Waiting for the Bitcoin Moment

One of the biggest drivers for crypto prices lately has arguably been the macro environment. In fact, I fail to remember a time where crypto prices have been so correlated with what is happening in the traditional financial markets as now.

Following the bloodbath in the first quarter of 2020 where financial markets adjusted (read: nose-dove) to the outlook of a glooming pandemic with decreased economic activity, the crypto markets turned around like a rocket when central banks introduced lower interest rates and other fiscal stimuli. In the current landscape, the central banks are battling high inflation by hiking rates and introducing economic tightening and as a result, crypto is suffering.

In fact, the old trader saying: “Follow the FED” has proved to be very good advice for intelligent investor behaviour lately.

In 2020, the Federal Reserve kept calling inflation transitory and kept buying bonds and pumping the economy and as a result valuations rose of practically all asset classes. Risk assets such as crypto were huge beneficiaries of the loose monetary policy and investors kept seeking higher and higher on the risk spectrum in pursuit for an asymmetric upside. As consequence, most digital assets rose significantly from 2020 to 2022 with the biggest gainers arguably also being the most risky bets.

The Technology Stock “Bitcoin”

Looking back over the last few years, it is easy to recognise how correlated crypto has been with technology stocks and how both have acted in tandem to economic policy. From a fundamental standpoint, this is interesting because it contradicts some of the core features and promises made by assets such as Bitcoin (something I will like to dedicate a full essay to in a coming newsletter).

For now, let’s assume that if Bitcoin and the rest of crypto is to truly break free and form the foundation of tomorrows financial systems, we are yet to see an environment where BTC will not swing in price based on what is being said at a meeting for central bankers.

Right now, we are left to think about why price events from the traditional financial world are so impactful on price: Has the digital assets economy yet to reach the critical point of adoption? Can we expect this connection to weaken over time? What will the triggers for this behaviour to change? 

One thing is certain. It is an interesting time to be an investor. Distress is everywhere. And while that sure is disconcerting, we must also remember that the time of distress is also where opportunity is found.

For now all we can do is to stay to all that is going on while assessing what may happen in the future while applying a conservative approach to investing.
As for market direction, I am still a subscriber to continued zig-zagging as communicated in my last letter.
 

Worth Highlighting

• ECB hikes rates by 50 basis points
  Earlier communication by the ECB suggested a 25 basis point rate hike but as

  consumer prices have kept climbing, the ECB finally pulled the trigger and hiked rates higher-than-expected to 50 basis points. 

• Tesla sold 75% of their BTC
  It seems Mr. Musk did not have the diamond hands he claimed to possess. Fundamental analyst speculates the sale was done to prop up financials before earnings call. In the end, who really cares? Even for price discovery, there’s a big difference to someone saying they have already sold and someone saying they are about to sell. Nothingburger.

• 3 Arrows Capital saga (still) unfolding
  The situation around the liquidation of 3AC continues to be messy. Insights from the liquidation process shows an outstanding of roughly $3B while speculation rises that a luxury yacht worth $50M may have been bought using borrowed funds. The founders of 3AC claims these claims are smearing campaigns.