The Printer is Coming
Financial markets are a humbling mechanism. The past two weeks remind us just how difficult predicting the future can be.
Since our market cycle indicator signalled a crypto slowdown on June 2nd, we have been risk-off. As a reminder, our framework for understanding the market cycle encompasses the financial, adoption, and innovation cycles. We distill both the financial and adoption cycles into a single composite indicator. The innovation cycle is more challenging to quantify and is more of a qualitative input to our market understanding.
Because of this, we have avoided much of the pain in the tail end of cryptoassets as the fund only holds BTCUSD, ETHUSD, SOLUSD and Cash, all of which have sold off but held up much better than the tail end of crypto markets since June.
Over the last five days, we have witnessed the Yen carry trade unravel. For those unfamiliar with the trade, it's like a financial magic trick where you borrow money in a currency with an artificially low interest rate, like the Japanese Yen, and then invest it in assets with a higher rate of return in a different currency, like the U.S. dollar. The trick is to ensure the interest you earn on your investment is higher than the interest you pay on the loan. For many years, this carry trade has been used to fund investments globally, whether in equity, bonds, or even cryptoassets.
But, just like a magic trick, things can go wrong if the exchange rate between the two currencies changes in an unfavourable way. If the Yen suddenly appreciates against the dollar, you might end up owing more than you initially borrowed. This seems to be the scenario we are in today, and it comes after the Bank of Japan's interest rate hike, which caused a massive rerating (-10%) of USDJPY.
Crypto took a proper beating over the weekend and into the early hours of Monday morning. BTCUSD (-20%), ETHUSD (-27%), SOLUSD(-29%) and OTHERS INDEX(-26%) since Friday last week. The sell-off began due to abysmal job numbers, indicating a recession may be on the horizon.
Favourable outcomes for crypto have waned due to decreasing odds of a pro-crypto Trump administration getting elected since Biden dropped out, with the odds moving from 70% to 53% of a Trump victory, according to Polymarket. Tensions in the Middle East have also inspired risk-off behaviour, which the significant move in USDJPY has exacerbated.
I expect the Fed to step in over the next few weeks; they now have an excuse to cut as the labour market has softened, and the bond market is begging for a cut. Fed Funds rate remains elevated at 5.3%, with the US02Y at 3.8% and US10Y at 3.7%, signaling cuts are on the horizon. Once again, the Fed has been caught offside; the future will look at these times in awe that we allowed twelve men to set the cost of the money for the entire world with a track record of getting it wrong almost every time.
Altcoins have been decimated since June, and some opportunities have started to emerge. DeFi, as a sector, now has many tokens trading at multiples lower than 10x earnings, completely underpricing the compound growth rate of key performance indicators for many DeFi projects. This could be a good place to use our cash as these projects are cash-flow-generating, high-growth plays and have pulled back considerably.
The market is still under appreciating BTCUSD. The rise in Gold price coinciding with the fall in BTCUSD is a reminder of how early we are in the market's understanding of BTCUSD. I am convinced that will change, but I appreciate how difficult this is for many to see. Crypto is also the only market open over the weekend and a global source of liquidity for those fearing what the new week may bring, this being both a feature and bug of crypto markets.
Nothing has really changed. We have been here before many, many times. The developed world is swimming in wartime debt levels and deficits, and our financial market infrastructure is archaic and ripe for disruption. Central banks are on the wrong side yet again and losing credibility at an alarming rate. Regulatory clarity, regardless of a Trump or Harris victory, will be orders of magnitude better for crypto than the current regime.
The ingredients for the expansionary phase remain intact and the printer is coming.
While it’s easier to look away, seeking to understand is the only path to a more enlightened and empowered world. Bitcoin, Ethereum and distributed ledger technology are complex systems. Etherbridge lowers the barriers to understanding this fast-growing digital economy.
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This is not financial advice. All opinions expressed here are our own. We encourage investors to do their own research before making any investments. Collective Investment Schemes (CIS) are generally medium to long term investments. The value of participatory interests may go down as well as up. Past performance, forecasts or commentary is not necessarily a guide to future performance. As neither Lima Capital LLC nor its representatives did a full needs analysis in respect of a particular investor, the investor understands that there may be limitations on the appropriateness of any information in this document with regard to the investor’s unique objectives, financial situation and particular needs. The information and content of this document are intended to be for information purposes only and should not be construed as advice.