Have we reached the BOTTOM?!

It’s been one of the toughest fortnights in crypto’s storied history. In fact, there are many who would claim that it was the toughest.

Never have we had a confluence of so many negative themes (macro and crypto-specific) coming together all at once. Never have we had a bear market where the price of Bitcoin has fallen below a previous bull market top. Never have we seen sentiment in the space sour so quickly.

This has many people wondering if we have reached the point of max pain - i.e., the elusive “bottom.”

It’s perhaps one of the most common questions that I have been getting over the past few weeks and it’s something that I want to address in my video today.

In the video, I take a look at a number of factors that have marked previous bear market lows and compare them to our current position. I also analyse some price models that help put the current market in context with supposed “fair value” crypto prices.

You can watch that video here

📊 Main Portfolio 📊

No changes to the portfolio this week. As I mentioned in my video today, I am not fully convinced that we have reached the bottom for Bitcoin. Similarly, there may be pockets of value in the altcoin space but I would also approach them carefully. If you want to be the first to know about any portfolio moves I make, you can make that happen by joining my Telegram group!

BTC 35.08% | ETH 34.77% | 6.70% | SOL 5.88% | DOT 4.88% | ATOM 3.10% | RUNE 1.90% | ADA 1.63% | HNT 1.60% | NEAR 1.44% | MATIC 1.06% | FTM 0.83% | LINK 0.63% | INJ 0.52%

📈 Thoughts on Market 📈

It is certainly nice to see a small recovery rally, especially among altcoins. Don’t get too excited, however. If you pop open BTC’s price on the daily you can see that we seem to be forming a bear flag. If my measurements are correct, if this bear flag breaks to the downside then we could fall as far as 12k in the coming weeks - consistent with today’s video!

While there’s certainly a chance that we continue to move sideways around these levels (before eventually moving higher), I suspect not and that’s simply because stablecoin dominance continues to increase, according to CoinMarketCap’s data. This means many crypto investors are taking advantage of the recent recovery rally to take profits and minimise losses.

This makes sense when you consider that all the macro factors keeping the crypto market down haven’t changed at all. If anything, you could argue that these macro factors have only gotten worse as we got news of, shall we say, a deeply polarising development in the United States on Friday. This will create more uncertainty, and there’s nothing investors hate more.

Another concerning headline that caught my eye was the news that a whopping 15% of Americans are behind on their rent payments. This is because US rents continue to hit record highs. This means we could see over 8 million people evicted in the United States over the next 2 months. Make no mistake, this would be very bad.

As many of you will know, one of the main reasons why rents continue to hit record highs in the US and elsewhere is because of inflation, specifically due to high energy prices. While many believe it’s only a matter of time before energy prices come down, the consensus seems to be that they will continue to rise for the next few months.

As I’ve mentioned many times recently, the only quick fix to this problem would be a resolution of the war in Ukraine, or even just declaring an end to the pandemic. If none of these things happen though, we could be in for something much worse than a recession, at least according to a sobering discussion by Blockworks Macro.

Basically, the only thing the Federal Reserve can do to combat inflation is to destroy demand - in this case destroy the demand for energy. The world is apparently already short around 3-4 million barrels of oil per day. A typical recession reduces global demand for oil by around 1-2 million barrels - not nearly enough to keep energy prices from rising higher.

According to Warren Pies (the chap from the Blockworks discussion), the only times the demand for oil was reduced by 3-4 million barrels of oil per day was during the 2008 financial crisis and the first round of pandemic lockdowns in the spring in 2020. This means we would need to see a similarly catastrophic event to reduce energy prices from the demand side.

Obviously there is a supply side to this equation, but things aren’t looking too good there either. The US president reportedly skipped an important oil and gas summit and instead met with companies working on wind power. Under normal circumstances this would all be well and good, but the harsh reality is that we still need oil, and not just for energy.

To make things worse, the CEO of one of the largest oil companies in the world is calling on the US government to increase the costs of carbon emissions and incentivize renewable energy. As per the first paragraph in CNBC’s report, he’s saying this because his company wants government handouts and subsidies for its own ‘clean energy solutions’.

This just reminds me of all the crazy stuff that was said at the World Economic Forum’s annual meeting in Davos, Switzerland. I would like to think that there is only so long that our leaders can ignore economic reality, but then again, they don’t exactly live the same reality we do.

🤯 Too Big to Fail? 🤯

This week we had further fallout from the collapse of Three Arrows Capital. More specifically, we learned just how badly exposed some of the lenders in the space are to the firm. These include the likes of BlockFi, Genesis and Voyager. In the case of Voyager, that exposure took the form of a $661m unsecured loan.

Just think about that. A loan that was granted to 3AC with no collateral whatsoever. A loan that was granted to a company that was (by all accounts) heavily in debt and running a highly leveraged casino.

Voyager is a listed crypto lending platform that is run by people with a long history in TradFi brokerages. It seems impossible to believe that a company of this nature would lend out their customers’ deposits to such an opaque operation.

Moreover, according to the co-founder of Hodlnaut (another CeFi lender), 3AC also approached them for a loan. However, given that 3AC was not able to provide any sort of financials, apart from a “self declared” NAV statement (yes, they actually suggested this), Hodlnaut couldn’t offer them a loan.

So, one has to wonder what sort of due diligence Voyager must have done in order to have been comfortable giving such a large loan to 3AC.

Of course, this exposure to 3AC meant that Voyager was in a lot of trouble and that’s when Alameda stepped in. They offered Voyager a $500m lifeline in the form of a revolving line of credit. Many viewed this as a “bailout” of sorts, that allowed them to remain solvent and honour withdrawals (albeit at a reduced rate).

The reason why this was done was of course to stem the contagion in the crypto space. It would also lead to a massive collapse in trust if another crypto lender like Voyager went under with the loss of retail users’ funds.

Bailouts - if indeed this was one - were commonplace during the Great Financial Crisis, albeit they were taxpayer funded. Whatever the source of the funds though, actions like these create a moral hazard. One has to ask whether saving firms that act recklessly warps incentives. There are some, including pro-crypto SEC commissioner Hester Peirce who think these firms shouldn’t be bailed out.

This could also lead to a situation in which those firms that acted recklessly continue doing so because of the belief that they will always have a hand to turn to. It impedes the “creative destruction” that rewards the prudent players in the long run. By rewarding failure, you inevitably sow the seeds of a bigger and much more catastrophic failure down the line.

For example, did you know that UST lost its peg in May last year? At that time it had a much smaller market cap and its failure wouldn’t have been too consequential. However, because their VC backers helped to defend the peg, this gave people a false sense of security around just how stable it was. The end result of that intervention was that when the eventual collapse did come, it was way more destructive.

Now, having said all of this, watching crypto companies go under with billions in retail losses and contagion spreading is not something any of us want. And, under the circumstances, I think the bailout was necessary. However, it still begs the question of what this will mean for the health of crypto companies in the long run.

Food for thought…

🔨 Can Crypto Survive A Financial Crisis? 🔨

As the world heads towards what is likely to be a recession (if not something worse), many individuals, institutions, and even media outlets are starting to ask this question. This is simply because the crypto market has never gone through a financial crisis like this before. As with today’s video, I can’t tell you with any certainty as to how the crypto markets will react, but here’s my take.

There are two potential scenarios that could play out. One is that the Fed continues to pump those interest rates and thereby precipitates the feared recession and financial crisis. This is, in fact, quite likely when you consider the history of the Federal Reserve’s interest rate hikes. In most of the previous rate hiking cycles we have seen recessions precipitated by the contraction of credit in the economy.

In those previous recessions, the Fed has had to reverse course on its interest rate hikes the moment that consistent negative growth came around. This has got many people wondering if Fed chairman Jerome Powell is likely to follow that playbook when the contraction really starts to bite. If that is indeed the case, then the reversal of rate hikes could cause all asset markets to rally again - including crypto.

On the other hand though, if inflation is still extremely high, lowering interest rates runs the risk of hyperinflation, which is the counterargument to this narrative.

So, let’s play devil’s advocate. Suppose Jerome Powell goes full Paul Volcker and raises interest rates into double digits to combat inflation. This would suck trillions of dollars out of the economy, as everyone rushes to buy dollars for double digit savings. And, it won’t just be Americans buying USD.

Stablecoins like Tether’s USDT, Circle’s USDC, and Paxos’ BUSD and USDP have made it possible for just about anyone to buy US dollars (or more accurately, the US government debt these de facto digital dollars are backed by). Regardless of what the Fed does, there will almost certainly be demand for fiat in a financial crisis, and especially USD.

What makes the next financial crisis different from the previous ones is that many fiat currencies are on the cusp of collapse against the USD, and not just the currencies belonging to small economies. The Japanese yen seems to be in a lot of trouble, and even the Euro is showing signs of weakness as investors doubt whether the ECB can raise interest rates.

So, what happens when the Fed raises interest rates, the global economy starts to implode, and most major currencies start to fail? Obviously, everyone will be scrambling to get their hands on USD. You can bet that their local banks won’t give it to them, and maybe their governments will even block them from buying dollars like Russia did after it invaded Ukraine.

This leaves only one option, and that’s to go the crypto route: buy a USD stablecoin on a smart contract cryptocurrency blockchain like Ethereum, Solana, Avalanche, or Algorand. If demand for USD is really through the roof, it might be all of the above and more. It’s possible every smart contract cryptocurrency could start to bloat from the demand for stablecoins.

Because buying stablecoins requires ETH, SOL, AVAX, or ALGO, the demand for these cryptocurrencies would necessarily explode. Once there’s trillions of stablecoins circulating within the crypto ecosystem, there’s a high chance that some percentage of that capital will flow into BTC and other major altcoins, especially if stablecoin issuers start to freeze assets.

In sum, the next financial crisis will likely cause a flight to the US dollar on a global scale, especially if the Fed is raising interest rates at the same time. Because US dollars are hard to buy outside the USA (and may even be impossible to buy), the only alternative will be stablecoins. Smart contract cryptos will explode, and BTC could see some serious inflows. Nice.

🔥 Deal of The Week 🔥

If there is one thing that the past 3 weeks has shown us, it’s just how exposed many exchanges & lending services were to the contagion flowing from 3AC. Therefore, now it’s more important than ever to make sure that when you do use an exchange, you are using the most secure and well capitalised.

It’s no secret that FTX falls into that category. After all, it is the exchange that is bailing out all these other operators and platforms.

On top of this, the exchange has considerably expanded its coin & token support and has a number of features & functionality that other exchanges can only dream of.

You can try out FTX for FREE and get your first $30 in trading fees covered by FTX. That means you won’t pay a cent when initially trying out the exchange! If you like what you see you’ll also get a 10% trading fee discount for life - on top of those already low fees.

🇺🇸 Americans can try out FTX.US for free!

👉 Everyone else will want to head to FTX.com to bag that deal!

🔮 Video Pipeline 🔮

  • Polkadot Update - What's Up With DOT?
  • Top 5 Hardware Wallet in 2022
  • The Future of Finance According to the BIS?
  • Charles Hoskinson & The Future of Crypto Regulation!
  • Electric Stablecoins - Promising or Yet Another Ponzi?

🏆 What's New At CoinBureau.com This Week? 🏆

Bancor Review: Impermanent Loss Protector?

That’s all for this newsletter. The whole Coin Bureau Team would like to thank you for your support. We truly couldn’t do it without you.

Guy your crypto guy

Guy Turner

Guy is one of the founding members and face of the Coin Bureau. Like many of us, he is just an average joe who became “crypto curious” back in 2013. After recognising the potential of blockchain technology, Guy set off on a mission to create crypto educational content, working with others to start the Coin Bureau website and released our first video on YouTube in 2019. You can learn more about him in his Who is Guy? blogpost.

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