Connecting the Dots
Episode 5 - Crypto is Dead...Long Live Crypto!
As a bruising year for markets and particularly crypto draws to a close, we at London Crypto Club will wrap up with some brief thoughts on the year past and look ahead to 2023.
Black Swans Everywhere
Black Swan events - those unexpected, tail events that no one predicted yet have massive ramifications - are meant to be rare. Yet crypto has had so many black swans to deal with in 2022 that market's are now paralysed with fear, expecting the next to show up any moment and feeding the perpetual FUD.
The macro back-drop has been the toughest in decades. The sharpest Fed tightening cycle in recorded history, 70's level inflation (level not style - I'm in the this is 1940's not 1970's camp) Russia/Ukraine war and wider geopolitical strains to name a few.
That alone would have been a full blown storm for Crypto to deal with, but then came the Luna collapse which set off a chain of contagion events, with 3AC blowing up, crypto lenders like Celsius going bankrupt and then just as crypto started to climb up from the canvas, FTX delivered a knockout blow. Ouch!
Crypto is dead...again
Boomer no coiners smugly declare crypto dead...again. Even crypto bro's are in a state of apathy. All signs we like to see at the bottom of a bear market!
Ironically, most of the events of 2022 act to only reinforce the value proposition for crypto. The need for decentralised, trustless forms of value exchange. It's the centralised actors once more causing the problems!
Whilst all of this has no doubt been a major setback on the road to institutional adoption, let's not forget some of the HUGE progress crypto has made in 2022. From Blackrock (the world's largest asset manager with 10trn AUM) announcing plans to integrate Aladdin (their investment management platform) into Coinbase, to BNY Mellon setting up a crypto custody unit, major investment banks all now pouring resource into Digital Asset units, Credit Suisse testing securities tokenisation on Ethereum - when I think back to the last bear market, this would have been unthinkable!
Not for nothing, the successful merge to PoS for ETH was a remarkable tech achievement that will have a huge impact on the supply dynamics, as well as giving crypto a benchmark "yield curve" which will be important for crypto to establish itself more firmly as an asset class. If that pi*ses off BTC maxi's idc. This will be good for everyone in the space and in fact, I'm looking for the ETH/BTC cross to break higher as a signal for broader crypto recovery 👇
(ETH/BTC approaching resistance. A break above trend resistance at 0.07310 could trigger broader crypto recovery)
Our expectation then is that the FTX blowup will accelerate the move towards and the development of effective custody and prime broker solutions and will usher in the required regulation that institutional money requires to flow into this nascent industry. It's knocking at the door and it isn't going away.
What about the macro?
We've written in previous posts about the shifting macro regime as we go from a year dominated by the Fed and other central banks hiking rates in the face of rising inflation, to pricing the end of the Fed hike cycle, peak inflation and focus now on the deteriorating growth backdrop. This is a MASSIVE change to the macro regime with huge cross asset implications.
I expect inflation falls harder than many appear to agree with (supply chains continue to ease, especially with China re-opening, inventory/sales ratios are high, commodities broadly lower, house prices falling fast, rents to follow, real incomes squeezed and pandemic savings depleted amidst rising unemployment - this is a huge disinflationary environment) and gives the Fed room to cut into latter part of 2023.
Rates markets are already pricing cuts in 2023 and they're probably the best "Economist" to follow.
The growth slowdown should drive a continued rally in duration (bonds with maturity 10yrs plus) and Crypto and tech as the long duration proxies I suspect will outperform.
The dollar wrecking ball meanwhile, that has suffocated every asset draining liquidity out of every corner of the world, looks to be breaking down on both policy "convergence" as other Central Banks catch up to the Fed, as well as in anticipation of a Fed pause. This should ease financial conditions and relieve the pressure on all assets.
In summary
To conclude then, as we draw to the end of a tumultuous year, we at London Crypto Club go into 2023 with a far more bullish outlook.
Whilst the handover to 2023 still contains high uncertainty and likely more volatility, we're in the slow process of macro regime change which we expect markets to start to price more aggressively through Q1. The macro headwinds are abating, inflation has peaked, the Fed are near the end of their hike cycle and liquidity conditions look to be at max tightness. Crypto and wider risk assets then look to be in a bottoming out process and risk/reward looks significantly better in the New Year.
Of course, black swans may still be lurking, but crypto has faced an onslaught of bad news in 2022 and yet we're still here. What doesn't kill us, makes us stronger!
Wishing all of our readers a happy, healthy and prosperous New Year. We're just getting started here at London Crypto Club and are grateful that you're joining us on our journey 🙏
DISCLAIMER: The content in this newsletter is not financial advice. This newsletter is strictly educational and is not investment advice or a recommendation to buy or sell any assets or to make any financial decisions. Crypto markets are volatile, please be careful and do your own research.