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Let us start with a riddle. How much profit/loss have you made if an asset you own rises by 47%, having previously fallen by 77%?
The answer is a gruesome 67% loss.
That is the predicament facing Bitcoin investors who bought at all-time highs in late 2021. While markets have kicked off the year in scintillating fashion, it is important not to lose perspective.
Humans have short memories, though. With Bitcoin up nearly 50% from the lows post-FTX collapse, crypto markets have that giddy feel about them again. It’s amazing what hope can do for people, huh? And by hope, I mean hope that interest rates will come down again.
I wrote a piece last week about how this latest rally, if it shows anything, simply proves once and for all how much Bitcoin is trading as an extreme risk-on asset.
Bitcoin was crushed last year as central banks worldwide flipped hawkish for the first time in Bitcoin’s existence. With the cheap money of the last decade no longer available, and stout yields available on other investments such as T-bills, high-risk assets collapsed.
The tech sector, also notoriously sensitive to interest rates, has been sacking employees left, right and centre – Meta, Salesforce, Twitter, Google, and the list goes on.
This latest rally now comes as inflation begins to cool, with hope renewed that the pain of suffocating monetary policy will, in fact, one day come to an end.
While the picture undoubtedly looks rosier than this time two months ago, the crypto market is still in a world of pain.
Bankruptcies are still flowing – see Genesis filing last week – while there are numerous other potential downside catalysts as the market still delves through Sam Bankman-Fried’s chaotic mess: DCG still present a lot of uncertainty, for example.
While prices have been running, there is no particularly good news to explain this rally. As I said, it’s all macro, with investors staring squarely at the Federal Reserve.
A couple of charts paint a good picture of the pain still present in markets. Despite the recent upturn, the net realised profit marker, which is an on-chain metric calculated by comparing the price of recent coins moved to the price at which they previously moved, shows how much the recent rally pales in comparison to the scale of the fall last year.
In truth, there is no need to complicate things. Despite the bluster of “hedge” narratives and “uncorrelated investment” that floated around through COVID, it is as clear as night and day that Bitcoin is trading off interest rate expectations right now.
The below chart is perhaps the most important one in all of crypto over the last couple of years.
That little bounce at the end could reverse very quickly depending on how things shake out at the upcoming Fed meeting. It could also do the opposite if things end up being more hawkish than the market has currently priced in.
Either way, it is clear what is moving markets right now.
Tesla boss Elon Musk opines that the Fed’s attempts to stem inflation may inadvertently induce a full-blown recession.
Elon Musk believes that the Federal Reserve must cut interest rates immediately or risk incurring a severe recession. The outspoken Tesla CEO made his opinion known in an early tweet Wednesday, which read:
“Trend is concerning. Fed needs to cut interest rates immediately. They are massively amplifying the probability of a severe recession.”
According to Musk, the Fed’s attempt to rein in runaway inflation could worsen the economic situation. As it stands, the prices have skyrocketed, and several households across the US are feeling the crunch. Energy prices are hovering at record-high levels, and the tech space and crypto industry are wallowing in significant devaluation.
Musk has warned of an impending recession before. On October 24th, the brash billionaire estimated a global recession could last until the spring of 2024. Although Musk admitted he was “just guessing,” his prediction came amid other gloomy economic forecasts from several business leaders. Some of these leaders were Amazon CEO Jeff Bezos, JP Morgan CEO Jamie Dimon, and Goldman Sachs CEO David Solomon.
The latest remarks by Elon Musk on a likely recession comes in an exchange with Tesmanian co-founder Vincent Yu. Like Musk, the Tesmanian co-founder had earlier expressed concern about the economy’s health and forewarned a recession next year. The Twitter exchange between Musk and Yu sparked participation from several other users who also chimed in. While a few seemed to side with the Fed’s position on interest rates, others frowned on hiking rates to stem inflation. Furthermore, a small number of Twitter users expressed ambivalence at the Fed’s stance. For example, a user with the handle @CricketSurfing stated:
“I don’t know where the sweet spot is in terms of interest rates, but the goal should be to allow the M2 money supply to grow at about the rate of GDP. Right now, the Fed is *shrinking* M2. They have slammed on the brakes, when they should have eased off the accelerator.”
Also notable in the thread on interest rates is input from NorthmanTrader founder Sven Henrich. According to Henrich, the Fed’s actions on perceived inflationary pressure were overdue. As a result, the US apex bank has tried to make up for its decisive delay amid the aggressive tightening of a record-high debt construct. However, Henrich lamented that the Fed is implementing its strategy without “accounting for the lag effects of these rate hikes”. The NorthmanTrader concluded by predicting that the Fed would realize the extent of the damage of its decision too late.
Like Yu, Henrich’s assessment of the Fed decision drew an affirmative response from Musk.
Henrich also slammed the Fed further by stating that the central bank continues to project positive GDP growth for 2023. He reasoned that such misplaced optimism comes amid the obvious signs but does not appear surprised by this. According to Henrich, the Fed displayed the same misplaced GDP optimism in 2008 en route to the economic meltdown of ’09. Henrich concludes his criticism of the Fed by saying:
“As always, they will panic cut rates once the recession impact is here & then blame unforeseen factors.”
Read more business news on Coinspeaker.
Tolu is a cryptocurrency and blockchain enthusiast based in Lagos. He likes to demystify crypto stories to the bare basics so that anyone anywhere can understand without too much background knowledge.
When he’s not neck-deep in crypto stories, Tolu enjoys music, loves to sing and is an avid movie lover.
As the FTX crisis unfolded over the last week, the world’s largest cryptocurrency Bitcoin (BTC) has been facing severe selling pressure. As of press time, BTC is trading 1.68% down at a price of $16,571 and a market cap of $318 billion.
So far Bitcoin long-term holders have shown great conviction in holding their coins. However, they are undergoing a period of acute financial stress. Pointing out the MVRV ration of the long-term holders, on-chain data provider Glassnode explained:
Bitcoin Long-Term Holders are currently experiencing acute financial stress, holding an average of -33% in unrealized losses. This is comparable to the lows of the 2018 bear market, which saw a peak unrealized loss of -36% on average.
As we can see in the above chart, the last time the long-term holders came under similar stress, it was the point of reversal for the Bitcoin price. This might suggest that the bottom for Bitcoin could be nearly in.
However, Bitcoin critic Peter Shiff believes that the lion’s share of selling hasn’t started yet. He shared his older prediction from June 2022 wherein he said:
The need to sell #Bitcoin to pay the bills will only get worse as the #recession deepens and many #HODLers lose their jobs, especially those working for soon to be bankrupt #blockchain companies. If circumstances change, long-term buyers without paychecks will be forced to sell.
The FTX collapse has forced BTC investors to move their coins away from the exchange and opt for self-custody. Post the FTX episode, the withdrawal of coins from exchanges has happened at a truly historic rate. In its latest report, Glassnode writes:
Exchanges have seen one of the largest net declines in aggregate BTC balance in history, falling by 72.9k BTC in 7-days. This compares with only three periods in the past; Apr-2020, Nov-2020, and June to July 2022.
The presented content may include the personal opinion of the author and is subject to market condition. Do your market research before investing in cryptocurrencies. The author or the publication does not hold any responsibility for your personal financial loss.