Crypto prices across the board have fallen today as geopolitical tensions rise and capital allocators move to US dollars as a “risk-off” bet in times of turbulence.
Crypto prices continue to fall
Since the peak of the market in November of 2021, the crypto markets have consistently fallen with only a few brief relief rallies that provided more exit liquidity for people to close their positions.
There have been all sorts of reasons for this.
Firstly, the collapse of several large-profile companies, such as Celsius, 3AC, and Terra meant that huge amounts of cryptocurrencies were forcibly sold on the market and triggered cascades of liquidations – in the case of LUNA, a price decline of 99.99% over the course of a matter of days caused shockwaves throughout the industry (a situation that is ongoing).
Moreover, all markets happen within a larger macroeconomic context, and the context of 2022 is one of rising interest rates, rising inflation, war in Europe and energy uncertainty – none of this is a good thing for “risk-on” assets.
Has the UK Chancellor lost control of the economy?
The new Chancellor of the Exchequer, Kwasi Kwarteng, has come under fire for losing control of the UK economy, particularly from those who sit on the opposition benches.
At the Labour Party conference this week, both Keir Starmer and Angela Rayner made the claims that the Conservative government has completely lost control of the economy.
UK citizens are currently being forced to contend not only with rising inflation, but also a cost of living crisis given the high cost of heating (which ought to become more problematic throughout the winter).
The new Chancellor’s recent decision to cut the top rate of income tax, amidst a few other reforms, was initially seen as a good thing, particularly by conservative supporters.
However, over the past few days the markets have responded, and sterling has continued to decline significantly against the US dollar.
There are now concerns that sterling could even fall below the value of the dollar, something which happened to the euro only recently.
All of this uncertainty has been extremely problematic for the British economy, and particularly for the new Prime Minister, Liz Truss.
The British economy is an extremely important aspect of the cryptocurrency industry, and over the last 48 hours Binance has registered several all-time highs in volume, particularly for their GBP/BTC pair, which is a sign that British investors are disconcerted by the volatility in traditional currencies and are coming to view Bitcoin as a safe haven.
Crypto remains correlated with stock markets
Cryptocurrencies, particularly larger cap cryptocurrencies that are more established, continue to remain highly correlated with stock markets, moving directionally in tandem even if by different magnitudes thanks to the higher degree of volatility that one can expect with smaller market caps.
There is some hope that, if Bitcoin’s market cap were larger (and it was thus more liquid) there would be a chance for capital allocators to look to Bitcoin as more of a “risk-off” asset.
The legendary investor Stanley Druckenmiller has made the case that the high degree of quantitative easing during the last few years has caused a bubble in asset prices, and that the deleveraging of this will be extremely difficult for markets to contend with.
Druckenmiller speaks again,
“Our central case is a hard landing by the end of ’23”
“You don’t even need to talk about Black Swans to be worried here. To me, the risk reward of owning assets doesn’t make a lot of sense.” pic.twitter.com/nOfaA1fXET
— Dylan LeClair (@DylanLeClair_) September 28, 2022
The fact that he doesn’t think there needs to be a black swan for this turmoil to unfold ought to be extremely concerning, and investors holding “risk-on” assets ought to be cautious moving forwards, particularly if they are trying to conserve capital over the short to medium term.
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