Easy Money Makes Easy Bitcoin And Crypto Markets
This is an opinion piece by Adam Taha, host of an Arabic Bitcoin podcast and contributor to Bitcoin Magazine.
Luna is infamous collapse was followed by a implosion to Celsius, then suddenly Tron show death clues and now Capital of the Three Arrows is in deep financial problem. Nobody knows who is then, but one thing is certain: more pain is coming. Current market conditions reveal capital and technology issues in the cryptocurrency world. Things are not going well in the Web3-hood.
What about bitcoins? For the sake of clarity, bitcoin is not a crypto. It is important to distinguish between the two. When I say “crypto”, I am referring to digital products and innovations that rely on the use of blockchain technologies to run their projects. At the time of this writing, there are 19,939 cryptocurrency projects out there, most of which published in the last 12 months. Why are many of these companies struggling today? How do they fail at a relatively similar time? Are all these projects and companies scams? Did the Federal Reserve cause this? The answer is simply no. As I said the market did not cause any problems in web3 and crypto projects, the market simply revealed the rot below. The problem is a liquidity problem and not necessarily technical. We saw a “gold rush” during the last market run from fall 2020 to spring 2022. This euphoric market rush meant increased competition. Higher competition created an environment where two things emerged:
- Unrealistic promises: Projects promising unsustainable rewards (high returns, fundamental upgrades, consensual changes, etc.) to attract buyers.
- Outright scams: projects for financial exploitation purposes (scams, false marketing, theft, etc.).
In the case of Luna (which is still under investigation), we saw unrealistic promises. In hindsight, its high yield promises were a clear red flag. Few people noticed it because there was a liquidity party. No project was innocent. Ethereum is still over-promising and under-delivering. As an outsider, I feel Ethereum developers are pressured by venture capitalists and investors to deliver “The Merge”. Lots of Ethereum users are jaded with diminished faith in the network itself.
What has made the soil of the cryptocurrency market so fertile for the aforementioned issues? Granted, there was a level of risk to institutional money, but in a liquid market with near-zero interest rates, that was tolerable. Therefore, the risk-on mode has been activated for retail and institutional participants. However, when the race got bumpy and the Fed started to change its tune as the stock and housing markets began to signal an increase in risk, risky assets were the first to be sold. Therefore, risk-on mode is disabled.
To reiterate, the problem with most cryptocurrencies in general is not a technical problem, it is a liquidity problem. The Fed’s quantitative tightening (QT) announcement at the end of 2021 shook the market and the effects were almost immediately clear to all observers. This is when over-promising projects and projects with unsustainable returns cracked under the pressure of cash.
What is a liquidity problem? What is quantitative easing and tightening? Quantitative easing is how the US Fed “prints” money. The Fed credits the Fed accounts of sellers of Treasury bills and mortgage-backed securities (MBS), and thus expands its own balance sheet in the process. Supporting the Treasury debt market allows the Treasury to issue more debt, which is funded by future taxes and must be paid for by future generations. In other words, kicking the can on the road. Since 2008, the Fed’s balance sheet has grown by about $8.5 trillion. Quantitative tightening occurs when the Fed stops or slows the buying of Treasuries and MBS while simultaneously selling these assets in the open market. Since early June 2022, the Fed has let $45 billion in matured assets without a replacement, but their balance sheet has only shrunk by $23 billion. This is increasingly creating liquidity pressure in the market, and in particular in risky markets – starting with the cryptocurrency market of course. The Fed wants to fight inflation, and it can do so by raising interest rates and sucking liquidity from the market. Until something breaks – most likely the real estate market.
Until early 2022, the market was a block party with a gushing fire hydrant openly supplying the market with easy cash. This liquidity fire hydrant was started by the Fed itself. Now the Fed is back to shut down that spouting fire hydrant. The party is over.
As Noted, they will let the cap on short-term assets on their balance sheet drop by $47.5 billion in assets by the end of this month. Then they will do the same with another $47.5 billion in July and another $47.5 billion in August. Then they will increase that amount to $95 billion starting in September, or at least that’s what they promised. Remember, the Fed has $8.9 trillion in purchased assets on its balance sheets, which could take years if not interrupted by political, financial, or other macro factors.
Crypto’s problem is not technical, it is a liquidity problem. Surprisingly, the party was happy and going “oh so well” even when the scam schemes were prevalent and obvious. Obviously, all the market needed was free money, who would have known? (Bitcoiners knew this.)
Where do we go from here? Jerome Powell announcement an increase of 75 basis points on June 15, 2022. On the same day, he admitted that US inflation is directly affected by macroeconomic factors “outside our control” and that the Fed could change course if inflation shows signs of decline. Other Fed members such as Jim Bullard and Christopher Waller signaled a more hawkish stance going forward. However, I believe that other liquidity problems are to come. More pain in the short-medium term, then a long-term pivot. The party is back.
Markets won’t rally until the Fed pivots or brings inflation under control in a non-catastrophic way (“soft landing” as Mr. Powell puts it). Remember that historically, the Fed has always been successful in fighting inflation with interest rate hikes when they hit less than 2.5% of the annual inflation rate. Also note that the Fed was never able to reach the previous historically high interest rate since 1982. Why would they succeed now?
What about bitcoins? In times of stress, I always ask myself the following question: has what is happening changed Bitcoin in any way? The answer is always no. So I buy more. This is when generational wealth is created for you, your family, and your future. Now is the time to buy because the Fed will pivot, the Fed will not create a soft landing, the Fed will impact the dollar and the bond market. Bitcoin supply is still capped at 21,000,000. Bitcoin is still rare, decentralized, immutable, solid, and focused. Crypto does its accounts while Bitcoin does its thing, the same since January 3, 2009.
Every token in this latest bull market relied on the Fed’s easy money (liquidity). The current crash is caused by Fed policy and that same Fed policy will change again – they’ll be back to open that fire hydrant. So, ask yourself: why invest in or back a token or market subject to unstable Fed policy? While bitcoin is here and still relevant, unphased and unaffected by Fed policy. Of course, those who have entered in the last few months don’t believe me, but let this idea marinate in your head: the price of Bitcoin in USD at the time of this writing ($21,800) is up more than 100% since June 20, 2020. That’s a More than 100% return in just two years. Can the Fed tighten for two years? It is certainly not possible.
You and bitcoin will outrun the Fed. So buy more and HODLing happy.
This is a guest post by Adam Taha. The opinions expressed are entirely their own and do not necessarily reflect those of BTC Inc. or Bitcoin Magazine.