Stocks

What to make of the crypto carnage

The ongoing correction in global stock markets isn’t unexpected… but if you’re not ready, check out our crisis preparation checklist. And if you’re focused on your losses now… take your emotions out of the equation by focusing on your stop-loss levels. And while you’re at it, get some of the best portfolio hedge available.

In the meantime, the cryptocurrency market is in the depths of a sharp correction… as Tama explains…

What to make of the chaotic crypto carnage

As I write this in my hotel room on the east coast of Mexico, the Satoshi Roundtable, a gathering of some of the most prominent and renowned blockchain and crypto experts, is about to officially begin… and it kicks off amidst the backdrop of a bloodbath in the crypto market.

As a crypto analyst, I’m attending the gathering because there’s no better place to be right now than amongst the people who have been fundamental to the development of the entire asset class.

Over the next couple of days, I’m looking forward to seeing how a collective of individuals, some with massive personal crypto portfolios, view the current crypto market correction.

I’ll be reporting back on the general ideas and points made at the gathering… but the Roundtable is considered “off the record” and is under “Chatham House Rules”. This means I can’t share any details that would in any way identify a speaker.

Over the past few days, I’ve had messages from friends, readers and Crypto Capital subscribers from all over the world asking for my thoughts on the crypto market. So I’m taking the opportunity to share my observations with you now.

An expected surprise

One never knows when a bubbly market will pop its top. But in all fairness, I’ve been warning about this correction for a couple of months now. In November, I told Crypto Capital subscribers:

“Dozens of crypto tokens are up hundreds of percent over the past few weeks.

Now, we’re seeing a lot of self-congratulatory backslapping from crypto investors. Folks talking victory laps, bragging about their returns. Hubris.

This makes me uncomfortable…

make no mistake, large sums of money will be lost in cryptos in the year ahead. And cryptocurrencies will continue to be one of the most volatile asset classes on earth…

It’s easy to feel like a ‘genius’ in a raging bull market. But make no mistake, markets don’t go parabolic forever…”

And in December, I told subscribers:

“Please stay conservative. Be ready to ride the volatility because we haven’t really even gotten started yet. The big shakeout is going to come. Don’t be even vaguely mistaken about that.”

Finally, in early January, I warned subscribers:

It [the altcoin market] continues to go fairly parabolic, I don’t know how much longer it’s going to last

the market is getting extremely ahead of itself in my opinion. And, when I look at this, it makes me somewhat concerned for many of the reasons I’ve talked about in the past with people not really knowing what they’re buying.

Between the end of November and early January, the overall crypto market rose at an unsustainable pace, from around US$240 billion to over US$800 billion in total market value in a matter of weeks.

Now, greed has turned to panic, and the market is down to around U$315 billion… back where it was in early December.

Why?

Well, the first reason is that the market was speculatively overbought.

This correction, whilst ugly, is simply a reversal of a market that flew too close to the sun… and is now suffering the burning after effects.

The second reason is what looks like a fairly monumental “risk off” sentiment is gripping global financial markets.

As I write, the Dow Jones Industrial Average was down as much as 4.6 percent in its intraday high/low. That’s a huge drop. And as the crypto market becomes increasingly (albeit slowly) institutionalised as an asset class, it will get treated like one.

That means instead of bitcoin and crypto being viewed as some kind of uncorrelated standalone asset class, it will instead be viewed as one that retains a link to global financial markets and will increasingly be traded in that context.

So in a heavy “risk off” market like we’re seeing now, crypto will also suffer.

Take a look at the below chart, which shows a very closely correlated intraday bottom in today’s equity and bitcoin markets.

Thirdly, regulatory scrutiny of the asset class is increasing. The days of shady initial coin offerings bait-and-switching millions of dollars from unsuspecting investors is likely drawing to a close.

On Tuesday, Chairmen of the Securities and Exchange Commission (SEC) and Commodities and Futures Trading Commission (CFTC), Jay Clayton and Christopher Giancarlo, addressed the U.S. Senate Committee on Banking, Housing and Urban Affairs regarding the oversight roles for their regulatory bodies over the crypto markets.

In their prepared remarks, their general message to the committee was that they have things under control and that they will work to preserve innovation while continuing to use the Howey test as a measure of whether a crypto asset falls under their purview (plenty will).

However, in my opinion, regulatory noise and uncertainty will continue to keep a chill on the market for the next few months.

At the end of the day…

Nothing that has happened in the past two months has altered my view that crypto is here to stay. But what this correction will do is force market participants to “force discipline on an otherwise broadly unsophisticated market”.

In other words, the market will start to diverge and discriminate between projects with real fundamental potential, and those with little to no prospects at all.

The days of simply buying any old crypto and riding the wave of crypto euphoria are likely numbered.

Good investing,
Tama