June 19, 2022

Insights, news and analysis for the professional investor

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Bitcoin (BTC) - $18,323.86

Ether (ETH) - $944.84

Prices as of 6/18/22 @ 6:50 p.m. UTC

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Welcome to Crypto Long & Short

"There is, in general, a lot of what we call 'grift' in the space, where 99.9% of the crypto projects out there probably don't solve anything." – some guy

Oh, gosh, here we go … except that some guy was this guy. It was me. I said that. I went on TD Ameritrade Network to chat crypto, and given the breadth of things I wanted to discuss I'm co-opting that appearance to power the next few newsletters because there wasn't enough time to cover everything.

I want to cover the big risks as we enter Hard Times in Crypto, now that bitcoin is down over 50% in 2022. The main, big risks I'm paying attention to are:

Price and macro risk
Platform and protocol risk
Public company risk

I'll take each of these week by week for the next three newsletters: This week is price and macro risk, next week we'll cover platform and protocol risk and the week after public company risk, just in time for CoinDesk Layer 2's "Future of Work Week."

So … from the top.

– George Kaloudis

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The Briefing

Before that though, it's worth mentioning there's a lot of general market stress. There aren't many places to hide. Even cash is being gobbled up by 8.6% inflation, according to the U.S. Consumer Price Index. Unless you're strictly invested in commodities (which you aren't), your portfolio is probably not having a good time.

Price and macro risk

Bitcoin (BTC) is flirting with price levels that would have been considered highs in December 2017. That was when bitcoin first touched up against $20,000, only to fall precipitously, then scratch and claw for three years to reach $20,000 again by December 2020. Bitcoin's price has fallen out of the $30,000 range over the last week and it has come dangerously close to breaking down below $20,000.

It might sound painfully obvious to point out that "bitcoin's price going down is not good," but … uh … bitcoin's price going down is not good. This is true for all assets, but it's especially true for bitcoin.

In late 2020, there was lots of chatter about institutional adoption of bitcoin. Much of the response from institutions was "we can't take bitcoin seriously until it's at least a $1 trillion asset." But then bitcoin did become a $1 trillion asset; so BlackRock (BLK) entered the chat and people started talking about bitcoin as a new type of reserve asset. Counterintuitively, as the value of bitcoin goes up, it becomes more, not less, investable.

Coupled with the price risk is macro risk: The Federal Open Market Committee (FOMC) meeting last week signaled a 75 basis point increase to interest rates. And, as expected, the stock market surged.

Except.

That's literally the opposite of what you'd expect to happen. Perhaps the market was happy that Federal Reserve Chair Jerome Powell called the 75 bps move "unusually large."

In any event, stocks went up during Powell's prepared remarks. And so did bitcoin, which I guess is good. But with inflation proving itself a formidable foe and the possibility of recession looming, keeping a close eye on the Fed is critical. It's important, not only from the angle of assessing if the U.S. can right the ship, but also from crypto's perspective, given bitcoin's vascillation from risk-on to risk-off to neither at a moment's notice. If the world's biggest economy struggles to recover, that could spell doom or opportunity for bitcoin, depending on how you view it.

Time will tell.

Meanwhile, while trawling through data to back up the notion that interest rate increases should lead to lower stock prices I came across something interesting. Looking at the 30-day correlation of bitcoin to 10-year U.S. Treasury yields and the Nasdaq to 10-year U.S. Treasury yields, these relationships have been scattered in the second quarter. These correlations moved from somewhat negative to somewhat positive correlation and moved sharply toward somewhat negative in the last few weeks.

When Treasury yields go up, that's either because interest rates have increased or demand for Treasurys has fallen. This might be counterintuitive, but in order to get someone to buy a Treasury the seller would have to sell it for less if fewer people want it, which increases the yield (since yield takes the price you paid for the instrument into account). Higher interest rates mean that investors could get higher interest on Treasurys from the government, so they'll pay less for already issued Treasurys with lower interest rates.

All said, given we are in a rising interest rate environment, I expected this relationship to be negative. At least, I expected it to be consistent. As yields go up because of increased interest rates, risk-on assets like stocks (and sometimes bitcoin) should go down. Perhaps investors remain unconvinced that we are headed toward a recession so yields are up because of suppressed demand for Treasurys. Maybe investors believe that a supply-driven economic slowdown will prove less potent than a demand-driven one.

My take is that markets were expecting higher interest rate hikes and signaling that more heavy hikes were on the way, so the previously priced-in doomsday scenario was undone after the announcement.

Like I said above: Time will tell.

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Takeaways

Circle to introduce a euro-backed stablecoin.

TAKEAWAY: By the end of the month, the issuer of USDC will introduce the euro coin (EUROC), a new token that will be fully backed by euro-dominated reserves made up of "cash and euro government debt only." Circle announced on June 16, "Euro coin is a regulated, euro-backed stablecoin issued under the same full-reserve model and built on the same pillars of trust, transparency, and security that have made USDC one of the world's most trusted digital currencies." Read more here.

The U.S. Federal Reserve increased interest rates by 75 basis points.

TAKEAWAY: The Fed raised interest rates by 75 basis points, or three quarters of a percentage point, on June 15. This is the biggest interest rate hike in 28 years and is part of an ongoing effort to counter inflation. Federal Reserve Chair Jerome Powell said, "The labor market is extremely tight, and inflation is much too high." Read more here.

Binance, Kraken and Polygon are speeding up hiring amid industry-wide job cuts.

TAKEAWAY: Following the recent news of large crypto firms like Coinbase (COIN), BlockFi and Crypto.com laying off workers, Binance, Kraken and Polygon are adding more staff, despite the crashing crypto markets. Binance has over 2,000 open positions, Kraken announced it will hire over 500 staff and a Polygon source told CoinDesk it has "hired at least 50 senior folks all across." According to CEO Changpeng Zhao, Binance sees "this moment in time as an opportunity to gain access to some of the industry's best talent." Read more here.

Three Arrows Capital (3AC) is facing possible insolvency.

TAKEAWAY: The massive crypto venture capital and trading fund incurred at least $400 million in liquidations by several top-tier crypto lending firms including BlockFi. On-chain data suggests 3AC is selling its existing crypto positions to lower collateral requirements for certain positions. Blockchain data also shows that one of the 3AC's wallets has debt totaling $183 million. Founder Su Zhu tweeted, "We are in the process of communicating with relevant parties and [are] fully committed to working this out." Read more here.

CleanSpark, the Las Vegas-based, sustainable bitcoin miner, is acquiring more mining rig contracts.

TAKEAWAY: To capitalize on the bear market and decreasing prices of bitcoin mining rigs, CleanSpark is buying existing purchase contracts of 1,800 Antminer S19 XP computers from another miner. Once fully deployed, the machines will add more than 252 petahashes per second of hashrate to its bitcoin mining capacity. Additionally, CleanSpark is partnering with TMGcore, a developer of high-performance computing solutions, to expand its immersion-cooled infrastructure for bitcoin mining. Read more here.

– Sage D. Young

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