These days, I get questions like, is cryptocurrency crash over? why did the crypto market crash? can I catch bitcoin ay $19 k level? what is the fair value of bitcoin?

In this blog post I attempt to come up with a perspective on will cryptocurrency crash further?

Crpyto Market Perspective

Crypto has had a rough start to the year. One word comes to mind to describe the drop in price… Trainwreck.

An ugly disaster and hard to look away from.

This can be a massive disappointment for anyone currently sitting on losses.

As I write this Bitcoin is down 22% from the beginning of the year and Ethereum is down nearly 35%. 

If you just started getting into crypto, I know how frustrating this can be. I can’t count the number of times I made an investment, only to see it go down immediately and second-guess my decision.

Despite all of this bad luck, I’ve still managed to make respectable returns over the years.

The reason why is simple. I ignore the prices.

That’s right, my greatest investing successes have come when I ignored the prices and focused on the long term. 

I’ll give you an example. If you’re old enough, you might remember Facebook’s IPO in 2012.

What was supposed to be one of the biggest IPOs of all-time turned into a colossal disaster. A weird glitch in the stock exchange software caused Facebook’s stock to tank the first day of trading. 

All of a sudden, people saw the price drop and assumed there must be problems with the company. Some analysts were saying that the company did not have a strategy in place for mobile and was going to get killed. The stock fell 52% within 90 days.

Turns out buying during the IPO was the buying opportunity of a lifetime. Sure, a $10,000 investment at the IPO price would’ve been worth $4,800 just 90 days later. But zoom out and that investment would be worth $79,000 today. 

Turns out that Facebook stock was a really good investment!

The same holds true with cryptocurrency.

Today, there is nothing wrong with cryptocurrency. 

There were a lot of scams and the market went way too high, way too fast. So now the market is pulling back a little bit. But there is nothing fundamentally wrong with cryptocurrency.

Cryptocurrency still has the same massive unrealized potential as it did when the market was at its peak back in November.

In fact, all of the excitement and enthusiasm around cryptocurrency caused a lot of private investors (like hedge funds, venture capital, banks, etc.) to invest in new cryptocurrency projects this past year.

What this means is that crypto probably has even more massive unrealized potential than ever before.

Just like the Facebook IPO, when people saw the stock price going down and assumed there must be something wrong with the company. This is a classic case of the tail wagging the dog.

The same is happening today with crypto. Just because the price is down, does not mean that crypto is doomed. In fact, crypto is just getting started. If I had more money, I would invest more at these prices.

Are We Done With Cryptocurrency Crash?

The crypto capital markets are the last free financial markets on earth. All other major asset classes and the intermediaries who help people trade these financial products have become political targets of governments and their central bankers.

“When a measure becomes a target, it ceases to be a good measure” — Goodhart’s law.

Equity, fixed income, and currency markets are infected with the largesse of central and “too big to fail” banks. That means that they can run infinite leverage on the backs of the taxpayer, with the consequence being inflation created by wanton money printing. These banks’ balance sheets are used to pin asset prices to politically expedient levels. This benefits the wealthy, as in every society, the distribution of financial asset ownership is highly concentrated in the top 10% or 1% of the citizenry.

Crypto is wholly outside the TradFi system, and thus finds a market clearing level well before stonks or bonds. Crypto is now a real asset class, traded by plebes like us, hedge fund masters of the universe, and a smattering of sell-side banks.

Crypto as the last functioning true free financial market will find a clearing price on the up and downside that reflects the current macro economic environment well before all other assets.

The belief in the above statement leads me to a bit of a conundrum.

In the first three weeks of the year, the crypto markets traded down sharply. The American equity markets – and by that, I only mean the index prices of the S&P 500 and Nasdaq 100 – are slightly off their all time highs. Equity markets are certainly not in a true bear market yet. But the capital destruction visited upon crypto holders suggests that the future removal of USD liquidity by the Federal Reserve in their renewed fight against inflation will visit equity index holders in short order.

That is fine. But the Fed hasn’t even stopped purchasing bonds yet, nor have they raised their policy rate. Would I be too greedy, and thus miss an amazing entry point to exchange filthy fiat for clean crypto, to wait until the March meeting where the markets forecast the Fed to hike rates? I can’t deny if Bitcoin trades below $30,000 and Ether $2,000 that may trigger finger on the buy button would get quite excited. But does this impatience square up with the mental map of the probability cloud of the future?

Let this be an essay that attempts to allow more flexibility in how one determines it is the right time to buy the fucking dip!

Oh, Then Comes Fed Policy & Rate Hikes…

The US President held a solo press conference last week and affirmatively stated that it is the responsibility of the Federal Reserve to tame inflation. Regardless of whether or not you believe the Fed is both 100% culpable for high and rising US inflation, and/or they actually can do something about it with their remit of policy levers, the Fed politically must raise rates. However, the Fed will never 100% commit to any policy; they always leave the door open to change their mind should something blow up spectacularly in the financial markets.

The question becomes: can the Fed publicly change its future telegraphed restrictive monetary policy in advance of the March meeting, where everyone expects them to raise the policy rate 0.25%? Here are three possible scenarios where the Fed could justify a change of course:

1. The S&P 500 and or Nasdaq 100 trades down at least 30% from it’s all-time high (3,357 for S&P 500 and 11,601 for Nasdaq 100).
2. Some nook and cranny of the US Treasury / Money Markets implodes.
3. Investment grade / high yield corporate bond spreads widen considerably.

It is well believed that if either of the first two scenarios occur, the Fed might go against the political wishes of the ruling party and turn the money printer back to the “Brrr” setting. What is less spoken about is the corporate credit sector, mostly because everyone assumes the Fed solved that problem when they nationalised the market in March 2020.

The Fed nationalised the US corporate bond market by backstopping all bonds BBB and above, and by indicating they can purchase ETFs that hold high yield credit (read: Junk Bonds) such as $HYG. The two charts below show how the nationalisation crushed Credit Default Swap spreads. The CDS spread is a good indication of how much interest a corporate in a particular ratings category must pay to issue bonds.

High Yield Spreads (CDX HY CDSI GEN 5Y CORP)

Investment Grade Spreads (CDX IG CDSI GEN 5Y CORP)

Left to its own devices, the market began demanding high levels of interest for corporate borrowers in the face of a pandemic of unknown severity, the red color % change. The Fed said “naah naah nah nah,” the market has the wrong level– so let’s nationalise it by offering an unlimited backstop of printed money. The “market”, if you can call it that any longer, exhibited right thought, which caused spreads to fall and maintain easy borrowing conditions for sufficiently large corporations. Unfortunately for small businesses, they can’t access institutional credit markets, so they got fucked. The market went sideways and quiet until recently.

If the Fed publicly stated it will contract the size of its balance sheet, then how can it maintain its pledge to backstop corporate issuers? The backstop necessitates buying or threatening to buy any and all eligible corporate bonds, as defined by the Fed. The market has woken up to this inconsistency, and yields have begun a small breakout to the upside.

This is a problem because in 2022, approximately $332.42 billion worth of non-financial US corporate bonds mature (source: Bloomberg Terminal). A company must either pay back investors with cash on hand, or issue new debt to pay back the old debt. Using 2021 issuance statistics as a benchmark (source: SIFMA), the amount of debt that must be rolled over represents 17% of the yearly total.

Very few companies have pricing power to offset the pernicious effects of wage and commodity inflation; profit margins and earnings must contract. Therefore, free cash flow generation with which to pay back bond holders will decline as inflation continues to ravage America and the world. As such, the market will demand a higher rate of interest on newly issued bonds if the Fed is not actively stomping on spreads via expanding its balance sheet.

The nightmare scenario for the Fed is if the market pulls forward expectations of tighter monetary conditions and requires higher and higher rates of interest for the issuance of corporate bonds. If companies can’t finance themselves, they will reduce activity, which means job losses at a very inopportune time politically. Inflation doesn’t necessarily mean someone will lose their job, but if a company cannot finance itself because its business cannot stomach the rate of interest demanded by the market then said company will terminate workers.

I believe that, politically, 7% unemployment is worse than 7% inflation. The Fed and their political handlers may soon be forced to choose between more goods and wage inflation or job losses if this sector of the credit markets blows up. We may bet on a resumption of easy monetary policies, which as we know is positive for the crypto markets. Market conditions change very quickly, and should the market believe the Fed does not have their back in the corporate bond sector, spreads will widen rapidly.

The play is not to wait for the Fed to publicly announce its change of heart, but to use the signals provided by these indices as an indication of an imminent pivot. Crypto will pick up on these signals and trade higher well in advance of a public announcement by the Fed about its change in policy.

Crypto Resistance Levels

$28,500 BTC/USD

$1,700 ETH/USD

I don’t believe in a bottom until these levels are retested. If the level holds, amazing. This prong has been met. If it doesn’t, then I believe a mega liquidation candle will happen in the $20,000 to $28,500 range for BTC and the $1,300 to $1,700 range for Ether.

If either of Bitcoin’s 2017 and Ether’s 2018 previous ATH ($20,000 and $1,400 respectively) are breached on a daily candle, then I don’t even want to think about it.

Maybe Bitcoin never breaches $30,000, and/or Ether never tests $2,000. The market never provides a perfect setup. In the absence of a clear test of prior trend channel lows, then things become a bit more touchy-feely. Depending on your ideological view of capital markets, you may look at one or more statistics such as: total open interest on leveraged trading platforms, net on-chain stablecoin inflows into exchanges, growth in the AUM of select exchange-listed products, implied vs. realised volatility levels, etc.

What’s a Sure Thang..

One can dream about a setup where the Fed turns on the tap at the same time Bitcoin and Ether hold the bottom of the current trend channel. However, I am pretty certain that ain’t happening. We must be more flexible in our thinking about which signals inject confidence into our hands so that we can buy, buy, buy, and buy some more.

The traditional markets have not intimidated the Fed enough to stop channeling their love for Cervantes and cease flailing at windmills that billow with the winds of inflation. As far as price action goes, over many years as a participant in the crypto capital markets, dumps come in waves. This last weekend, while brutal, has not broken the soul of the bulls.

Remember that the marginal seller determines the price. The institutional hoard that holds a small amount of crypto in aggregate will puke it with no abandon if their portfolios of bonds and equities get the stick. They haven’t started selling yet (they don’t work on weekends), and negative headlines in the mainstream financial media does not provide the confirmatory bias needed for these sell-side suckers to stomach the volatility of crypto on the downside. The correlation one moment is upon us, but is not here yet. If the S&P 500 and Nasdaq continue sliding into the quarter end, watch out if it ain’t tied to a post with an Hermès tie, or nailed into the ground with a Louboutin stiletto…

Sell the rips, and dodge the dips.

To Conclude, Where We Go From Here…

To wrap up, there are two types of players in the Bitcoin market: Momentum buyers and value buyers.

For momentum buyers, particularly from a high time frame perspective, short-term holder cost basis is the level that is most important to reclaim and flip as support (as per the onchain cost perspective shown below). The psychology behind this is that above this level, newer market participants are in a state of profit; when below they are sitting in a state of loss. Historically it has been wise to be cautious once below this level and ideally, you want to buy the retest of support once broken back above. This currently sits at $41,500. Again this is for momentum-based market participants.

For value-based market participants, the low 30Ks/upper 20Ks are a value area for Bitcoin. this is partially based on price action, as well as macro bottom indicators such as the 200W, realized price, and delta price being in the mid 20Ks. Calling the exact bottom is a bit of a fool’s game, but sometimes it’s as simple as asking yourself where the asymmetry lies.The asymmetry is not skewed the downside with Bitcoin in the low 30s/upper 20s. Does this rule out a potential capitulatory wick on some type of macro breakdown? No. This is also why buying a lump sum and trying to time the bottom is probably not the best idea. Averaging into these levels with a multi-month horizon is the approach one may take. (NOT FINANCIAL ADVICE)

For longterm perspective, as bitcoin’s market capitalization hit an all-time high in 2021, its network fundamentals remained healthy. Bitcoin’s market capitalization still represents a fraction of global assets and is likely to scale as nation-states adopt as legal tender. According to ARK estimates, the price of one bitcoin could exceed $1 million by 2030.

Recommended article: Are You Ready For DeFi Crypto Winter?

Disclaimer: The information provided on this page does not constitute investment advice, financial advice, trading advice, or any other sort of advice and it should not be treated as such. This content is the opinion of a third party and this site does not recommend that any specific cryptocurrency should be bought, sold, or held, or that any crypto investment should be made. The Crypto market is high risk, with high-risk and unproven projects. Readers should do their own research and consult a professional financial advisor before making any investment decisions.

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