Rowing boats in choppy waters
Views expressed in this article are the personal views of the author and should not form the basis for making investment decisions, nor be construed as a recommendation or advice to engage in investment transactions.
“Only when the tide goes out do you see who’s been swimming naked”
Surveying the state of the markets, this particular pearl of wisdom from investing stalwart Warren Buffett has never held truer. Just a month after the multi-billion dollar implosion of Luna sent shockwaves through the industry, BTC finds itself grazing 2017’s ATHs, with some of the space’s most prominent influencers and funds capitulating in the process. 3AC, a VC firm that cut its teeth on Solana, Avalanche, and Luna, now finds itself on the verge of insolvency, after having commanded >$10B Assets Under Management (AUM) at 2021’s cycle peak. Meanwhile, popular lending protocol Celsius has run into similar issues, making the dubious decision to freeze user funds in a last-ditch effort to stave off a bank run - catalysing a >15% decline for BTC last Monday.
However, nothing happens in isolation in 2022, and recent drawdowns are more symptomatic of wider systemic issues than the utility underpinning crypto itself.
As has been discussed before, crypto has never faced a harsher macro climate, and in a general sense, the current state of the global economy is more uncertain than it’s been in decades.
Macros
The Federal Open Market Committee (FOMC) was forced into action last Wednesday, with May’s 8.6% CPI print showing that the lukewarm 25-50bps rate hikes until now have done little, if anything, to stave off the highest inflation the US has experienced in 40 years. As a result, the FOMC announced a 75bps hike for the first time since 1994 - with chair Jerome Powell indicating that there is likely to be no relief before 2024 as the Fed attempts to reign in a monster of its own making.
Markets immediately rallied on the news, as the Fed’s hawkish stance finally provided clarity on the path to salvaging economic stability after years of overspending. However, the reality of what this means for businesses and individuals has since set it, with both equities and crypto resuming their months-long declines.
Tightening economic policy this far off-kilter is inherently a painful endeavour. Many of the world’s largest companies have either enacted hiring freezes or layoffs in recent weeks, sandwiched by the dual pressure of rising costs of goods and increasing borrowing rates. VC’s have pivoted to risk aversion, bringing many company fundraises to a halt for the time being. Notably, Coinbase terminated 18% of its workforce, after two years of hypergrowth proved untenable.
Forward focus
With no relief from the Fed in sight and markets currently unwinding 14 years of uponly since 2008’s crisis, it’s likely that further downside awaits on the horizon. At present, BTC finds itself ranging a hair above 2017’s ATH of $19,6k. Without a doubt, we are firmly within the bounds of bear country. However, as per Buffett’s sage analogy, drawdowns bring clarity, and with clarity comes opportunity. While we have already experienced a ~70% retracement from October’s highs, the sizeable liquidations below $20k remain cause for concern. In this climate, we can expect range-bound volatility to continue as bulls fight to defend sustained selloffs. The receding tide is already providing us with a clearer picture of which projects have the needed fundamentals to endure regardless of broader conditions - the true pillars of utility that will go on to form the basis of the next cycle.
Though we may not know how long the tide will take to fully recede; research, patience, and perspective are the most valuable tools in any investor’s arsenal at present. We’ve seen professional trading firms mark the casualties of this drawdown, a searing reminder that nobody is truly immune to the wills of the market. There is no rush to navigate waters this stormy - the best we can do is consolidate our resources and reconsider strategies before embarking on the next voyage toward mass adoption.