Well, hate to say we told you so.
Yesterday, we covered the likelihood of an imminent move for Bitcoin.
The technical and on-chain metrics told us that the market was ready for some serious volatility. The fuse was set. All it needed was a spark – and it got one, courtesy of the Fed. (Admittedly, even sooner than we anticipated!)
You might be asking three questions. WTF happened? Is the worst over? And is it time to dust off the old McDonald’s application?
Let’s jump in.
- Crypto market…way overleveraged
- Stock market…way overheated
- Inflation numbers…way underestimated
- The Fed has no choice!
The stage was set for fireworks
Ran called it. The market was way over-leveraged. And super high-leverage almost always precedes a shakeout event. The charts don’t lie.
As Sheldon might say, the trend is your friend. But that alone wasn’t enough to bring Bitcoin tumbling down to around $42k, prices not seen since last month!
Blood is in the streets!
In short, the whole stock market got rocked yesterday.
Risk-on assets across the board took a serious nosedive, with tech stocks (NASDAQ), in particular, taking a beating.
How’s that for an ugly candle?
As ever, we have our friends at the Federal Reserve (Fed) to thank!
2022 macro outlook
Yesterday, the Federal Open Market Committee (FOMC – the guys who get to decide the US’s interest rates and money supply) confirmed what we already knew weeks ago: the Fed is ready to put its money where its mouth is. The committee plans to introduce tapering (the slowing down of Treasury bond purchases) in Q1, and a series of interest rate hikes across the year.
Further, the minutes revealed that they would be addressing the soaring balance sheet.
You really don’t need Sheldon on hand to explain this one: after the COVID crash in March 2020, the money printing went absolutely parabolic.
None of this is news. With US inflation reaching its highest levels in 40 years (6.8%, a conservative calculation!), the Fed has no choice but to address it.
But it’s a balancing act. The Fed has a mandate to manage two things: employment and inflation.
Right now, its task is to slow things down, to lower the inflation numbers. That’s why it’s shifting gears; the hawkish language coming out of yesterday’s FOMC was intended to talk down the overheated markets.
(Remember, the Fed announced its intentions a month ago already. But the markets were only briefly spooked, and made a stunning V-shaped recovery, with the S&P printing an all-time-high in a matter of days. The Fed can’t let that continue.)
And it looks like it’s succeeding.
How long will it last?
Circumstances have changed. This isn’t March 2020, and we can’t expect a miraculous recovery. The Fed is reading from a different script.
This necessary market cool-off isn’t a one-week plan, and the Fed has no intention of talking the market down only for it to go parabolic again the next day. By the same token, this doesn’t mean equities are heading towards a multi-year bear market either. When was the last time that happened?
Investors might be moving into risk-off assets right now, but funds won’t sit in cash (or cash equivalents – like big, highly liquid stocks) all year. Why? They have shareholders to answer to. If funds don’t generate returns, they can’t justify their management fees. Sure, they can go into US 10-year Treasury bonds. To the tune of 2%. Not good enough. They’ll have to start deploying capital soon!
Don’t take our word for it, though. Just ask Nancy Pelosi!
Yep, she’s the greatest (allegedly insider) trader of all time. When she takes a position, we listen!
Has our investment thesis changed?
Nope, not really. This is a cool-off, not the frozen end of the world. And our fundamental thesis is intact: we believe the markets will continue to go up, crypto and equities alike.
What we’re seeing play out today only supports the idea of a lengthening cycle: this isn’t a bear market, but a bear trend within a bull cycle. We do not expect a sudden reversal!
Is the worst over?
Maybe, maybe not. Probably not. Truth is, yesterday’s leverage flush-out was significant, but by no means impressive.
As Will Clemente described it, a liquidation cascade for ants!
And open interest remains high. Really, really high. Only about 15% got wiped out in the correction.
Wow. There may well be a way to go yet before we reach the point of max pain. Plenty more blood to be spilled. So you’ll need a worst-case-scenario strategy. Which is EXAAACTLY what we’ll be giving you!
First of all, don’t panic. Relax. We saw this coming, and our fundamental thesis is unchanged. The question is, are you positioned to ride it out? Here’s the play:
- Reassess your portfolio. Rebalance where necessary. Are your shitcoins going to survive a (potentially) multi-month bear trend? If not, swap them for durable, proven projects.
- DCA is the way! If you have dry powder to deploy, start Dollar Cost Averaging into quality. Set some low-ball bids, just in case. And if you don’t have dry powder to deploy, promise yourself you’ll never, ever, be in this position again!
- Make your tokens work for you. Earn yield on your stable, and stake those quality coins!
- Don’t try and time the market. And definitely don’t think about playing with leverage. Instead, focus on bringing down your costs and building a rock solid portfolio based on fundamentals and relative strength. Fill up those HODL bags!
For more wisdom on the ultimate strategy, keep an eye out for our deep dive into playing this market like a boss, due out just before 17h00 today.
The deep dive we promised is here.