Why did “crypto” go risk-on from risk-off?
On January 3, 2009, the Genesis block of Bitcoin was constructed by Satoshi Nakamoto.
“The Times 03/Jan/2009 Chancellor on brink of second bank bailout,” said the recorded data in the block.
At the time, we were going through the Great Financial Crisis, and early adopters believed that the technology could offer salvation from the excesses of central bankers running on overdrive. Thirteen years later, we are witnessing the “crypto” industry being correlated with the stock market and the meme industry.
Institutional money
Before 2020, the digital currency was not affected much by the economic condition of Wall Street. Significant correlation started when a few institutions (who got rich after the quantitative easing season during the coronavirus pandemic) started pouring money into the Bitcoin industry. Michael Saylor’s MicroStrategy (NASDAQ: MSTR ) remains the top example because its balance sheet contains tons of BTC. However, due to the financial constraints created by the Federal Reserve recently, institutions are having a tough time pouring more money into the industry.
Instead of investing more, it seems that companies like Tesla are selling back their BTC holdings to give their balance sheet and cash flow a better overview. So what’s next? It’s easy. If the Fed creates a less restrictive environment, institutions will start pouring money back into the digital currency industry. However, if the Fed continues to fight inflation with aggressive rate hikes and quantitative tightening, it is quite clear that BTC will remain in a bear market or trend sideways (at best).
Furthermore, Grayscale BTC (GBTC) is currently trading at a record discount, proving that institutional investors’ interest in BTC has fallen sharply. Barry Silbert of Grayscale Digital Assets appears to have tried his best to get the SEC to approve the ETF, which could prevent the discount. But apparently Gary Gensler, the current chairman of the SEC, seems stuck with his decision and will not be ready to approve any ETF due to several factors, including the significant dominance of Tether backing BTC and manipulation across digital currency markets.
Level of risk on asset class which BTC has achieved
The entire crypto industry seems to be reaching the point of a maximum risk asset class. BTC is now affected by the number of iPhones sold (i.e. Apple revenue). The Fed raised interest rates by 75 basis points instead of 50 basis points? Dump it. Microsoft’s earnings beat expectations? Pump it. Fewer Tesla cars sold than expected? Dump it. MicroStrategy bought more BTC? Pump it. More jobs were created than expected, which could lead to a bigger rate hike in the upcoming Fed meeting? Dump it. This is far from what Satoshi wanted to happen when he created Bitcoin, especially when you think of it as a purely peer-to-peer electronic cash system designed to send small random micropayments frictionlessly.
Excessive influence
Binance offers 125x leverage; Bybit has 100x. FTX offers 20x leverage; BitMEX has 100x. Leverage levels of this magnitude only pave the way for more volatility, ultimately leading to more risk. In addition to all these insane levels of influence across centralized exchanges, there are on-chain lending platforms like Aave, along with publicly available liquidation prices that enable the whales to manipulate markets and spread fear, especially in the case of hundreds of millions worth of crypto-securities.
Over the past few months we have witnessed the aftermath of extreme greed and lack of risk management in this industry. Three Arrows Capital never thought of a very quick Terra/LUNA collapse despite the fact that the Terra ecosystem had a heavily leveraged so-called stablecoin (UST), so they (and the entire market) had to pay the price for their greed. Similarly, large centralized lending platforms like Celsius, BlockFi and Voyager never imagined such a rapid drawdown and dissolution would occur. They were all caught off guard, along with the influx of panic withdrawals. Unfortunately, all the new real punters were wiped out as the crypto whales dumped on the fresh liquidity taken for profit after hype marketing campaigns ran their course.
At this point, it is hard to imagine that the crypto industry will ever stop tracking the performance of risk assets. Will crypto always be correlated with stocks and other risk assets? With a complete lack of utility coming from the crypto tokens and the players who support them, the answer is a resounding “YES”!
See: BSV Global Blockchain Convention panel, Blockchain for Digital Transformation of Nations
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