Crypto’s Shakeout Looks More Like a Reset Than a Collapse

Source: TradingView, CNBC, Bloomberg, Messari

Is it Safe to Resume Buying?

We’ve just come off one of those spine-tingling crypto episodes that leaves many market participants numb, or calling for a further crash. Recall, on Friday October 10th, digital asset prices snapped. Bitcoin tumbled, leveraged perps were liquidated, and panic seized the order books. But what followed wasn’t just despair, it was likely the beginning of a market reset (though don’t get me wrong, there was plenty of despair too). While the road ahead remains rocky, the cracks in the infrastructure and sentiment are showing signs of healing.

By Monday of last week, a meaningful bounce was already underway with BTC rising to $115K, and ETH and SOL jumping 9% each. Trading volumes registered a week-over-week uptick (total exchange volume up ~15%) and open interest on decentralized perpetual platforms started building again after the major washout.

Source: Arca Internal Calculations

This alone is testimony that the system is not broken, it’s resetting. When markets crack, you want to see layered recovery:

Liquidity returning
Participation resuming
Interest building

And that’s exactly what we’re seeing. The exchange ecosystem isn’t dead, the on-chain derivatives plumbing isn’t collapsed.

Unfortunately, a second macro bomb last week led to further crypto weakness. While the first leg of the crypto selloff was triggered by Trump’s hard stance on China, the second was sparked by stress in the regional banks. But that too is likely overdone, and already subsiding. The KRE (Regional Bank ETF) bounced on Friday after a rough week, and borrowing from the Fed’s standing repo facility (SRF) fell to zero on Friday, after $8.35B on Thursday and $6.75B on Wednesday. That’s notable. No borrowing means less immediate stress.

Source: TradingView

Further, while high yield corporate bond credit spreads jumped from an OAS of +276 bps earlier in the month to +318 bps mid-week (an early stress indicator), that too has already tightened back below +300 bps, and is nowhere close to the +500 bps level typically associated with market panics.

Source: Fred

It is possible that the recent hiccups in lending standards will be a canary in the coal mine. We may see tighter lending standards and more scrutiny from banks after the events of last week. But at least right now it appears that these were one-off events and there is little to no contagion. In fact, corporate fundamentals remain solid with about 10% of S&P 500 firms reporting earnings, and full-year operating profit expectations are still climbing ~10 % year-on-year.

Source: Creative Planning

Broader macro tailwinds continue to line up heading into the end of the year. Amongst some of the more bullish signals:

The bond market is now pricing in a 100% probability of a Fed rate cut at the last 2 FOMC meetings this year (Oct 29 & Dec 10), bringing the Fed Funds Rate down to 3.50-3.75%.
Geopolitical risk is de-escalating, as trade talks between the U.S. and China are showing signs of thawing, eroding one major overhang for risk assets.
Gold and stocks remain elevated, and crypto tends to lag big moves in gold but eventually catch up.

We’ve seen this song and dance too many times to be bearish due to a structural blip. The rebound we’re witnessing isn’t just a dead cat bounce.

Are we fully out of the woods? Not quite. But the setting is now right for the next phase of expansion. It’s perhaps no coincidence that 38 years ago today was the worst single day in the history of the US stock market (Black Monday). But even though the Dow fell 22.6% that day, it is important (and surprising to many) to note that stocks still finished higher in 1987.

And That’s Our Two Satoshis!
Thanks for reading everyone! Questions or comments, just let us know.

The Arca Portfolio Management Team

Jeff Dorman, CFA - Chief Investment Officer

Katie Talati - Director of Research

Sasha Fleyshman - Portfolio Manager

David Nage - Portfolio Manager

Wes Hansen - Director of Trading and Operations

Michal Benedykcinski - Senior Vice President, Research

Alex Woodard - Associate, Research

Christopher Macpherson - Research Analyst

Andrew Masotti - Associate, Trading and Operations

Joey Reinberg, Associate, Trading and Operations

To learn more or talk to us about investing in digital assets and cryptocurrency

call us now at (424) 289-8068.

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