Simple money makes it easy with bitcoin and crypto markets
This is an opinion piece by Adam Taha, host of a Bitcoin podcast in Arabic and a contributor to Bitcoin Magazine.
Luna’s infamous collapse was followed by an implosion at Celsius, then suddenly Tron showed signs of death and now Three Arrows Capital is in major financial trouble. Nobody knows Who is Next, but one thing is for sure: more pain is coming. Current market conditions reveal capital and technological problems in the cryptocurrency world. Things are not good in the Web3 cap.
What about bitcoin? For the record, bitcoin is not crypto. It is important to distinguish between the two. When I say “crypto”, I mean digital products and innovations that rely on using blockchain technologies to run their projects. At the time of writing, there are 19,939 cryptocurrency projects out there, most of which have emerged in the last 12 months. Why are many of these companies struggling now? How do they fail at a relatively similar time? Are all these projects and companies scams? Was it the Federal Reserve that caused this? The answer is simple, no. As I said, the market did not create problems in Web3 and crypto projects, the market simply revealed rotten underneath. The problem is a liquidity problem and not necessarily a technical one. We witnessed a “gold rush” in the last market run-up from autumn 2020 to spring 2022. The euphoric rush to the market meant higher competition. Higher competition created an environment where two things emerged:
- Unrealistic promises: projects that promise unsustainable rewards (high returns, basic upgrades, consensus modifications, etc.) to attract buyers.
- Pure fraud: projects with the intention of exploiting financially (fraud, false marketing, theft, etc.).
In Luna’s case (which is still under investigation) we saw unrealistic promises. In retrospect, the promises of high returns were a clear red flag. Few people noticed it because it was a liquidity party. No projects were innocent. Ethereum is still over-promising and under-delivering. As an outsider, I feel that Ethereum’s developers are being rushed by venture capitalists and investors to deliver “The Merge”. Many of Ethereum’s users get tired of losing faith in the network itself.
What made the soil of the cryptocurrency market so fertile for the aforementioned problems? Admittedly, there was a level of risk for institutional money, but in a liquid market with almost zero interest rates, it was tolerable. Therefore, risk-on-mode is enabled for both retail and institutional participants. But as the trip became bumpy and the Fed began to change tone while the stock and housing markets began to signal an increase in risk, risk assets were the first to be sold. Therefore, risk-on mode is disabled.
To repeat, the problem with most cryptocurrencies in general is not a technical problem, it is a liquidity problem. The Fed’s announcement of quantitative easing (QT) at the end of 2021 gave the market a spin, and the effects were almost immediately clear to all observers. It was then that projects that were oversold and projects with unsustainable returns burst under liquidity pressure.
What is a liquidity problem? What is quantitative easing and tightening? Quantitative easing is how the US Federal Reserve “squeezes” money into existence. The Fed credits the Fed accounts to sellers of government bonds and mortgage-backed securities (MBS), thereby expanding its own balance sheet in the process. Supporting the market for government debt means that the Treasury can issue more debt, which is serviced by future taxes and must be paid by future generations. In other words, kick the box down the road. Since 2008, the Fed balance sheet has grown by around $ 8.5 trillion. Quantitative tightening is when the Fed stops or slows down the purchase of government bonds and MBS while selling these assets in the open market. Since the beginning of June 2022, the Fed has let $ 45 billion in assets fall due without compensation, but their balance sheet has only shrunk by $ 23 billion. This is increasingly creating liquidity pressure in the market, and especially for risk markets – starting with the cryptocurrency market, of course. The Fed wants to fight inflation, and they can do so by raising interest rates and sucking up liquidity from the market. Until something breaks – most likely the real estate market.
Until early 2022, the market was a block party with a splashing fire hydrant that openly supplied the market with light liquidity. That liquidity fire hydrant was unleashed by the Fed itself. Now the Fed is back to close the squirting hydrant. The party is over.
As mentioned, they will lower the current assets limit on the balance sheet 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 this amount to $ 95 billion from September, or so they promised. Keep in mind that the Fed has $ 8.9 trillion in purchased assets on the balance sheet, so this can take years if not interrupted by political, economic or other macro factors.
Crypto’s problem is not a technical one, it is a liquidity problem. Surprisingly, the party was happy and went “oh so well” even when fraudulent projects were widespread and obvious. Obviously everything the market needed was free money, who would have known that? (Bitcoiners knew.)
Where do we go from here? Jerome Powell announced an increase of 75 basis points on June 15, 2022. On the same day, he admitted that US inflation is directly affected by macro factors that are “out of our control”, and that the Fed can change course if inflation shows signs of declining. Other Fed members such as Jim Bullard and Christopher Waller signaled a more hawkish position going forward. However, I think there will be more liquidity pain. More pain in the short to medium term, and then a pivot in the long term. The party is on again.
The markets will not recover until the Fed swings or gets inflation under control in a non-catastrophic way (“soft landing” as Mr. Powell says). Remember that historically, the Fed has always been successful in tackling inflation with interest rate hikes when they reached within 2.5% of the annual inflation rate. Also note that the Fed has never been able to reach the previous all-time high rate since 1982. Why should they succeed now?
What about bitcoin? In stressful times, I always ask myself the following questions: Did any of what was happening change Bitcoin in any way? The answer is always no. So I buy more. This is the time when generational wealth is created for you, your family and your future. This is the time to buy because the Fed will swing, the Fed will not create a soft landing, the Fed will affect the dollar and the bond market. The Bitcoin supply is still limited to 21,000,000. Bitcoin is still in short supply, decentralized, unchanging, healthy and focused. Crypto has a bill while Bitcoin does its thing, the same since January 3, 2009.
Every token in this last bull market depended on simple money from the Fed (liquidity). The current crash is caused by the Fed policy, and the same Fed policy will change again – they will be back to open that fire hydrant. So ask yourself: Why invest or support a token or a market that is subject to an unstable Fed policy? While bitcoin is here and still on point, unphased and unchanged by the Fed’s policy. Of course, those who have participated in the last few months do not believe me, but let this idea marinate in your head: Bitcoin’s price in USD at the time of writing ($ 21,800) is up over 100% since June 20, 2020. It is a 100% plus return in just two years. Can the Fed tighten in two years? It certainly can not.
You and bitcoin will surpass the Fed. So buy more and happy HODLing.
This is a guest post by Adam Taha. Expressed opinions are entirely their own and do not necessarily reflect the opinions of BTC Inc. or Bitcoin Magazine.
