crypto bear market

Can’t Spell Crypto without “Cry”: Bear Market

2022 has been a tough year for all equities and bonds  as raging inflation has forced the federal reserve to raise interest rates which has cut the global money supply. The velocity of this move has been unprecedented, which can be seen in the 30-year mortgage rate moving from 2% to 6% in nearly 6 months. These tightening conditions have been felt inequity markets and there seems to be little safe haven. Netflix, Meta, PayPal and many tech stocks have been beaten down. All major crypto currencies such as Bitcoin, Ethereum and Binance have all taken major price hits all trading well below 50% from all time highs. 

Highly leveraged markets have made these loses even more devastating. Crypto markets were some of the most leveraged markets and we are now seeing exchanges failing, “stablecoins” decoupling and sell offs of almost every crypto asset. Projects such as Terra are examples of the worst aspects of crypto currencies, where people are scammed out of millions of dollars. Everyone loves “decentralization” until people lose their life savings in an unregistered security. And this is not unique just to Terra, of the 19,000 crypto’s out there I’d say 99% of them are SCAMS. 

In the short term things look dark. Major crypto currencies such as Bitcoin and Ethereum are down +50% from all time highs. Overleveraged investors have taken on a lot of water and the blowing up of exchanges like the Celsius Network shows us what happens when assets get overleveraged. 

So, does the dip keep dipping? There is a possibility that Bitcoin continues to retrace the second half of 2022 if the Fed hikes interest rates (100 bps???). Here it is important to talk about a critical inflection point that I believe we will inevitably see. IF the Fed has a more difficult time slowing inflation than predicted you will see large outflows of capital that are currently sitting in cash reserves. In order to make this a reality MAJOR regulation is required and currently is being worked on. Plenty of traditional institutional money wants to offer crypto products to their clients but can’t due to the lack of legal and accounting regulation.  Here I see a window in this bear market where dollar cost averaging into projects that you think provide value could return immense returns over the next decade. 

Paying attention to SEC and Federal crypto legislation will be key in identifying which projects will survive or die. The case can be made that all crypto currencies besides Bitcoin are unregistered securities. The SEC is investigating Ethereum and Binance. It was no shock that this was anticipated, Ethereum and Binance have been bringing on people from regulatory agencies for months. Companies that can properly manage the coming regulatory wave will be the next great companies of the 2030s. 

When discussing the state of Bitcoin it is important to discuss mining and the state of Proof of work. Energy regulators are set against carbon negative Bitcoin mining. Price inflations are also hurting mining operations as these costs eat into shrinking profits as the price of Bitcoin falls. Like many industries, Bitcoin mining is very competitive and this down turn will prove who is competent and capable and who is not.

 

While bear markets can be scary they offer great opportunities for those who can find them. While most Shitcoins are exactly as advertised, there maybe some projects that utilize blockchain technology to provide large amounts of value. To make stomaching the volatility of this market it is important to have a long time horizon (3-4 years). While this is counter to the washtrading shitcoin culture, I think it allows one to make sounder decisions. So, in the short term buckle up for a bumpy ride. Using this time to educate people on crypto currencies and their values is important. As we wait for legal adoption and a subsequent rocket blast off to the moon, HODL. 

All ideas express are of my own and should not be viewed as investment advice, just my opinion. 

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