Going Through a Tantrum...

While financial commentators are still hesitant calling out words of recession (re: I believe we are in one), there can be no doubt that the digital assets markets are well underway for yet another “crypto winter”.

And while price development may indeed be disconcerting, longer term participants of the crypto markets should hardly experience this as anything new. During the last crypto winter that followed the cycle high of December 2017, the markets went on a year long downwards grind before any momentum for the upside materialised.

So is this time different?

It is difficult to say at this point. If we observe the crypto markets in isolation from everything else and do an apple-to-apple comparison with the last market cycle of crypto, the dynamics of price development are not much different from what we experienced during 2018. Perhaps, this time around price has been accelerating downwards quicker than it did back then.

However, this time is different in many other ways. Most noteworthy, BTC, which is the most reliable indicator of market strength of the digital asset space, is trading in a macro environment very different from 2018. And while some die-hard crypto believers would discount any relationship with the “real” financial world, the entire industry is currently trending very much in sync with traditional markets.

Macro Outlook

All eyes continue to be on the Federal Reserve as the attempt to salvage the rising inflation with additional rate hikes continues. The FED is in a tough spot where it needs to be very focused on bringing inflation rates down to the norm but on the other hand needs to pay attention to the consequences of a too rapid tightening of the monetary policy. Basically a choice between fixing inflation and breaking things or letting inflation run wild.

Chairman of the FED, Jerome Powell, has said again and again that the objective remains to lower inflation even if this will slow down growth. As political pressure increases due to how financial markets are reacting to this course of action, it is yet to be known whether the FED will be iron-willed enough to stick to its course. It remains crucial to track the course of events here as this is by far the strongest narrative in play for the current environment of all markets. 

If the situation in itself was not worrying enough, recent comments made by Joe Biden and Jerome Powell provide concern that neither of the two are fully aware of the dynamics in play or have ulterior motives. Luckily, more and more are calling them out including notable characters such as Jeff Bezos.

Crypto Lense

Bitcoin continues to trade sideways and is for the time being range bound between 17.500 and 21.800 USD providing no real signal of directional movement.

To quote an old trader saying: “When the stock is trading down, it probably will trade down tomorrow” and for as long as we can see the negative narrative in control, crypto markets will probably be in a slump.

And right now, we don’t have to look very far to find narratives that support the bear thesis. TerraLuna’s collapse represents one of the biggest and quickest wealth destruction events in modern history, and while that event is a forgone chapter already, the cascading effects of TerraLuna, Celsius and 3AC imploding are still causing waves in the industry and materialising the first systemic event in crypto. Whether the fallout effects are over for now or new skeletons will fall out of the closet is yet to be seen. I am leaning towards the latter having the highest probability as other industry operators are rumoured to be in trouble.

Worth Highlighting

• BlockFi signs term sheet with FTX
  BlockFi has been one of the companies caught up in the cascading dominos of recent instability. It’s interesting to see FTX coming out and showing financial aid here. A philanthropic gesture to put a hand under the industry they operate in or is it just a plain good deal?

• FTX rumoured to be eying acquisition of Robin Hood
  Interesting if true, as it shows a difference in strategy from Binance. Binance is doubling down on investments within the crypto industry while FTX could be pursuing expansion to other verticals.

• The 3 Arrow Capital saga explained

  Yet another great post by Arthur Hayes detailing the cascading events that followed the liquidation of 3 Arrow Capital. Long but great read.

Round-off

The market’s are not showing anyone much love lately. Fiscal and monetary tightening combined with a continuous conflict in Ukraine gives us the ingredients needed for what the JPMorgan Chase CEO Jamie Dimon recently described as an economic hurricane in the horizon.
On the brighter side of things, the crypto markets have already taken a heavy beating and while most technical indicators are still pointing towards continued downside, the negative sentiment extreme provides hope that a contrary move could be in the brewing. It may still be too early to be jumping into the markets but a number of fundamental indicators start pointing to BTC valuations in a severe oversold territory, hinting that this could be a moment of opportunity for long term investors.