This is an opinion editorial by Adam Taha, host of a bitcoin podcast in Arabic and a contributor to Bitcoin Magazine.
Luna’s infamous collapse was followed by an explosion at Celsius, then suddenly Tron showed signs of death and now three arrow capital is in deep financial trouble. No one knows Who is there? Next, but one thing is certain: More pain is coming. The current market situation is revealing capital and technical problems in the cryptocurrency world. Things are not good in the web3-hood.
What about bitcoin? For clarity, bitcoin is not crypto. It is important to differentiate between the two. When I say “crypto”, I am referring to digital products and innovations that rely on using blockchain technologies to run their projects. As of the time of writing this, there are 19,939 cryptocurrency projects, most of which have appeared in the past 12 months. Why are so many of these companies struggling now? How are they failing in the relatively similar amount of time? Are all these projects and companies scams? Did the Federal Reserve cause this? The answer is simple, no. Like I said, the market didn’t cause problems with web3 and crypto projects, the market just revealed Bottom rot. The problem is a liquidity problem and not necessarily a technical one. We saw the most recent market “gold” rush from 2020 to spring 2022. That enthusiastic crowd in the market meant high competition. High competition created an environment where two things emerged:
- Unrealistic Promises: Projects promising unrealistic rewards (higher yields, fundamental upgrades, consensus revisions, etc.) to attract buyers.
- Outright Scams: Projects with the intention of financial exploitation (scams, false marketing, theft, etc.).
In the case of Luna (which is currently under investigation), we saw unrealistic promises. In the end, its high-yield promises were an obvious red flag. Few people noticed because there was a liquidity party. No project was flawless. Ethereum is still over-promising and under-delivered. As an outsider, I think the developers of Ethereum are pushed by venture capitalists and investors to give “The Merge”. Many users of Ethereum are tired of the low trust in the network itself.
What made the soil of the cryptocurrency market so fertile for the above problems? Certainly, there was a level of risk to institutional money, but in a liquid market with almost zero interest rates, it was tolerable. Therefore, the risk-on mode is active for retail and institutional participants alike. However, when the ride turned rough and the Fed began to change tone, while the stock and housing markets began to signal an increase in risk, riskier assets were the first to sell. Therefore, risk-on mode has been disabled.
To reiterate, the problem with most cryptocurrencies in general is not a technical issue, it is a liquidity. The Fed’s announcement of quantitative tightening (QT) in late 2021 threw the market for a spin and the effects were almost immediately apparent to all observers. This was the time when projects with highly-promised and volatile returns collapsed under liquidity pressure.
What is the liquidity problem? What is quantitative easing and constriction? Quantitative easing is how the US Fed “prints” money into existence. The Fed credits the Fed accounts of sellers of Treasury and mortgage-backed securities (MBS), and thus expands its balance sheet in the process. Backing the market for Treasury debt allows the Treasury to issue more debt, to be serviced by future taxes and to be paid for by future generations. In other words, knocking the can down the road. Since 2008, the Fed balance sheet has increased by about $8.5 trillion. Quantitative tightening occurs when the Fed stops or slows the sale of these assets on the open market as well as the purchase of Treasuries and MBS. Since the beginning of June 2022, the Fed has allowed $45 billion in assets to mature without replacement, but their balance sheet has shrunk to only $23 billion. This is increasingly creating liquidity pressure on the market, and especially for riskier markets – certainly starting with the cryptocurrency market. The Fed wants to fight inflation, and they can do so by raising interest rates and sucking liquidity out of the market. Unless something breaks – most likely the real estate market.
Until early 2022, the market was a bloc party with a grueling fire hydrant openly supplying the market with easy liquidity. That liquidity fire hydrant was siphoned off by the Fed itself. Now, the Fed is back to shutting down that gruesome hydrant. party over,
As mentioned, they’ll let the current asset limit on their balance sheet fall below $47.5 billion in assets by the end of this month. Then, they will do the same with $47.5 billion in July and $47.5 billion in August. Then, they’ll increase that amount to $95 billion by September, or so they promised. Remember, the Fed has $8.9 trillion in purchased assets on its balance sheet, so it could take years to unravel from political, financial or other macro factors.
The problem with crypto is not technical, it is a liquidity. Surprisingly, while the scam projects were prevalent and evident, the party was still happy and “oh so well” going on. Obviously, the market needed free money, who would have known? (Bitcoiners knew.)
Where shall we go from here? Jerome Powell announced a 75-basis point hike on June 15, 2022. On the same day, he acknowledged that US inflation is directly influenced by macro factors that are “out of our control” and that the Fed may change course if inflation shows signs of decline. Other Fed members such as Jim Bullard and Christopher Waller signaled a more aggressive position going forward. However, I believe more liquidity pain is coming. More pain in the short- to medium-term, and then a pivot in the long-term. Party back on.
Markets won’t recover until the Fed pivots or controls inflation in a non-destructive manner (“soft landing” as Mr. Powell calls it). Remember that historically, the Fed has always been able to tackle inflation by raising interest rates when they reached within 2.5% of the annual inflation rate. Also, note that the Fed has never reached the previous all-time high interest rate since 1982. Why would they be successful now?
What about bitcoin? In times of stress, I always ask myself the following question: Has any event changed bitcoin in any way? The answer is not always. So, I buy more. This is the time when generational wealth is created for you, your family and your future. It is time to buy because the Fed will pivot, the Fed will not make a soft landing, the Fed will affect the dollar and the bond market. Bitcoin supply is still limited at 21,000,000. Bitcoin is still scarce, decentralized, immutable, sound and focused. Crypto is doing a calculation while bitcoin is doing its job, the same thing since January 3, 2009.
Every token in this most recent bull run depends on easy money from the Fed (liquidity). The current crash is due to Fed policy and the same Fed policy will change again – they’ll be back to open that fire hydrant. So, ask yourself: Why invest in or support a token or market subject to a volatile Fed policy? While bitcoin is here and still on point, the Fed remains unmoved and unchanged by policy. Admittedly, people entering the past few months don’t believe me, but let this thought come to your mind: the price of bitcoin in USD ($21,800) is up over 100% as of June 20, 2020, as of this writing . This one is more than 100% return in just two years. Could the Fed be stricter for two years? It certainly can’t.
You and bitcoin will overtake the Fed. So, buy more and happy HODLing.
This is a guest post by Adam Taha. The opinions expressed are solely their own and do not necessarily reflect those of BTC Inc. or Bitcoin Magazine.