Is Crypto at the 'Mercy' of Fed Rates and Macro Conditions Now?

There are a lot of interesting crypto native narratives and flows going on right now. I do not think they're going to overwhelm macro flows. So if we, if inflation picks up again and the fed is forced to raise rates, you know, I think that would spell difficulty for crypto over the next 9 to 12 months. I think we're at the mercy of Macro and the, and the fed and, and rates at the moment. Good morning, everyone and welcome to Markets Daily a show where we pick the brains of the smartest minds in financial markets. It's Wednesday, April 17th, 2024 and I'm your host, Helene Braun Markets Reporter here at Coindesk. It seems crypto assets are still holding on to the slight selloff that started over the weekend and has continued throughout this week. Bitcoin was trading lower again over the past 24 hours according to Coindesk indices at 8 a.m. Eastern time, by about half a percent at $62,696. Ethereum saw a slightly bigger drop of about 1.3% currently trading at $3046. And a similar trend can be seen in the broader market. The coin 20 index was down by about 0.2% over the past 24 hours. There is a lot of uncertainty in the market right now between the fed, unsure about interest rates, the anticipation of the hal and slowing inflows into the spot. Bitcoin ETF S. So let's try and figure it all out with our guests, which is Nico Karo, Chief Investment Officer of Quan Digital Asset Hedge Fund, Stri Leviathan. Good morning, Nico morning Elaine, thanks for having me on Nico. How normal are corrections like this in a bull market? They are fairly normal. Um You'll usually see 30 40% drawdowns over the length of a bull market uh in Bitcoin uh for alternative cryptocurrencies that can go a bit lower. Uh you know, 50 50% plus, I think the the most surprising piece of the price action over last week was just how counter trend it was typically, you know, we see we've seen a lot of these over the last six years. That's how long, you know, we've been doing set trip to bath and uh but typically, you know, the trend reverses before you kind of get these bottom falling out of the market. Um As of Friday right before the Iran Israeli conflict kicked off, you know, from a market structure standpoint, everything looked bullish looked like we were moving to higher highs. I think the market got really caught off guard. So Marcus Talen, an analyst who's a frequent on this show said yesterday that a quote, significant price correction is ahead of us, which is largely going to be triggered by the uncertainty around inflation. Do you have a similar outlook? Do you think things are going to get more ugly here? Wouldn't say I have an outlook yet. I would say I would agree. There is a ton of uncertainty. Um you know, given how off guard the market was uh last week. Um There is a lot of open questions about what the FED is going to do, you know, really the setup and risk assets and this includes crypto. I know a lot of people consider Bitcoin kind of a, a safe haven. Um I consider it a high risk beta asset. Um It's going to be driven driven by both inflation and what the FED does. The setup was, fiscal spending is extremely high. Inflation is sticky but it's stable and the federal reserves are lower interest rates going into the US election. Uh It was a good set up for risk after Friday, I think, you know, it's, it's a wait and see mode um at the moment, right? So Fed chair Jerome Powell, he spoke yesterday and he said that the recent inflation numbers have caused uncertainty around when and whether the central bank can cut rates this year. What's the consensus view among traders these days? Are we still expecting rate cuts or has that ship sailed? I think it's mixed, depending on who you're talking to. Um, and that's, that's part of the uncertainty in the market. It's not as, uh, certain as it was a week ago. Um, so it's not clear. I lean towards that. We'll continue to see it. We'll probably see at least one rate cut before the election. Um, I'm skeptical that we're going to see, uh, rates rise again. Um, So there's that, I think what the market is really looking for is just some stability into the direction of the rates rather than where they're actually going. Um just kind of having your understanding of, of their path, right? So if we look at the price action over the past few days, given cryptos reaction to the macro situation, I'd argue that we are indeed seeing a strong correlation to the stock market. Still. How does that influence your outlook for the rest of the year or I guess, do you anticipate the bigger narrative behind crypto and Bitcoin is going to persist here? That's a good question. I think there are a lot of interesting crypto native narratives and flows going on right now. I do not think they're going to overwhelm macro flows. So if we, if inflation picks up again and the fed is forced to raise rates, you know, I think that would spell difficulty for crypto over the next 9 to 12 months. Um So, yeah, I mean, II I think we're at the mercy of Macro and the, and the fed and, and rates at the moment, the hacking is coming up obviously a big topic among traders these days. What does this sell of? Tell you about what traders are expecting the impact on Bitcoin to be after the hing. Yeah. Uh I mean, the expectation was that we're going to have uh a very large rally, typical crypto bull market that we see following Bitcoin's having. Um And that plays into what we were speaking about earlier, traders got caught off guard, you know, the market was overconfidence, the macro setup was good and the crypto, you know, native narratives were really good. Um And that overconfidence led to, you know, nearly a billion dollars in liquidations. Uh Alternative cryptocurrencies were down 40 to 50% in 36 hours during the uh Iran Israeli conflict and really nothing's recovered. Um You know, typically we'll see, especially on the back of that large liquidations, we'll see some, you know, counter moves back up towards, towards the mean, but we're not even hit that today, which kind of indicates that, you know, uh market participants are now nervous, they flip from extremely confident to extremely uncertain. So do you think we can expect the bottom here before the h and I guess what's, what's your prediction for the bottom for Bitcoin and Ether? If you have one, I typically don't have price predictions. I do think I do think things will stabilize. Um, I think a lot of this was driven by the Iran Israeli conflict, uh, as that, as clarity gets there. Um, you know, we'll continue on the path that where we were before, which was kind of a bullish shut up with rates falling high fiscal spending. Um, and, and risks will continue higher, um, where we bought today over the next week, month. I, I don't know. Is there anything else that's sticking out to you Nico that you think our audience should be paying attention to? I mean, I'd pay attention about how well Bitcoin has done relative to the rest of the asset class. Um You know, for, I caught it from the bottom of the bear market in 2022 to last week. You know, there wasn't much difference in performance. Uh I would say Bitcoin probably underperformed uh the rest of the market, but the sell off uh was a clear indication that, uh you know, at least within the industry or within the asset class. Bitcoin truly is the safe haven and because we do have some time here left, I want to quickly throw in a question about the Bitcoin ETF S fidelity wise origin Bitcoin Fund on Friday broke its daily inflow streak and Black Rocks IBID is now the only one of the ETF S that has seen steady inflows for 65 days now, but we are indeed seeing a significant slowdown in inflows when we look at the ETF S overall, a lot of the days now there are zero inflows or even outflows out of most of the funds, I guess is, is that concerning to you that we're seeing this, this significant slowdown? I wouldn't say it's concerning. No, I, I think that's just the function of the regime or the environment that we're in. Right when the ETS launched, it was a risk on uh environments, everyone was piling to the NASDAQ, you know, high, high flying tech stocks growth and that's what Bitcoin is highly correlated with. It's a high risk meta asset. So as the environment changes where people are reconsidering their positions to risk um and potentially moving into safe havens like gold or us treasuries. Um I'd expect those flows to, to change or even reverse if you know, if we enter a bear market. Awesome Nico. Thank you so much for joining us. I appreciate you for having me next. That was Nico Karo and that's it for today's show. Thank you for tuning in and let us know if you like this episode and feel free to leave a comment wherever you're listening or watching until then tune in every day to get your latest markets news from me, Helene Braun and my co-host Jensen Asi.