Bitcoin has been in a five-day rout that has brought its price, which is maybe what we care about most, to its lowest level since last July. Other coins are seeing similar gutting, amid a larger economic fallout.
The Wall Street Journal reports:
“Cryptocurrencies have fallen in lockstep with the broader stock market in recent days. The trend for bitcoin and other digital assets to fall alongside stocks is one that has become more pronounced in recent years, investors say, as traditional money managers such as hedge funds and family offices have entered the space. Such funds may be more likely to sell crypto holdings during periods of volatility rather than hold them.”
This nut graph (journo speak for a summary) gets at the changing conditions of the crypto industry in relation to the wider economy. Public blockchains like Bitcoin and Ethereum are open markets. They are experiments with financial and computer systems to open a wide array of economic and cultural activity to anyone, similar to how the internet leveled access to information and social media flattened social hierarchies.
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Crypto is often seen as a retail man’s game. You can buy bitcoin from banks, brokerages and trading apps like Robinhood – with no pre-approval or advising necessary. And so people do. Some small investors have a game plan: They dollar-cost average (or make consistent purchases over a length of time regardless of the market price to try to avoid “timing the market”). Others “ape in,” spurred by a sense of “missing out” as a market’s Ponzi-like mechanisms kick into gear.
But there are now big, big, big players in crypto. These are individuals or institutions that have “size,” or an amount of capital that can move markets or cause slippage depending on how they play. A few “crypto-native” names: Alameda Research, a trading outfit co-founded by crypto luminary Sam Bankman-Fried, hedge fund Three Arrows Capital and venture firm Andreessen Horowitz.
It might be easier to list traditional firms that aren’t involved in crypto, in at least some way. Most notably, Warren Buffett’s conglomerate Berkshire Hathaway isn’t seeking crypto exposure.
It’s not always easy to tell who loses most when markets contract. We, or at least I, have a tendency to sentimentalize the economy knowing how people’s retirements and livelihoods are tied up in capital. And so “corrections” appear to be more personal than just the mechanizations of money. People are making decisions to buy or sell or hold, after all, often based on incomplete, contradictory or confusing information.
It seems clear enough, however, that the market turmoil is tethered to the Federal Reserve’s commitment to raise interest rates amid a period of surging inflation. New York Times columnist Jeff Sommer said this policy decision is “stunning,” considering the past two decades of “easy money,” where interest rates were kept low to encourage people to move into riskier investments to find yield.
The economy is now slowing by design. And investors “don’t know how to react,” Sommers writes. It’s a difficult play especially because it’s never clear what direction things could move, or what other events – like a global pandemic, a European war, worsening geopolitical tension between the U.S. and China, lockdowns – could take place.
The Wall Street Journal cites analysts who say prices could return to “pre-pandemic” levels or lower, after a two-year rally that brought the market for tech stocks up 60% and crypto astronomically high.
So, decisions need to be made to potentially protect your wealth as decisions are being made to theoretically protect the economy. Some people have it incredibly hard: Do Kwon, founder of the breakout crypto ecosystem Terra, is working to salvage his risky algorithmic stablecoin after it lost its one-to-one peg to the U.S. dollar. Terra’s backers had previously planned to purchase $3 billion in bitcoin as a backstop, and yesterday took the incredible move to sell a significant chunk of it as UST, the stablecoin, dropped as low as $0.61. CoinDesk columnist David Z. Morris called this “Kwontitative easing,” playing on one of the Fed’s generous policies to spur economic growth through spending.
Michael Saylor, CEO of a software company turned quasi-bitcoin fund, also made a decision. His MicroStrategy has bought more than 129,000 bitcoins at an average price of $30,700 since August 2020, and has taken out loans on a portion of those assets to buy more bitcoin. As bitcoin falls below Saylor’s purchase price, he may have cause to sell (in part to collateralize his company’s loans). Today, he said he will never sell – following the popular mantra among bitcoiners to “hodl,” thinking that, long-term, all assets will depreciate against the hard-capped BTC.
There’s a chance that you, dear reader, may also need to make decisions. It may not always be clear what to do, and who knows what your financial situation looks like or will look like if the economy worsens. As Sommers notes, “The current situation is anything but normal.”
He’s putting his money in “broadly diversified index funds that track the overall market,” which are being hit as hard as anything else but historically have been safe plays.
Lily Francus, an exceedingly bright market commentator and “quantitative memeticist,” noted that even if crypto is tracking tech stocks now, these digital assets are fundamentally different because they don’t pay dividends or offer future cash flow. Crypto assets are basically risk embodied, floating signifiers that move based on people’s desire or fear. And so they could rise or fall accordingly, she said. The direction is as open as the market.
That may not seem like sage advice, but at a moment where all things seem chaotic and out of your hands, it’s worth evaluating what you may hold. You cannot make decisions for other people, you cannot change the Fed’s policy, but you could act with conviction.
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