Everyone is talking about The Great Reset, the only reset happening right now though is your portfolio… Over the past 7 months crypto has lost over $2 Trillion in value and it now trades (time of writing) below the $1 Trillion mark.
We will walk chronologically, starting off with what helped the bull-run start, what caused it to stop and initiated a bear market. Then we’ll take a look into the future.
Words you need to know while reading this:
Risk-On: Investor sentiment and risk tolerance is high, wanting to have exposure to risk assets such as stocks or crypto.
Risk-Off: Investor sentiment and risk tolerance is low, wanting to minimise exposure to risk assets such as stocks or crypto.
Tapering: Slowing down the rate of asset buying
When COVID-19 was announced as a global pandemic by the World Health Organization on 12 March 2020, all markets crashed… really hard. That day will forever go in the history books as Black Thursday – a black swan event.
A pandemic needs certain measures to minimise worldwide health damage, the main one being lockdowns in this case. This meant that businesses such as shops and restaurants would need to shut down, tourism would take a massive hit too as everyone sat at home. The economic damage that this would cause because of unemployment and decreased revenues would be very severe. Everyone was also fleeing to cash and exiting all positions given the fact that they don’t know how long this would last and they’d need cash to survive.
Naturally, the Federal Reserve stepped in to save the day by announcing Quantitative Easing (i.e. Printing) to purchase assets causing all markets to bottom and V-shape recover.
They tell you to follow the big boys’ movements. What about when the biggest, baddest and richest bank in the world starts buying? You definitely don’t want to be selling.
Obviously, the FED was not buying Bitcoin or any crypto, but investor sentiment was risk-on so this effect propagated to crypto given it presents one of the highest risks and highest rewards. At the same time, fundamentals of crypto were improving as value accrual started to exist in tokens and actual products were being shipped beyond promises on a whitepaper like 2017.
All of this helped propel Bitcoin from $4,000 to $69,000 and ETH from $80 to $4,900.
The Day the Music Stopped
After helping all markets recover, especially the S&P500 with +112%, it was now time to deal with the other end of the stick: inflation.
Printing is great for risk assets, prices go up tremendously but you know what else goes up? The prices of everyday goods because the system was flooded with so much USD supply (i.e. inflation). On the 3rd of November 2021, the Federal Reserve announced they will start tapering all the way until March where the monthly asset purchases would go down from $120B to $0 per month. This caused investor sentiment to start shifting risk-off and markets began their journey in marking the top.
There are three main methods that can be used to tame inflation:
Tapering: Slowly stopping asset purchases in the market.
Raising Interest Rates: By raising rates on loans, borrowing capital is discouraged because it becomes more expensive.
Shrinking Balance Sheet: When the FED purchases assets on the market, these become part of its balance sheet which can quickly ramp up. The assets they deal with are Mortgage-Backed Securities (MBS) and Treasury Securities. Both of these assets are bonds and have a maturity date by definition. At maturity, the face value of the bond is paid back to the buyer. During QE, the FED reinvests that capital which keeps their balance sheet growing; they renew the bonds. When they want to shrink it, they simply stop reinvesting the capital after maturation. By letting them run-off they reduce the size of their balance sheet.
Here is the full timeline of events on the Bitcoin chart.
Tales of Crypto
The macro environment is causing the main effect on crypto prices, but crypto itself continues to deal with its own issues. First we had the LUNA death spiral after the UST depeg which deleted $50B+ of wealth from the market. Recently we began dealing with mismanagement of customer funds from centralised entities such as Celsius Network. If there is a bank run (everyone wants to withdraw at once) and the platform isn’t able to redeem then we must brace ourselves as they liquidate their wBTC and stETH holdings which represents further selling pressure on the market. Nexo, another lending provider, has offered to purchase their remaining qualifying assets to give liquidity to their clients given that they’ve halted withdrawals. This is a solution that would have lower market impact if chosen.
In a bull run, many of these details are hidden in plain euphoria but when the tide shifts we start seeing who’s over-leveraged and the market will punish the sinners – as it is now.
Now that we’ve evaluated the past, let’s take a look at the future and what it may hold.
Market stress is high and we’re already seeing people calling for sub-$10,000 BTC. The new and revolutionary financial system is trading under the $1 Trillion mark because of internal leverage and external pressures. When those pressures release, crypto will see light of day again – not every token though.
The bottom may be in or very close but that does not mean we’ll see another V-shaped recovery, in fact it is unlikely. We’re likely to sit in a deadly boring range for the remainder of the summer and people who buy today may end up puking their positions out of boredom and doubt before the market recovers. The safest route (slightly less rewarding) is waiting for a clear signal from the FED about some pressure relief.
Under the hood of crypto, very little has changed. The building continues to live on, bull or bear we continue to build on for a better tomorrow. This can be said of many other crypto projects and protocols too. The rain washes out a lot of the BS which gives those who stick around a clearer view on the real builders and future winners.
Crypto is destined to repair the broken TradFi system, the mistakes of which we are currently dealing with collectively.
Today, you are in a prime place and still early. Why? Because crypto is still under construction, the proof-of-concept (Bitcoin) is complete and now we are building the building blocks (base layers) and linking them together (cross-chain comms) to help the end product thrive which is the application layer. When all three elements are built, then it would be too late. Today isn’t that day.
When it is all said and done and this market attains a $100 Trillion market capitalisation in 2030, everyone will say:
In retrospect, it was inevitable.
But was their conviction strong enough to help them stick around in the hardest of times?