Original Author: VNTGPRN

Original Translation: Block unicorn

"Are we in a bear market now?" Overall, I think we are. Every altcoin has dropped by 40% or more (with a few exceptions). As of the time of writing, Bitcoin is down 23%, having previously dropped 30% from its local low, and the current situation does not look optimistic. This time, every new altcoin or meme coin that creates millionaires has fallen so drastically that selling during each rebound seems almost reasonable in the context of Bitcoin's weakness and the broader macro and liquidity backdrop. But don't worry. As long as you haven't over-leveraged yourself during every 5% pullback, there will always be new opportunities. Additionally, I must say I cannot determine where Bitcoin will go next. I am a trader; I only know what price I want to buy and sell at, and then let the market do the rest. I want to speculate on what a Bitcoin bear market might look like now that we are in the ETF traditional finance era. That is the purpose of this article.

I reiterate, I do not know what will happen next. I know I want to buy at a low of $70 for a rebound, and I know I want to sell at the resistance level of $88-90. All I can do is formulate a contingency plan.

Scenario 1: Indifference and Exhaustion

This bear market is likely to be worse than the last one. I am not referring to price; I mean it may take years of turbulence to reach the bottom. I believe a 75% pullback within a year is far less painful than a 50% pullback over three years. Imagine you are an investor trying to buy the S&P index during the stagflation of the 1970s. While there were many opportunities, it took 7 years to reach a new high (1973-1980). Additionally, the second downtrend of the 1970s took 2 years to complete a 50% pullback. The first correction also took nearly 2 years to complete a 38% drop (from November 1968 to June 1970). Remember, this was a period of stagflation, characterized by high inflation and low or negative growth. In real terms, that 50% pullback was much worse than it appeared on the surface. I will discuss stagflation more later, as I believe it is the worst-case scenario for the broader economy.

Extremely brutal price movements over seven years.

Continuous decline over the past two years.

I would say this decline has largely been predictable. It may not be obvious to crypto natives who trade obscure tools with low liquidity 90% of the time, but for those focused on U.S. trade policy (tariffs), domestic policy (DOGE, mass deportations), and valuations of large tech companies, they have been quietly exiting risk since last November. I believe this is the initial correction as these large pools of capital exit the market. This has shifted the market to a defensive posture, leading people to hedge their positions at the slightest hint of downside risk. With the adoption of various financial products related to Bitcoin by traditional finance (CME futures, Ibit options, etc.), there is plenty of liquidity available to buy and sell various hedging tools.

In my view, I can see a scenario unfolding that would be absolutely devastating for crypto natives chasing green candlesticks. Everyone knows how bad a Bitcoin bear market can be. So far, a 75% drop has been normalized, which is one reason people are even reluctant to participate. Despite its excellent performance on a risk-adjusted basis, the volatility is too much for many. However, there is now a liquid market to hedge against this volatility and downside risk. Enter IBIT options. The painful slow decline scenario may stem from the options market, and it would unfold this way mechanically. Larger participants buy put options to hedge their spot exposure. Put options become very expensive, so market makers are happy to sell these options. Market makers need to hedge their short put option positions by selling spot and maintaining delta neutrality or adjusting other positions. Many of these market makers will close their short positions, buy spot, or adjust positions to restore delta neutrality as they approach the options expiration date. Assuming a low liquidity environment (bear market), this could lead to one of two scenarios.

1. The buying pressure from market makers and short covering slows any downward movement near the options expiration date, causing prices to decline very slowly to their target over several months, accompanied by significant volatility and fluctuations near the options expiration date.

Or

2. The buying pressure from market makers and short covering near the options expiration date is sufficient to push prices up, as market makers close their short positions to restore delta neutrality when these put options expire. Volatility near the options expiration date intensifies, and everyone except those selling put options at a high premium loses money. This cycle continues until sellers overwhelm any passive buying, or more marginal sellers enter the market due to abandoning their positions.

Of course, this assumes a lot of things. As I said, this is not my base case, but it is certainly something to watch out for. Additionally, if the premiums on put options are extremely high, it may indicate that people are fearful of a market downturn. If sellers overwhelm the buying from market makers, spot prices could still decline. The hedging pressure from market makers is just one factor—it does not operate in a vacuum. Furthermore, if implied volatility rises significantly (pushing up those expensive premiums), market makers may use other tools (such as futures or offsetting call options) to hedge, thereby diluting the direct impact on spot prices.

Once again, in my view, this is the worst-case scenario because every small rebound is a glimmer of hope for many who still believe this is a bull market.

Regarding stagflation, it is the central banker’s worst nightmare. It is a failure of the dual mandate to stabilize prices and balance the labor market. High inflation and low growth once again become the worst-case scenario for the overall economy, which is absolutely disastrous for financial markets. The only thing I can see performing well during stagflation is gold, but even then, would you feel comfortable chasing it at a high price? Currently, there are early signs that stagflation is brewing. Core personal consumption expenditures have been revised upward. GDP estimates are softening (to be fair, this is largely related to government layoffs), and many market commentators are shouting stagflation as the new hot topic bait. I do not think this is likely to happen yet. I want to see more data to confirm this, as I am reluctant to build a multi-year argument based on a few soft/hot indicators. I would also add that if you are a central banker, would you be willing to fail on both fronts of the dual mandate? Or would you sacrifice one to save the other? These central bankers have repeatedly shown that they would rather accept high inflation than face a catastrophic deflationary spiral that threatens the foundations of the financial system. So, would they take the risk? Perhaps they are too slow to react to the economic deterioration. This is something I do not know, but I also do not want to experience it. Therefore, I see this as a possibility, and once I have enough confirmation, I will take action.

Scenario 2: This Time is No Different

This may be the better of the two bear market scenarios. Every crypto cycle ends in the same way. Bitcoin peaks, and in the frenzy of Bitcoin reaching its peak, people increase their leveraged exposure. Smart money exits, and people begin to get liquidated, leading to a significant pullback from the historical high. Bitcoin slowly declines, occasionally rebounding, but is rejected upon retesting, ultimately moving lower. An exchange or a large fund, or both, collapse, leading to final capitulation, with a drop of 70-80% from the historical high, and everyone claims this asset class is dead, while those who sold near the top begin to set the bottom during the brief consolidation at the bottom.

I say this is the best scenario because it offers many opportunities. You can once again gain an entry opportunity that comes once in a generation. You have the chance to succeed rapidly again. In this case, I think it would last a maximum of 14 months.

However, I think this possibility is low. My reasoning is that the market has matured a lot, liquidity has greatly increased, and many large holders hold a significant supply without using much leverage at all. In more mature markets, extreme pricing efficiencies like an 80% pullback are not a big deal because people have liquid options to hedge their exposure. Again, it must be something catastrophic and unique to cryptocurrency for us to reach that point; it is possible, but currently, it is a 50-50 chance. Nevertheless, altcoins can easily pull back 50-60% again here. In this environment, who are the marginal buyers of altcoins? Traditional finance is turning to safe havens, crypto natives are exhausted, and the liquidity in the crypto market is dispersed, with everyone waiting to see if Bitcoin will pull back another 20%. The only argument supporting "this time is different" is that altcoins have not experienced a true altcoin season, but why would that be? There are hundreds of new altcoins, and none provide new utility. Moreover, they do not need to hold value to provide this utility; in many cases, they function better when they are cheap. I believe in this scenario, capital will continue to rotate among various altcoins in a PVP-type market, with no sector significantly outperforming others, and the entire altcoin system will drop 90% from its historical high. The only argument I can see for a recent rise in altcoins is a significant positive catalyst in the form of traditional finance adoption (RWA, stablecoins, etc.), but such things take months or even years to fully establish.

I want to end this chapter on a positive note. However, I also want to reiterate that with each failed rebound, this scenario becomes increasingly unlikely. In the medium term, I hold a neutral to slightly bearish stance. That said, I often make mistakes, but I will ensure to retain most of my capital when I am wrong so that I can achieve outsized returns when I am right.

Scenario 3: This is a Pullback Similar to Summer 2021

I think this is very unlikely, but again, I emphasize that I am just a trader. Aside from what I want to buy and sell, at what prices, and how much, I know nothing else. Given the environment we are in, the best you can expect is for Bitcoin to remain relatively quiet over the next few months, just trading sideways. I do not even think the most optimistic headlines now can drive Bitcoin to continue rising. Every rebound will be met with heavy selling. Before the liquidity environment becomes more accommodating for risk assets, before trade policies become more certain, and before economic data shows moderate growth and slowing inflation, your primary goal should be to preserve capital.

I will state again that my view in the medium term is slightly bearish. My base assumption is that we will not hit historical highs until a lot of economic and geopolitical uncertainty is resolved. However, you do not earn and retain capital in financial markets by making predictions. You earn and retain capital by preparing for every scenario and adjusting your positions based on those events. From a trading perspective, if you plan to go long, remember to lock in profits during each rebound. Now is a great trader's market; as long as you have patience and discipline, you can still profit from this market. Do not chase highs, and do not be greedy. If you want to short, be cautious. Bitcoin has already dropped nearly 30%, and altcoins have fallen over 50%.

I will be the first to tell you that staying optimistic will earn you more. There is more upside potential in going long in financial markets. However, now is one of those times you should prepare for further downside. There are more things that could go wrong here; despite many things progressing smoothly, prices still have not reacted favorably over any extended period.

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