Note: If you have any thoughts on if we should stick with this "weekly update" model or move to 2-3 weekly market updates, please let us know!
This week has certainly been an interesting one. Russia has decided to essentially invade Ukraine, causing many assets to go "risk-off" and the total crypto market cap to fall by about $200 billion before rebounding over 12% in the past 18 hours. Now, usually, we'd be able to point to some specific crypto-market-related catalysts to see why, but it appears that most of this week's fall has been driven by a geopolitical situation that has continued to get worse (we won't rehash all the news here - we're sure you've seen the headlines) and dominate broad market movements. Crypto followed growth stocks down - there's not much more to say about it than that!
Let's talk about what this means for crypto markets going forward. In terms of the geopolitical situation, we're looking at two possibilities:
• Things get worse. One or more of: more sanctions, a larger scale war, China using this time to make a move on Taiwan and seeing strong pushback, supply chains hit even harder, etc. Hopefully this is not the possibility we see occur.
• We've seen the worst. Things cool down and negotiations can proceed in a more peaceful manner. This seems more likely at this point.
What does all of this mean for crypto markets? Well, it's interesting...on the initial news of invasion, most assets (including crypto) made sharp moves downwards while the price of things like oil and gold went up. Then, the reverse happened as it was revealed that the next round of sanctions would not heavily focus on the energy sector, which was a big concern for most investors given how reliant many countries, especially in Europe, are on Russia for energy at this point. Tightened oil and gas supplies could cause issues such as civil unrest and notable price increases (+ inflation). These fears, at least for now, were calmed a bit.
If we've already seen the worst of this Ukraine situation, it would be a blessing. Still, market-wise, we've heard that the Fed has assessed the situation and is more likely to stick with at 25bps rate hike in March rather than a 50bps one due to economic troubles stemming from all of this - the transition to monetary tightening may be slowed, but it's still on track. The Fed is stuck between a rock and a hard place; they want to fight inflation by raising rates, but, to effectively do that, the economy needs to be able to stand on its own, and recent events could throw that assumption for a loop. Although these events hurt, it does not mean (as of right now) that the Fed is flipping "supportive" and/or flipping the money printer back on - combating inflation is still a huge priority for them. We personally think that the Fed could very well be forced to reverse course on this stance sometime in the next 12 months (and high deficits + debt/GDP at about 120% + falling foreign treasury demand + the flattening yield cure agree with us) which would probably be good for crypto, but that time is not now.
Sam Bankman-Fried, CEO of FTX, also wrote a solid Twitter thread about how all of the news has impacted crypto prices. We saw gold move higher this week and bank account shutdowns by governments cause some people to say "hey, crypto could help there." Some think that crypto should be moving up due to reasons like these. However, realistically, Bitcoin is still trading like a risk-on asset (a "tech stock on steroids"), and the rest of the crypto market has followed. Algorithms are responsible for some of this correlation, but also, in the face of global uncertainty, many people sell their most volatile assets...and crypto is near the top of that list.
Another newsworthy event occurred this week - The DAO hacker has allegedly been identified after six years. The DAO was an early example of a decentralized autonomous organization on Ethereum, with an intended purpose to operate as a decentralized investor-directed venture capitalist firm. Why is this such a big deal? Well, The DAO attracted nearly 14% of all ETH in circulation at that point, and, a month after launch, the smart contracts were compromised and the hacker walked away with 3.6M ETH. Laura Shin, a crypto-journalist and host of the crypto podcast Unchained, claims to have identified the culprit behind the attack as Toby Hoenisch, a 36-year-old Austrian programmer and co-founder of TenX, a failed crypto debit card company. If Hoenisch is indeed the perpetrator, he singlehandedly almost destroyed the Ethereum blockchain. How? After the initial hack, the Ethereum Foundation, backed by the majority of the Ethereum community, decided to roll back the chain and restore the stolen funds. This resulted in a fork that split the Ethereum blockchain into two separate chains: Ethereum (ETH) and Ethereum Classic (ETC). This was a pivotal moment in the history of Ethereum, and Laura Shin provides evidence of her claims in her new book titled The Cryptonians: Idealism, Greed, Lies, and the Making of the First Big Cryptocurrency Crazy.
In summary, geopolitical concerns (it's nearly impossible to predict where exactly the situation goes next) combined with continued tightening of monetary policy does not bode well for risk-on assets like crypto right now. Crypto is undoubtedly intertwined with macro movements at the moment. Bitcoin is still nearly 50% off its highs, and many other tokens are down worse, but things can still get worse if stocks break down further (the Nasdaq has only gone down far enough, so far, to reach levels last seen in May 2021). Major risks loom, but we are long-term bullish on crypto more than ever. Whatever levels you consider or don't consider buying opportunities are up to you, and keep in mind that positions can be taken piece by piece. Our outlook for the next week is neutral to slightly bearish (BTC staying below $41.5k), regardless of whether or not the Ukraine situation gets worse. Still, as stated in our last portfolio update, we will likely be buying some tokens in smaller sizes...and, if things get worse than expected (such as BTC breaking below $33k), perhaps buying in larger sizes. There are certainly some buying opportunities out there if you’re confident in the future of crypto. Stay safe, and we'll be back with you all on Monday!
Another quality assessment!