This Week in Crypto



Daniel Gupta
03/18/2020

By Guest Contributor: Daniel Gupta, Kenetic Capital

Fear gripped the global markets last week and unless your investment portfolio consisted heavily of USD (kudos to Warren Buffet), then nothing really was immune to the perfect storm of global uncertainty around the COVID-19 outbreak which was declared a pandemic by the World Health Organization on the 11th March.

Crypto markets had a wild ride last week with many traders opting to stay away from the screens as exchanges struggled with the massive volatility, liquidations and volume — we note that Coinbase saw record volumes on Thursday with over $1.5bn in value traded. With massive volatility, inevitably many traders would have lost fortunes and Twitter was indeed eerily quiet once the dust settled at the end of the week. We can confidently assume that hundreds of derivative trading accounts were liquidated as Bitcoin precipitously fell from $8,000 to $3,800 over the course of Thursday.

COVID -19 is a major black swan event — defined by the fact that no one anticipated it or still really understands the possible long-term impact to humanity and the world economy. As history has shown, the worst enemy to all markets is uncertainty and the sheer scale of the uncertainty surrounding this global pandemic, combined with the oil war is excruciatingly clear to see everywhere.

Crypto prices started weakening last weekend as wallets associated with the PlusToken ponzi started to move 13,000 BTC to coinjoin mixers, commencing mass liquidations and raising ~$100M in fraudulent cash. How exchanges are still facilitating this is absolutely staggering. What is the point of KYC and AML?! The timing of the liquidations coincided with the broader market chaos and panicked sell offs, with the hope this distraction would mask the activity of these criminals whilst focus is elsewhere. The good news is that there doesn’t appear to be much more PlusToken BTC or ETH inventory to be sold and therefore alleviating, once and for all, this frustrating and significant sell pressure. Follow @egroBTC for quantitative analysis of these liquidations and wallet movements.

Bitcoin’s massive price drop last week was the 3rd largest daily price decline in its history and triggered a cascade of liquidations across derivative exchanges. These liquidations, led by BitMEX, was nothing short of mind-blowing. In traditional markets such large moves can trigger ‘circuit breakers’ which temporarily halt trading and allow order books to be refilled and reduce panic in the market. This actually happened 3 times last week during trading of the S&P and allowed a more ‘orderly chaos’ to play out, ultimately protecting market participants and adding structure to the market. No such thing in crypto.

Thursday saw Bitcoin’s price plummet and subsequently the liquidation of hundreds of long positions resulting in orderbooks evaporating as buyers pulled out of any significant bid support. This is where circuit breakers in traditional markets are useful, as they allow the market to pause for breath which in turn allows buyers and sellers, who withdraw orders due to the volatility, to come back in to the order books. Thankfully BitMEX, and many other derivative exchanges, hold sizable ‘’insurance funds’’ that can absorb the liquidations in the absence of natural buyers to take over the positions. Sadly, for many, these aggressive down moves would have cleaned out trading accounts.

Looking ahead, it is hard to see a more terrifying and anxious week in crypto, let alone global markets. However, we are firmly in black swan territory and not even the best epidemiological, political or economic minds can say, with certainty, how this will play out.

One thing is for sure, Bitcoin doesn’t care about virus’s, oil or fiscal stimuli. It will just keep producing block after block and allow anyone to interact with the blockchain and move value from person to person without question or complaint. As the global financial system stutters and falters, demanding massive liquidity to keep its thirsty apparatus from grinding to a halt, it’s reassuring to know that Bitcoin doesn’t need any intervention to keep going. Bitcoin is the tortoise…slowing plodding along, reliable and consistent but new to this financial race. The modern financial system is a pumped-up, steroid using hare that must take its cyclical fix of performance enhancing stimulus to keep its legs running at an ever-increasing pace.

Whatever it takes…

So, what now? Trump’s precious stock market is looking decidedly shaky and the debt laden US corporations will soon need liquidity as a result of massive disruptions to the US economy. The next Federal Open Market Committee (FOMC) meeting is coming up next week however they decided to move early and cut rates to zero over the weekend.

“I’m not happy with the Fed because I think they’re following not leading, and we should be leading,”

“I have the right to remove him.’’ Referring to Fed Chair, Jerome Powell

“I also have the right to put him in a regular position and put someone else in charge, and I haven’t made any decisions on that.”

Donald Trump

As we discussed a few weeklies back, the US repo market came under alarming stress in Q4 last year and USD shortage caused lending to dry up and repo rates to skyrocket to near 10%. The Fed simply cannot allow the repo markets to fail otherwise the world economy that is built on top of it will collapse. There is obviously much more nuance to the problem but the stakes are massive should the repo engine stop firing. Last week the Fed offered up almost unlimited short-term liquidity to the repo market by promising over $5 trillion USD in 1- and 3-month loans should the market need it. As one commentator so eloquently put it…

’’The Fed just brought an aircraft carrier to a knife fight’’

Gennadiy Goldberg of TD Securities

This coming week will see if the Fed are prepared to broaden the asset purchasing and deploy real QE. As we expected last week, the liquidity faucets are opening and the world’s central bankers, via various means, will print fiat currency until the current problems are inflated away — hopefully. Will we see the Japanification of the US economy as the liquidity problems start to stretch into corporate America? Whatever happens, mass stimulus is coming, hold on to your hats.

Where to hide?

With huge devaluation about to happen (again), what should investors do?

For some, Bitcoin has failed in its test as a safe haven asset or gold 2.0. It has lost massive value in the face of global panic. So, if it’s not a safe haven asset or gold 2.0 then what is it?

Due to Bitcoin’s relatively young age, this is its first real test in a global macro shock. If the store of value / gold 2.0 narrative is to be believed then a significant draw down in price during the initial stages of a recession can be expected. The chart below shows gold suffering a ~34% draw down during the 2008 crises before flipping to its ‘’inflation hedge’’ store of value use case as central banks flooded the world with QE and printed the world out of crises via expanding the money supply. What this chart shows is a lag between the impact of a market event and the market’s realization of its need to protect purchasing power during mass fiat devaluation via QE.

It would be foolish to say the exact same thing will happen again this time but if Bitcoin is to do what it was designed to do then the macro landscape could not be better for the price of Bitcoin (and gold) to shock and amaze as investor seek shelter when panic subsides and QE starts flowing.

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