The Thrill Is Gone

Sentiment was described as “mixed” Thursday. I suppose that’s accurate, as far as subjective assessments go.

Markets still seem a bit reluctant to connect to dots between turmoil in the cryptoverse and the broader “de-frothing” story. Inflation fears and the threat of an “early” start to what will invariably be but a feeble attempt at Fed normalization, have sapped some of the joie de vivre from corners of the market seared with the “speculative” brand.

The figure (below) is simple, but effective.

“At the start of the year, my two biggest worries were notably higher yields and a bubble bursting in tech shares,” Deutsche Bank’s Jim Reid said. “As we get closer to mid-year, yields are indeed a lot higher across the globe and tech is deflating from its February peaks.”

Bitcoin was “stable” Thursday, but Wednesday’s harrowing rout was a rather stark reminder that the token, and its progeny, are anything but “stable.” Currencies they are not. Stores of value they are not.

A Bitcoin version of the VIX rose over the past few days (figure below).

“Futures are now signaling fresh jitters over the crypto trajectory, driving divestments across exotic products,” Bloomberg’s Justina Lee wrote. I’d be inclined to say this is one case where the underlying is more “exotic” than the derivative.

Apparently, at least 700,000 traders with positions worth a combined $8 billion had their accounts liquidated over the past 24 hours.

Obviously, I can’t personally vouch for the accuracy of the figure (above). It’s derived from Bybt data. (Bloomberg cited it too, but later removed the reference.)

“There are more than 7,000 crypto tokens out there, each with its own unique marketing pitch, including Dogecoin’s simply being a ‘joke,'” JonesTrading’s Mike O’Rourke remarked. “That compares to 4,700+ companies listed on the New York Stock Exchange and Nasdaq, which we are confident are, in fact, unique entities,” he added.

You’d be naive not to expect a continuation of the kind of rolling de-frothing witnessed over the past several months. The Fed’s taper hint (in the April FOMC minutes) will rattle market psychology at the margins, and any additional data seen as confirmatory vis-à-vis “further progress” (“substantial” or otherwise) will help cement the case for some kind of incremental pivot in August/September.

Mega-cap tech will be fine, of course. That’s not to say it won’t de-rate, and perhaps markedly so. But when it comes to FAAMG, it probably makes more sense to fret about regulatory risk than it does a shifting macro regime and/or less generous monetary policy, assuming you’re in it for the long haul. If you’re a “trader,” well, you have to worry about everything. Such are the perils of gambling for a living.

But “froth” (visualized rather poignantly in the figures from Goldman below) may have peaked.

And, relatedly, the storm clouds are gathering for crypto.

“The PBOC crushing crypto, or at least clipping its wings, stops the market meme that Bitcoin, or Dogecoin, or whatever, are about to ‘replace the US Dollar’ as global reserve because of their exponential market cap growth,” Rabobank’s Michael Every said Thursday, adding that “crypto-crushing sends a strong signal across other frothy areas of global markets, like profitless companies, etc.”

It’s really just that simple.