The Anatomy of a Meltdown (and Just BTFD)

There has been much consternation in traditional markets of late, with a variety of reasons to blame. First, the Bank of Japan raised interest rates to combat the falling yen, causing traders to unwind yen-carry trade positions. Second, worries around U.S. economic growth came to the fore after a series of disappointing releases, especially the latest employment report. And finally, fears of a wider war in the Middle East arose after Iran vowed retaliation for the assassination of a Hamas political leader.

Such financial, economic, and geopolitical uncertainty caused widespread panic, resulting in, for example, Japan’s Nikkei recording its largest single-day drop since 1987 and many large U.S. tech stocks falling by double digits over several days, just to name a few.

Cryptocurrencies, which would have been expected to fall by a greater amount than equities anyway, had their own negative drivers, including impending Mt. Gox fallout, mixed spot digital asset ETF flows, a rising appreciation that pro-crypto Trump candidacy isn’t a lock, and reports of a large market maker dumping hundreds of millions of dollars of crypto during the panic’s peak. All in, Bitcoin touched $49,200, down 30% from just a week earlier, while Ethereum fell below $2,200, dropping 35% over that time.

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Towering Bull Tenets and Fading Risks Offer Chance at $1m BTC

Despite the downturn, we remain as convinced as ever in the bull thesis, with its core tenets towering in place:

• Central Bank Rate Cuts: We stand at the beginning of global monetary easing. As shown below, rising global liquidity has historically catalyzed Bitcoin.
• ETF Flows: The spot Bitcoin ETFs have garnered $17b of net flows, the spot Ethereum ETFs are getting over the ETHE outflow hump, and the wirehouses are starting to allow FAs to solicit allocation, all amounting to a slow-but-steady TWAP buy.
• Improving U.S. Stance: Regardless of who becomes President, a greater desire from both parties to institute clear guardrails that protect consumers and foster innovation will ultimately ignite a wave of corporate activity.
• Bitcoin for Governments: Though low odds and likely requiring a Trump victory, the creation of a U.S. strategic Bitcoin reserve could prompt a nation state-level war for Bitcoin, given the potential implications and game theoretic buying by others.

Oh, and these near-term bull tenets say nothing of crypto’s supreme driver, which is what it will, over decades, ultimately become.

Global Liquidity vs. Bitcoin Price, Year-Over-Year Growth

Source: The People’s Bank of China, Federal Reserve, European Central Bank, Bank of Japan, Investing.com, Glassnode, GSR

Note: Converts local currency M2 to US dollars and aggregates before taking year-over-year growth. Note that different countries may define M2 slightly differently, but the general concept of M2 is that of a measure of the money supply that includes cash, checking deposits, and non-cash assets that can easily be converted into cash.

And, while there may always be a black swan event, it’s hard to identify many large and likely risks. For example:

• Dissipating Overhangs: The specters of past sins are resolving, whether it be FTX returning $13b of cash to creditors or Mt Gox disbursing BTC to victims of its hack. To boot, these may turn into catalysts as FTX cash is reinvested and the Mt Gox overhang is removed.
• Traditional Markets Risks: Financial and economic uncertainty may be ebbing, with the BOJ suggesting rate hikes are done for now and Goldman Sachs ascribing just a 25% chance of a US recession (and the Fed pledging to “fix it” should growth slow).
• Others: Other risks like the U.S. selling its $13b seized BTC portfolio, heavy altcoin unlocks, or CEX/stablecoin insolvencies could go the other way, seem manageable, or appear of falling odds.

All in, should the bull tenets materialize, risks fade, and crypto make strides towards its endgame – perhaps with a dapp that goes mainstream or Bitcoin/Ethereum’s adoption as the world settlement layer – we believe Bitcoin would easily surpass $1m, skewing the risk-reward exceedingly positive at just about any odds of the above occurring. Imagine, instead of Bitcoin as “digital gold,” gold becomes relegated to “physical Bitcoin.”

The Dip as a Gift - Time to Buy

Ultimately, we see the recent dip as a gift, offering a solid entry point and pushing crypto to its greatest risk-reward in years. Indeed, ETH is lower than prior to the SEC’s stunning about face on the Ethereum ETFs, while Bitcoin is down from prior to the U.S. changing its stance towards crypto. Yes, we’re in a very different macro environment than before, but it’s hard to argue these catalysts are priced in any major way.

So while 30%+ drawdowns are indeed disconcerting, they create compelling opportunities. And while it’d be easy to come away negative after the events of last week, using price to inform one’s view of the underlying fundamentals is a recipe to buy high and sell low. Instead, the best analysts check whether the cause of any adverse price movements invalidated their thesis, and if not, they grow the position given the now-much-greater upside.

So with the bull tenets squarely in place as risks fade, a legit chance of $1m Bitcoin, and greater potential upside after the recent dip, the risk-reward has rarely looked so compelling. Time to BTFD.

Note: The views expressed in this column are those of the author and do not necessarily reflect those of CoinDesk, Inc. or its owners and affiliates.