Market vol breeds crypto sustainability
The cycle is turning. Bellwethers like Target and Walmart warn of a weakening consumer. Housing data is starting to show cracks. Valuations are coming down. And at the same time, persistent and elevated inflation has brought the risk of stagflation back in focus.
In crypto, chaos ensues. Arguably the most trusted centralized exchange added a new line in their 10Q stating crypto assets held in custody could be subject to bankruptcy proceedings. Meanwhile, stablecoins are no longer…stable? Algo based UST broke its peg and LUNA fell to a new low destroying billions of $ worth of market cap.
And with the Fed draining tens of billions of $ from the market each month amidst these concerns, the outlook is set to worsen as the odds of a soft landing from the Fed goes down.
What happens next? We’re going to see (and have already seen) a wave of retail investors backing off the number 1 fringe asset (crypto). Why? Because depressed vol and low prices eventually leads to lower volumes (after the initial trading spike on the way down).
This creates an opportunity set but timing is critical given your carry likely won’t be that attractive. Predicting any sort of market inflection is anyone’s guess (no matter how hard the fundamentalists try or how many Elliott Waves are drawn), but we can try (A for effort!).
Crypto has become a risk asset but in contrast to equities, there is no fundamental analysis (no DCFs, no forecasts) underlying valuations. As a result, I argue crypto can rebound much faster at signs of inflecting growth than other assets. But this time around there will be way fewer options for token investing coming out of this recession.
I appreciate and have sympathy for the incredible amount of wealth destruction during market downturns, but ultimately we need to see how the crypto market at its current iteration performs during a growth driven down cycle in order to set it up for future success.
What I predict will happen, is this will lead to consolidation. During any market downturn there are winners and losers (albeit there will be more losers in crypto than companies that default). And while this will bode unfair for the newer less “established” protocols, it will allow the best ones to win and ultimately breed a more sustainable crypto ecosystem.