The Bear Take on Bitcoin’s Pump

Bitcoin has rallied 40% off its local bottom from mid-September, and with the imminent approval of a spot BTC ETF now being priced in, Crypto Twitter is ecstatic! 🥳

Indicative of the market's bullish expectations for spot BTC ETF, crypto investment firm Galaxy released a report projecting that approval will spawn $14B of Bitcoin buy pressure and should spike BTC price by 74% within the first year after launch!

But while the brave souls remaining in crypto have positioned themselves for new highs, external capital is required to take us there, and the mere approval of a spot BTC ETF is no guarantee that flows will follow.

Despite prevailing narratives that institutions and investment advisors are awaiting the arrival of a spot ETF to unleash a capital tsunami into crypto, there seems to be little evidence to support that this will be the case, with AUM of Canadian spot BTC ETFs virtually unchanged since July 2022.

Crypto remains a zero-sum game where assets compete for the finite amount of dollars available. Pumps are simply the result of the rotation of internal capital. The evidence that capital will flood into the industry post-approval of a spot BTC ETF simply does not exist!

Tokens that have found their way into the limelight, like BTC, LINK, and SOL, have been able to eke out gains thanks to extremely thin liquidity, which allows small amounts of buy pressure to result in massive moves, but the broader market lags behind the leaders. This showcases that the rally is led by the outperformance of a select number of assets and demonstrates the lack of breadth in crypto markets.

Just as the market swung from apathy to exuberance during the past month, sentiment is positioned to shift in the opposite direction in a nanosecond. While the recent rally has been exciting, it's time to temper your expectations and remind yourself that we are still deep in the macro woods.

Federal Reserve Chair Jerome Powell has maintained steadfast in his commitment to return inflation to the Fed's long-run 2% inflation target, a feat accomplished by raising interest rates. Simultaneously, US deficits are ballooning, and major US Treasury, like China and Japan, are selling off dollar assets to defend struggling local currencies, putting further upward pressure on yields.

Signaling that interest rates may need to continue to increase, the Bank of Japan announced yesterday that it would revise its yield curve control policy to allow for rates on long-term Japanese government debt to exceed the previous 1% ceiling.

Crypto projects are long-duration investments, and "higher-for-longer" interest rates can cause liquidity to evaporate from risk markets, like crypto and stocks, further suppressing valuations.

The only alternative to further rate increases is a collapse of the economy in which monetary policymakers react by cutting rates. Despite the global economy demonstrating resilience to previous hikes, cracks are beginning to emerge in the system, which threatens to drag down the prices of risk assets.

Consumer spending has been financed by growing debt levels, but high-interest rates have caused credit card delinquencies to skyrocket and propelled auto loan defaults to new highs! While stimulus delayed the inevitable end of the business cycle, it resulted in inflation, and the remedy – higher rates – has left many borrowers unable to afford their payments.

At the same time, real disposable personal incomes have been on the decline since May, leaving consumers with less money to pay off growing debt burdens. This indicates that further increases in delinquencies and defaults can be expected, which will result in even lower levels of spending that will force businesses to lay off employees, causing even further economic contraction.

While an era of fast and loose money helped to perpetuate crypto to all-time highs in 2021, the post-COVID credit bubble is threatening to burst, and investors will need to scramble for dollars; the resulting deflationary bust would almost certainly put crypto investments under pressure.

The only asset that stands a chance of surviving the burst is Bitcoin, which could act as a potential hedge to the monetary debasement that would ensue should central banks engage in yet another round of quantitative easing to stymie the crisis; however, it will still be competing with the dollar during a period of deflation.

While a healthy dose of FOMO in a low liquidity environment was enough to cause a short squeeze that sent crypto momentarily higher to send crypto momentarily higher, rates will continue to rise until things begin to break, and when they do, increasing unemployment and further declines in income will force long-term oriented holders to capitulate and sell their bags.

Virtually no asset stands a chance against the dollar in either the "higher-for-longer" or deflationary bust scenarios. 🐻