is one never knows precisely when or how severe a crash will be. Regardless of bear markets, blockchain technology is here to stay. So, now is the time to learn how to become a blockchain developer at Moralis Academy. Get started now, and you'll be ready for the next hiring spree when the market turns.