Happy Juneteenth to the readers in the U.S.! Over the weekend crypto markets had Twitter in a frenzy amongst traders and investors. $BTC declined 14% in overnight trading from Friday night into Saturday morning, kicking off a tumultuous and volatile weekend for traders as the price of $BTC declined to as low as $17,500 on some exchanges.
The volatility did not let up on Sunday as $BTC regained some of its losses from Saturday as $BTC fought to maintain the important $20,000 price level. Over the weekend more negative news from DeFi as another DeFi protocol comes under liquidity pressure.
For example, a Solana blockchain DeFi lending platform, Solend has been put in a precarious position because a whale (e.g. a blockchain user with a lot of tokens) on the platform held a $108 million stablecoin loan position (at time of writing) which is collateralized by 5.7 million $SOL tokens on Solend. The liquidation price of the loan is $22.30. At the time of writing this post $SOL price is at $35.93, which is a stone’s throw away from the liquidation price.
The concern is that if $SOL suddenly drops below the loan’s liquidation price there may not be enough liquidity on-chain to support the losses. It was so much a concern that the dev team proposed a vote to take over the whale’s account and force a more orderly liquidation, but this faced public pushback and was eventually reversed. This on chain lending activity is another development that many in the industry are keeping a close eye on.
Are we near the bottom?
Crypto markets have crashed from the meteoric mania that began in October of 2020 and peaked in November 2021. Crypto investors and traders should expect a long and protracted winter. In my view crypto markets won’t recover until traditional markets (e.g. bonds and equities) have worked through their own market turmoil.
In the current market regime of traditional finance (TradFi), $BTC has played the proverbial role of the “canary in the coal mine.” As you can see in the chart below $BTC peak in November 2021, right around the same time inflation fears begin to creep into the broader traditional markets. In addition to inflation, there are other concerns that have caused havoc in the markets such as the supply chain disruptions from the China Covid lockdown as well as the Russian invasion of Ukraine.
What’s worse is that it’s not clear how the Fed can solve those macro issues. These are geopolitical events that are out of the Fed’s control. As a result, the Fed is stuck between a rock and a hard place. Their only choice for the Fed being that they are behind the inflation curve, is to raise interest rates to slow the economy down and bring down prices.
Furthermore the Fed is implementing Quantitative Tightening or QT which will dramatically shrink the money supply. Through these monetary tools the Fed runs into the danger of causing a major global recession. What’s even more concerning is that the Fed could slow down the economy without bringing down inflation due to supply constraints. This nightmare scenario is called stagflation.
Where could interest rates go next?
How far the Fed will hike interest rates is a huge topic of debate these days and a very important one for financial markets. One of the markets I keep an eye on is Eurodollar futures which tracks the rate at which institutions will make unsecured loans to each other.
The Eurodollar futures market is an important indicator because it’s essentially the rate that U.S. banks lend to each other for short periods of time e.g. 3 months. The Eurodollar futures market is one of the most liquid markets in the world and is considered one of the plumbing mechanisms of the global financial system, so it’s probably a good idea to pay attention to them.
At the time of writing the EuroDollar Futures curve was pricing in rate hikes until March 2023 where the market expects a peak of over 4% interest rate.
There are some crypto participants that are predicticating a bottom in the near term. My current view is that we have some more issues to work through in TradFi which doesn’t seem like there will be clarity anytime soon. My expectation is that crypto will experience more pain in the near future until TradFi stabilizes.
According to current expectations in Eurodollar futures, we may not see relief until the 2nd or 3rd quarter of 2023. At that point we could very well see crypto begin to decouple from equity markets and once again lead markets out of bear market territory and into another bull market rally. In the meantime, crypto markets are dark, gloomy and dangerous.
Disclaimer: This post is for educational purposes only. This is not an endorsement to buy or sell any digital tokens or cryptocurrencies. Please consult your financial advisor before purchasing any digital assets.
