The State Of The Market
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We're now 6 months into a bear market. Or are we? Let's talk more about the state of the market in this newsletter.
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The State Of The Market
Is It A Bera Market?
There has been a discussion for quite some time now if we're in a bear market or not.
The mini $ETH-rally from $1,700 to the low $2,000s made people yet again believe that the bull market wasn't really over. Then, yesterday the price nuked back to the $1,760's because of QT (quantitative tightening).
No matter who you ask, no one really knows what will happen in the market next. Arthur Hayes called $25-27K the "BOTTOM" on $BTC in his latest newsletter (published June 1st). Should we then turn bullish again?
Personally, I'm not convinced yet that the bear market is over. Quantitative Tightening started yesterday. This means the FED will start shrinking its ridiculously huge balance sheet, which is the exact opposite of what has happened over the last decade (their balance sheet has been constantly expanding at an alarming rate).
The chart below displays the size of the Fed’s balance sheet.
The balance sheet has grown from ~$4.3T in March 2020 to roughly $9T now (see below).
Now what do you think will happen when the balance sheet doubles in 2 years?
Inflation.
But how did we get there in the first place?
Quantitative easing (QE) in 2020 due to the Covid-19 crisis.
QE is when the Fed buys longer-term Treasury securities and mortgage-backed securities (MBS) from the open market using reserves that it creates (essentially printing money).
The result: new money is added to the system, interest rates fall & the Fed’s balance sheet expands.
Everybody gets more money. People spend more, consume more and the economy is blooming. However, a consequence is inflation.
Now, the FED is pushing the brakes and aiming to slow down the economy.
They can do this through QT, the opposite of QE.
Effectively, the Fed’s balance sheet should shrink by roughly $1T annually.
This is a much faster pace than the last round of QT in 2017-2019.
Powell expects that it may take around 3 years for the balance sheet to normalize, although there is no fixed timeframe.
Here's how the S&P performed during the last QT cycle.
From the figure above we can see that the S&P500 returned 8.99% in the first 9 months of QT (Jan 2018 - Sep 2018). This was with a $30B/month tightening.
But returns turned sharply negative when QT's pace was $50B per month (-13,97% from Oct 2018 - Dec 2018).
In this round of QT, securities will “run off” the balance sheet at this pace:
June - August 2022: $47.5b/month
September onwards: $95b/month
If history repeats, it's hard to remain very bullish on stocks going forward. And if crypto is more or less correlated to stocks, then I don't think we will see huge upsides going forward.
You can read some more thoughts about QT below:
What About Crypto?
After the death of Terra $LUNA V1, the crypto market has been pretty bearish.
The total mcap of crypto is now $1.2B, down from almost $3B in November 2021.
Both Bitcoin and Ethereum are down approx. 60% from ATH.
Your favorite altcoins are down 70-90%.
We've seen a small reversal in the stock market already, but haven't seen the same for crypto yet.
And now QT has started too.
The big question is now: "Is this a good time to buy?"
As with everything else, I don't know.
Long-term investors love to look for new opportunities when the crypto market is in a bull market. This is counterintuitive because the best times to go long are when most people are too afraid to even look at the market (which is right now).
However, most altcoins will never go back to ATH. Only the strongest one will. Also, new narratives will shape and in 1 year new coins will look more attractive.
Personally, I treat $BTC (and $ETH) as a long-term investment, but everything else is just a short-term/medium-term trade.
It's difficult times out there now, and I recommend you to rather spend time teaching yourself new skills rather than trying to time the exact bottom.
What about DeFi?
DeFi is also down around 60% (from $200b to approx. $80b). But this has happened more sharply compared to the overall crypto market.
As you can see from the figure above the DeFi TVL went from $160b to $80b in the matter of 1 week (due to the collapse of Terra $LUNA) and it dragged the whole market with it down.
People are extremely risk-averse now, and people don't want to "gamble" their money anymore. 6 months ago people were willing to throw money on $OHM forks, but now we won't even touch it. The yield is gone. But that leads us to an interesting question: was there ever a yield? And where did it come from?
A lot of the APR comes from the incentivized rewards portion. These rewards are funded through token inflation and are not sustainable. There is no external revenue backing these rewards. Trading fees, on the other hand, are real revenue. Users are paying a trading fee for the service provided by LPs (liquidity providers). Think about Uniswap, Spookyswap, Trader Joe, Astroport, etc. A part of the trading fees produced goes to you as APR in the LP pool.
So was there ever a yield? Well, in the bull run most of the yield were from incentivized rewards, on top of that we saw lots of unsustainable ponzi protocols that offered high yield because we were the yield. That's right (because you put money in, they could offer that to the next person coming in). This system was typical for nodes and forks of $OHM.
Is there any yield left?
If you use coindix.com you'll get a quick overview for stablecoins. Here I've sorted for TVL > $10M and a minimum 10% APR.
There are only 5 results.
2 of them are from Vires (See why I would stay away from Vires here).
2 of them are from Maple, but only 6% on Maple are from base rewards. Maybe not worth the risk/reward.
The last one is from Curve, but the 38% APR might have lasted one day, but if we check back tomorrow it's probably around 1-3% again.
If we compare this to 6 months ago, there were at least 12-15 options for stablecoin yield that paid out more than 10% APR.
There's not too much to do in DeFi now, so what I do is just wait.
I see more and more people are trying to switch over from DeFi to NFTs, but I think there is more downside waiting there long-term.
I hope this newsletter issue gave you some thoughts about the current market.
What happens next is the million-dollar question.
As I mentioned, I'm a little bearish. But I'm prepared for both scenarios, and I'm waiting for a clear trend pattern before I invest heavily in the market again.
Just to finish this newsletter, let's look at some Twitter threads I enjoyed this week.
Some Threads I Enjoyed This Week
1) Dealing with emotions in the market by ColdBloodShill
2) Altcoin Market Cycle Structure by CryptoCred
3) Trading advice by AltcoinPepe
Okay, that was it!
See you next week :)