Bull Market Speed bumps
This week in Crypto
Hindsight is a wonderful thing and after a rather painful draw down in price across the vast majority of digital assets since our last Weekly, it seems rather obvious now that the market had become extremely frothy, greedy and irrational. In scenes reminiscent of the ICO boom (and bust) of 2017 and led by the quick returns provided by the original meme-coin Dogecoin, we saw significant interest in Binance Smart Chain (BSC) secured altcoins such as Safemoon, Elongate and Asscoin. Promoted and pumped by the viral mechanics of Tik Tok and a host of teenage ‘’day traders’’ / social media hungry bedroom personalities, these so called defi altcoins that trade on the BSC decentralized exchange Pancake Swap sucked in investors chasing a quick buck.
As traders, we look for signs of market tops (and bottoms) and as discussed last week it is concerning for the health of the bull market to see Dogecoin enter the top 10 and maintain a market cap above $35 billion, which for us is a sign that market conditions are very retail driven and euphoric in nature. Although we don’t believe the macro top to be in for this cycle, as we progress in this bull market it is interesting to observe these top signals along the way and keep track of signs of euphoria and late-stage bullish sentiment. Obviously, there are quantitative technical signals and on chain metrics which guide our conviction but there are also many more qualitative signs such as this recent defi altcoin sentiment being pushed by teenage TikTokers and the many money grabbing NFT drops with little to no originality or creative value — all signs of short termism and euphoria.
Violent price declines during this bull market serve to flush out this exuberance and reset the market before further price gains can be made. This recent price drop has nicely reset the derivative funding rates (see below chart) and taken some of the speculative retail heat out of this latest stage in the bull market. The recent 15% price recovery in BTC is evidence of this, which has largely been spot market led rather than derivative…an encouraging sign for price stability above $50k going forwards.
As the market recovers from this latest correction, it is our view that we are now entering the more mature middle stages of this current bull market but with significant upside (albeit less asymmetrical) potential still remaining. We will continue to closely observe the tension playing out between the supportive bullish onchain metrics and conflicting bearish qualitative retail sentiment highlighted by these recent meme coin pump and dumps and other speculative mania that will undoubtedly arrive in due course. It is worth noting that despite these clear scam-based pump and dumps, the intensity of these ‘’toppy’’ retail market events are nowhere near the extent that was seen in the chaos of 2017’s ICO bubble. This is unlikely a result of a more mature and learned market and regulation wary exchanges but rather a result of the middle stages of the bull run. We expect progressively more signs of retail leverage, scams, pump and dump and general mania as we move towards year end and the latter part of the bull run and the euphoric tops characteristic of crypto.
We have often talked about the regulatory moat that is being established and entrenched around the crypto industry. One of the main concerns for Bitcoiners, crypto enthusiasts and the likes of Ray Dalio (before he changed his mind) was that Governments would ultimately ban Bitcoin, therefore it does not make a long-term sustainable portfolio investment.
‘’Every country treasures its monopoly on controlling the supply and demand. They don’t want other monies to be operating or competing, because things can get out of control… That’s why also outlawing bitcoin is a good probability’’
-Ray Dalio, Bridgewater Associates
In many ways, Mr. Dalio is correct but these concerns appear to be mainly justified in countries where Governments preside over weakening currencies and are losing the confidence of their precious electorate which increasingly seek inflationary refuge in the safety of Bitcoin and it’s hard-cap. India, Turkey and Nigeria are the most recent examples where governments have tried to ban or restrict Bitcoin and it’s not surprising that inflation runs hot in all these countries, especially Turkey.
An interesting development during the past week or so has been the revolving door style of movement of US regulatory executives into the crypto industry. Even though the regulatory landscape in the US feels moderately favorable for crypto with Coinbase now a publicly listed exchange on the NASDAQ and Gary Gensler now formally voted in as SEC chief, US crypto companies are reinforcing their Human Resources to weather the regulatory scrutiny and changes that are inevitably coming. An outright ban seems a long way off but the crypto industry will likely be drawn in closer to the existing financial system’s infrastructure and regulation, and the major companies are preparing for this eventuality.
“I think it’s very difficult to ban something that’s essentially a peer-to-peer technology. I think the goal, as with any technology, is to prevent people from using it for illicit purposes and only allow them to use it for legal purposes. That’s what I expect to happen”.
-Hester Pierce, SEC Commissioner
First up is former Commodity Futures Trading Commission chair Christopher Giancarlo who will be joining the board of crypto neo-bank BlockFi. BlockFi offer a predominately retail base of client’s interest baring accounts on crypto deposits and USD loans products, collateralized with crypto. Having the gravitas of Mr. Giancarlo on your board is a very shrewd move should BlockFi wish to go public (likely in our opinion) in the future, or the regulatory landscape turns sour for their particular type of retail focused business model.
More surprisingly, last week former head of the US banking regulator (the Office of the Comptroller of the Currency) Mr. Brian Brooks was hired to lead the Binance.US expansion in the US. Like Giancarlo, Brooks has strong and established links with Washington and understands the regulatory landscape that a company such as Binance.US will face in the coming years. Although Binance.US is a separate legal entity to its Chinese parent Binance Holdings, we do wonder what the former US Comptroller of the Currency thinks of the current meme tokens that are being promoted by American Tik Tokers and whether he believes Asscoin and Moonsafe are appropriate products that should be offered by Binance.US? Regardless, there will undoubtedly be regulatory minefields ahead for Brookes to navigate.
Joking ASSide, the more the leading crypto firms in the industry follow BlockFi and Binance’s lead, the better the chances are that crypto regulation in the US is favorable to these firms and the more entrenched crypto becomes in Washington. What happens in the US in terms of regulation is important as it ripples through the rest of the world, so we will watch this space carefully. With FTX moving fast to entrench themselves with sponsorship deals in the US and last year providing public financial support to Joe Biden’s presidential campaign, we expect to see more of these strategic moat enhancing moves from other crypto companies in 2021. Regulation is coming and those that are thinking longer term are building strong foundations and getting prepared now.