Connecting the Dots
Episode 3 - The Final Capitulation?
Key Points
FTX news is dominating the price action in crypto. Despite a rally in tech stocks, Crypto prices have “decoupled” from stocks and are little changed post the FTX collapse.
Failure of a major actor in the crypto space will add to the potential for greater transparency and more effective tools to manage credit and custody risk.
The macro backdrop is turning more constructive. We haven’t had a pivot or a pause from the Fed, but the direction of travel is changing.
The US dollar has broken a major trend line and continues lower.
FTX News Dominates
FTX is dominating the headlines in crypto as well as the price action. We’ve seen a “decoupling” of crypto to stocks in recent days with tech shares seeing large gains and crypto unchanged, weighed down by the negative sentiment.
Certainly, the bankruptcy of FTX is a hammer blow for the crypto industry and a major set back on the path towards institutional adoption. Short term, uncertainty will likely weigh heavy as markets try to work out where the exposures lie and as those impacted are forced to liquidate. Forced selling may keep prices under pressure.
Long term of course, there's the potential that the failure of a major centralised actor in the space drives greater transparency and acts as a catalyst towards solutions to deal more effectively with credit and custody risk. Already, proposals are being made for a proof of reserves and CZ at Binance is trying to form an "industry recovery fund." Ironically, the need for decentralised, trustless forms of exchange has never been greater. Maybe this is Defi's crowning moment?
Positive Macro Backdrop
Elsewhere, the macro backdrop is turning more constructive. Last week's weaker inflation print in the US continues to feed a "pivot" narrative. Indeed, the Fed have paved the way to slowing the pace of hikes to a 50bp increase in December. Whilst this isn't a pivot or a pause, per se, markets care about the direction of travel and rates of change and it's clear that we are nearing the end of the sharpest tightening cycle in recorded history.
Dollar breaking lower
The US dollar which has acted as a wrecking ball, suffocating global growth and strangling financial conditions has also broken a major trend line and risk assets (excluding-crypto) have ripped higher. A good barometer is the Nasdaq, which is up over 5% since last Thursdays US CPI print.
Dollar Breaking Down:
The dollar is signalling a major turn in these markets and possibly signals the end of this bear. Crypto is dealing with it's own issues right now, but it may well be we're witnessing the final capitulation before the birth of a new bull market.