The crypto market is wrapping up July on a high note.
In the past 24 hours, the bitcoin price jumped 7.8% to $22,900 and ethereum’s price added 11.2% to its value, currently trading just over $1,600. Altcoins were a little more reserved. XRP
Still, crypto prices are quite a way off this year’s highs. What’s keeping the lid on them?
In a July 21 Twitter thread, Arcane Research’s analyst Vetle Lunde pointed out that, for the most, the crypto market is battered by massive liquidations from institutional investors and corporates that began after the Terra-Luna
“236,237 BTC. That’s the amount of known selling of bitcoin since May 10th by large institutions. Most of the selling is related to forced selling…“he wrote. “The number does not account for other natural capitulation and hedging activity that usually occurs during crypto bear markets.”
The biggest seller was Terra’s Luna Foundation Guard, which sold off 80,393 bitcoin in an utterly failed effort to defend its TerraUSD
So, what scared big investors back into fiat currencies?
Two things: Terra’s implosion and the Fed’s fierce battle with inflation.
After Terra’s Luna crash, investors realized the crypto market is more intertwined than thought before, which sparked fears of an all-out crypto collapse and potential contagion into the broader market. In fact, following the Terra crash, Goldman Sachs put out a letter that warned investors of the interconnection of DeFi platforms and how they “amplify systemic risk.”
Meanwhile, the Fed is doling out the most aggressive rate hikes since 1994 to tame near double-digit inflation. Such a hawkish Fed doesn’t fare well for stocks because higher rates increase the cost of borrowing and “tidy up” risk asset valuations (broader explanation here).
That applies to crypto, too. As I discussed before: “major cryptos are highly correlated to the stock market. They also have a high beta to stocks. That means crypto, in effect, amplifies stock moves. If stocks soar, cryptos soar higher. And vice versa. If stocks tumble, crypto goes into free fall.”
This was clearly seen in this week’s bitcoin price action. Bitcoin
The short-term fate of crypto is still shrouded in a lot of uncertainty.
The world’s major central banks are doubling down on a 180 in policy. There’s the biggest war in Europe since WWII with no end in sight, which is throwing wrenches in the supply of food and energy while fostering inflation.
Meanwhile, the economy is teetering on the edge of a recession. In the first quarter of 2022, real GDP in the US dropped 1.6%, and all signs show the second quarter will be in the red, too. If the economy tips over, risk assets will likely suck up another blow from sentiment.
For crypto specifically, regulation is another big unknown, but considering the proposed bills from the European Commission and the Senate, it is more of a concern for smaller, more unsustainable coins rather than major cryptos.
On the positive side, hordes of crème de la crème fund managers expect that major cryptos, especially bitcoin, will hold through this macro backdrop and come out stronger.
In a recent interview, Blackrock’s Rick Rieder comforted investors, “I still think bitcoin and crypto are durable assets. It’s a durable business, but there was so much excess built around it. I think there’s a healthy recalibration going on.”
He added: “My sense is like a lot of assets, if you look two to three years hence, they will be higher than today.”
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