Masters-Backed Hedge Fund: Greed and Leverage Broke Bitcoin's Rally

The bitcoin price may be stuck in the $800s for some time, a new investor note from Global Advisors Bitcoin Investment (GABI) argues.

Published today, the note finds one of the technology's more well-known hedge funds (led by ex-JP Morgan trader Daniel Masters) asserting that the market is "temporarily broken" after rising to near all-time highs of more than $1,100 at the start of 2017.

Overall, the firm projects that bitcoin's price is likely to continue to be volatile, and that further gains could remain elusive due to the uncertainty that it expects in the aftermath of the decline.

The note reads:

"The extreme move and the damage no-doubt done to a number of latecomers to the market will mean that no clear trend will emerge in the very short term. We believe that we will see a series of failed rallies fueled by new players, of whom many perceive bitcoin as 'cheap' relative to recent highs."

It continues: "In short, the price isn’t going anywhere fast."

That said, GABI is bullish on digital currency as an asset class long term.

Of note is that it believes there is the possibility bitcoin could see another breakout in 2017, with a ruling on a bitcoin exchange-traded fund (ETF) snapping the market out of the doldrums.

As reported last year, the SEC is expected to rule on two applications, one by the New York-based investors Cameron and Tyler Winklevoss, the other by New York-based startup SolidX, as soon as this March.

GABI goes on to suggest that its buyers accumulate bitcoin in advance of the expected rulings, and to establish long positions for when the time comes.

"There is room for a considerable upside during the last three quarters," the note reads.

The findings follow a separate note from investment banking and asset management firm Needham & Co, which contends that the Winklevoss filing has a less than 25% chance of being approved.

Still, it projected that an approval would be a boon for the market, attracting as much as $300m in capital in the first week of trading alone.

Leverage to blame

Yet, the note was also critical of a bitcoin market it identified as still insufficient for the needs of an expanding investor base.

According to the note, bitcoin traders should have been aware that the market was in for what it termed an "impending collapse" due to what it framed as the industry's acceptance of out-of-control leveraged trading.

The note goes on to break down offerings from both BitMEX, a Hong Kong-based leveraged trading specialist and Beijing-based OKCoin, one of the world's largest bitcoin exchange firms, noting the disparities between the two models.

Overall, it pointed to a lack of standardization as a culprit, noting that exchanges offer "divergent funding rates" that are often based on little more than the risk tolerance of its users.

It also painted the wider market as one that was forcing investors to consider bitcoin due to the possibility of large returns.

"Chinese investors and speculators – who are faced, as previously noted many times, with weak domestic currency, stocks, credit and commodity markets – turned to bitcoin as a non-correlated investment and speculative opportunity," it reads.

The note concludes:

"Wherever you looked around the bitcoin ecosystem in early January, the message was clear. Investors had become too greedy."

Download the full report here.

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