“As usual, since crypto traders deploy leverage, it results in cascading sell orders and liquidations,” the co-founder of a crypto lender told Bloomberg on Saturday, on the heels of a fairly dramatic plunge in Bitcoin.
It’s never possible to ascribe causality to episodic volatility in crypto. So, I typically eschew documenting all but the largest drops.
That said, given recent cross-asset volatility and the distinct possibility that incrementally tighter financial conditions on the back of a more hawkish Fed could have knock-on effects, Saturday’s mini-plunge was worth a mention. Ether fell in sympathy.
At one point, Bitcoin dropped near $42,000 (figure below).
At the lows in July, it traded around $30,000. Needless to say, you can find someone who thinks it’s going to a million and someone who thinks it’s going to zero. To say there’s a diversity of opinions is always a laughable understatement.
I won’t pretend to have anything like a “view” on where support is. As regular readers are apprised, my steadfast contention is that technical analysis is only useful for what you can divine about the likelihood of systematic de-leveraging when spot equities (for example) breaches key levels. But even if I believed in technical analysis, I’m not entirely sure it’s applicable to Bitcoin. “Cascading sell orders and liquidations” notwithstanding, Bitcoin generally trades on a combination of psychology, the greater fool theory, headlines about mainstream adoption, progress on the road to institutional buy-in and, occasionally, Elon Musk tweets. Obviously, there’s no way to fundamentally value it. It has no intrinsic value and no internal rate of return.
Ether, on the other hand, actually does have a function and something like an underlying investment thesis, although I’ll confess that I’ve just started to appreciate it over the past six or so months.
Saturday’s selloff underscored the extent to which Bitcoin (and crypto more generally) tends to trade like a risk asset during risk-off periods. Some proponents argue that even if you don’t buy the notion that Bitcoin is akin to gold or some other kind of “pure collateral,” crypto is an uncorrelated asset and as such, can serve a purpose. In my experience, that isn’t usually the case.
For what it’s worth, I finally came around to the utility in having a (very) small crypto position. Long-time readers who’ve chastised me for criticizing the space can claim a small victory. I own Bitcoin, Ether, Solana and Avalanche.
I’m prepared (and fully expect) to lose it all. I have almost no faith in crypto, but I have even less faith in the sustainability of the existing system, broadly construed. Not because the system hasn’t worked for me, or because I think it can’t keep working, but rather because chronic undereducation, worsening divisiveness, the disintegration of civic-mindedness, the death of civil discourse and Belle Époque-style inequality, all point to the erosion of society in advanced economies.
In short, I’m beginning to fear a world where a lack of trust in our existing institutions begets a slow, but inevitable decline. If we do end up living in a post-government, digital dystopia, I’ve no appetite to be marooned in such a world with no means of payment. So, in that sense, crypto is my doomsday hedge.
According Coinglass.com, some $2.1 billion in crypto exposure was liquidated on Saturday (figure, below, from their platform).
The slump in crypto came amid a deepening rout in highly-valued equities, as traders fret over the implications of a hawkish Fed.
So-called “hyper-growth” names are being liquidated en masse. Seen in that context, the crypto slide is no coincidence.
Concerns about a rates shock are “clear in long-duration stocks [like] ARKK, CLOU, TAN and XBI,” BofA’s Michael Hartnett said in a recent note, adding that the “next leg of tighter financial conditions” could hit crypto.
On Thursday, Hartnett flagged Bitcoin below $53,000 as a possible canary. Bitcoin was approaching that level on Saturday morning — from below.