Luna's infamous collapse, then Celsius implodes, suddenly Tron shows hints of demise, and now 3-Arrows-Capital is in deep financial trouble. No one knows who's next, but one thing is certain: more pain is coming.
For the sake of clarity, Bitcoin is not crypto. It's important to distinguish between the two. When I say crypto, I'm talking about digital products and innovations that rely on using Blockchain technologies and cryptocurrency models to run their projects. There are thousands of crypto projects in today's market, most of which appeared in the last 12 months. Not all of them are bad projects, but many are. Why is this happening now? How are they failing at a relatively similar time? Are all these crypto projects and crypto companies scams? The problem is a liquidity problem and not necessarily a technical one. We witnessed a "gold" rush (no pun intended) in the most recent market run up from fall of 2020 to spring of 2022. That euphoric rush to market meant higher competition. Higher competition created an environment where two things emerged:
- Projects providing unrealistic or unsustainable promises (high yields, foundational upgrades, consensus modifications, etc.)
- Projects with the intent of financial exploitation (scams, false marketing, theft, etc.)
What made the crypto soil so fertile for the aforementioned problems? Most of the money that entered the crypto market since 2019 was not from retail investors. It was institutional money that was comfortable with making risky moves in a highly liquid market and a dovish Fed. It was a very risky move for institutional money, but in a liquid market with near zero interest rates, high risk is high reward. Risk-on mode. However, when the ride gets bumpy and the Fed starts changing tone while the DOW and the housing markets start signaling an increase in risk, then risk assets are the first to get get sold. Risk-off mode.
Luna is still under investigation, but we can see how the high-yield promise was in hindsight a clear red-flag. No one noticed, because there was a "liquidity party". In Ethereum's case there was a lot of unrealistic promises that left its users with a jaded sense of faith in the network itself.
To reiterate, the problem with the crypto market in general is not a technical problem, it's a liquidity one. The Fed's QT announcement in late 2021 threw the market for a spin and the effects were almost immediately clear to all observers. That's when projects that over-promised and projects with unsustainable yields had to crack under liquidity pressures.
What is a liquidity problem? What is QT? Quantitative Easing is how the US Federal Reserve "prints" money into existence. The Fed creates the money on their balance sheets with the purpose of purchasing treasuries and mortgage-backed securities (MBS). So far (since 2008) the Fed has $8.5 Trillion on its balance sheets. QT is when the Fed stops or slows the purchase of treasures and MBS's coupled with selling these assets in the open market. Starting today, the Fed will sell $45 Billion in assets onto the open market. This will create liquidity pressure on the market, and especially on-risk markets starting with the crypto market. The Fed wants to fight inflation, and they can do that by raising interest rates and also by sucking up liquidity from the market.
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Up until early 2022, the crypto market was a block party with a gushing fire hydrant supplying the market with liquidity. That liquidity fire hydrant was unleashed by the Fed itself. Now the Fed is back to close that hydrant. Party's over.
As noted, they will sell $45 Billion in assets today. Then, the Fed is going to sell another $45 Billion in July, and another $45 Billion in August. Then, they will increase that amount to to $95 Billion each month starting in September. Remember, the Fed has $8.5 Trillion in purchased assets on its balance sheets, so this can take years if uninterrupted by political, financial, or macro factors.
Crypto's problem is not a technical one, it's a liquidity one. Surprisingly, the party was happy and going oh so well even when scam projects were so prevalent and obvious. Evidently, all the market needed was free money.
Where do we go from here? In about 2-3 hours, Mr. Powell will appear and signal a very hawkish monetary policy. Some of which, the market has priced in. However, I believe we should prepare for a hawkish surprise. Remember that historically, the Fed has always been successful in tackling inflation with interest rate hikes when they reached within 2.5% of the annual inflation rate. Also note that the Fed has never been able to reach the previous ATH interest rate since 1982. Why would they succeed now?
Crypto markets will not recover until the Fed pivots or gets inflation under control in a non-catastrophic way (soft landing as Mr. Powell says). Meanwhile, accumulate Bitcoin. This is the time when generational wealth is created for you, your family, your future. This is the time to buy because the Fed will pivot, the Fed will not do a soft landing, the Fed will impact the dollar and the bond market. Bitcoin will be there as it has been the whole time.
In closing, remember that Bitcoin did not technically or structurally change at all. Throughout this market turmoil and several crypto crashes; Bitcoin's cap is still 21 million, it's still decentralized, it's still scarce, that won't change. What changed is liquidity because of Fed policy. What changed is market participants' emotions. That can change again, the Fed will print and purchase again. Bitcoin is still on point. It's akin to George MacKay, focused and on time.
So, buy more and happy hodling.