TLDR: Many crypto analysts think the bottom is in, and there’s plenty of reason to be positive as we head towards the new year. But the wider financial markets may yet continue to puke, and this could lead to another round of selling pressure in the crypto markets.
The bottom is in, they’re all shouting on Twitter, and after a dismal year, most of us in the crypto space could do with some welcome news.
For sure, it’s probably the case that capitulation amongst crypto hodlers is likely over for now, and it’s really difficult to have missed the big news which led to the crushing the markets have had recently, so the likelihood is that hodlers are still holding.
The FTX scandal has in all likelihood shaken out those who aren’t die-hard Hodlers, and the contagion has spread to even some of the very biggest players in the industry (whether real, or perceived, and that in itself is a whole other question) has seemed to have largely started to abate from the news cycle.
This is lent weight by a recent report from Morgan Stanley which outlined the extremely low volume on the sell-off, and on-chain data showing more than 78% of Bitcoin hasn’t moved in the last 6 months, meaning that “retail hasn’t sold in the bear market”.
They go on to note that “anyone that bought/received bitcoin between 1–1.5 years ago has an average breakeven purchase price around $45k.” In other words, nobody is selling at a loss — there is positive sentiment around a rebound
This would also suggest the “marginal” price of Bitcoin is being determined by a lesser amount of transactions, and this reduces liquidity and, in turn, increases the possibility of higher volatility.
Moreover, Bitcoin does look to be sitting almost at the point of strong support, and, combined with improved sentiment across the Twitter-sphere, there is a good likelihood of a push to the upside very soon, and there are those who are calling this as the turning point for a new Bull market.
There’s another school of thought that basically invokes the mantra “as above, so below”, and in this context, the wider financial market is most definitely that which is above the crypto market.
Whilst it’s tempting to view crypto markets as gigantic, having around an $830 Billion market cap, even after the FTX debacle, this amount is pocket change compared to the global equity markets, which are currently valued well in excess of $110 Trillion. It’s self-evident, therefore that in comparison, the entire crypto market is just the weedy kid brother of this colossus — and if the wider market experiences some form of depression, well, this is almost certain to have implications for crypto.
The wider financial market is currently struggling with 40-year high inflation, armed conflict, supply chain issues, an energy crisis, spiralling credit debt and a general sense of negativity and frustration over the lack of clear direction on fiscal policy coming from Central Banks — especially the Fed, which could pivot — reverse it’s current monetary policy stance — at any moment.
For most of this year, the Fed has been largely on a contractionary crusade, raising rates to the highest levels seen since the 2007–08 Financial crash.
The trouble is that when the Fed pivots, it is almost always followed by a period of decline — sometimes as much as a 50% drop, and this can be seen across the entire market, as demonstrated in the chart below, which plots the benchmark S&P500 index against the effective Fed funds rate.
In fact, since the 1970s, there have been a number of Fed Pivots, and almost all of them preceded the S&P 500 dropping from between 28% to a gigantic 58% (2008).
The Fed has been under pressure to pivot for some time, and although it has signalled that it may ease up on rate rises towards the end of the year, so far, they’ve continued hiking rates month on month.
More importantly, markets have never been close to being as broken as they are now. If the FTX scandal showed us anything (and Bernie Madoff before SBF), it’s that nefarious players in the ecosystem can easily evade scrutiny for as long as they’re paying off the right people.
Even worse, in 2008, the money supply was nothing like it is now — when the Fed started tightening earlier this year, the M2 money supply had tripled in 12 short years, most of it in the last 2 years since the start of the Covid pandemic.
However, there is also the possibility that the Fed is trapped. Inflation isn’t transitory, and a pivot now might well let the inflation genie out of the bottle for good.
just a couple of days ago, Ryan Peterson posted a chart showing US citizens' personal savings plotted against credit card debt. This image probably should have had flames licking around it — and we’re sure you can probably guess which line represents the debt, and which represents personal savings!
The long and short of it is this — from institutions to ordinary investors, a major drop would see further capitulation, which would likely wipe out huge amounts of value from the markets — and this would affect crypto too.
Whilst it’s true that there are certainly risks to assuming the bottom is in, always remember there always exists a bear for every bull thesis.
It would be great if there was a way to remove downside volatility without affecting the upside, really, wouldn’t it?
This is precisely why we developed Bumper in the first place.
Risk markets are vital, and Bumper’s novel architecture is very different from any other, and Bumper’s job is to protect the actual value of your crypto tokens — it’s a little bit like using Options to hedge, but it applies directly to the tokens you hold.
Even better, Bumper’s novel Bumpered asset, returned when you open a protection position, is a composable token which can be deployed purposefully in DeFi applications. Genius.
In summary, as we head towards the festive season, perhaps we have reached the bottom, but there’s still a risk of more to pain to come before the inevitable market reversion. As always, this is not financial advice, and you should do your own research.
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