Source: TradingView, CNBC, Bloomberg, Messari
The Retrace
We spent a lot of time last week
debating the cause of the big August selloff, and discussing how the market would likely react. We were bullish, and continue to be. The sharp move lower a week ago Sunday cleared a large amount of leverage out of the market, with nearly $1.1 billion in futures liquidations in the span of 24 hours. This was the largest single day of liquidations since March 4th. This reset was yet another factor enabling a strong recovery.
- Strong BTC and ETH ETF inflows (i.e. others buying the dip)
- Japan equities recovering
- The Fed (and other Central Banks) reassuring the market without panic-cutting
We got all 3, in fairly short order. Japanese equities recovered as if the “Black Monday”-like crash didn’t happen- buoyed by the BOJ walking back their hawkish stance. The Fed joined the BOJ with reassurances, as several Fed speakers discussed the markets and the likelihood of a September rate cut, but dismissed all crazy notions from others calling for emergency cuts. And ETH ETF inflows were the strongest on record to date ($155 million inflows last week). At the end of the day, I’m still on record that this was one of the dumbest sell-offs in history, certainly in terms of magnitude, as it was entirely technically driven (Jump Sunday ETH liquidations plus the Yen-carry unwind). We even saw a rise in Stablecoin AUM, increasing +1.46% led by USDC, which saw a +4.47% increase, indicating fresh capital entering the crypto space via actual tokens and not just ETFs.
At the end of last week, pretty much every market had recovered. Bitcoin (BTC) and Solana (SOL) finished the week slightly positive, the Nikkei and the S&P 500 were basically flat week-over-week, the VIX closed at $20, right where it was a week ago Friday, and the 10-year Treasury yield rose back above 4% before closing just below. The market confirmed Sunday/Monday was a structural blip, which should be ignored.
Yet Ethereum (ETH) remains roughly 15% below where it started the week, meaning that Jump selling a meager amount a week ago Sunday ($500 million) was the largest factor of all.
Source: TradingView
Please stop with the “Bitcoin isn’t a safe haven” asset!
Did Bitcoin protect anyone’s portfolio during the selloff? Of course not. It is not and never will be, a flight to quality assets during regular old market selloffs. There’s no reason it should be, it never has been, and why this has become a talking point is beyond me. The only true flight to quality assets during a market meltdown is U.S. Treasuries. The folks at NYDIG did a great analysis in their weekly writeup:
“Long-Term US Treasuries have a negative correlation with major S&P 500 drops (-0.27), with an average increase of +0.74%, and have gained in value nearly 72% of the time (win rate). In contrast, gold has a minimal average return (+0.01%), is positively correlated with stock market declines (+0.59), and shows positive returns just over half the time (56.25%). When it comes to bitcoin, however, there is scant evidence that it serves as a hedge during significant 1-day stock market declines. Bitcoin demonstrates negative average returns, a low win rate, and a positive but weak correlation. While bitcoin may offer some hedging benefits, it appears to be geared towards risks other than sharp S&P 500 drawdowns.”
Bitcoin goes up when Governments or banks lose trust. It went up during the March 2023 regional banking crisis, the Canadian trucking standoff, the Cypress banking crisis, and every time Argentina or Turkey currencies debase.
Bitcoin never goes up when there is a market dislocation or geopolitical risk. Bitcoin will not protect your portfolio in a good old-fashioned fear trade.
And I would argue that being a hedge to local banks and governments stealing or harming your assets is a much better story than trying to pretend Bitcoin is going to protect your portfolio during a market crash.
If you define what we're fleeing, Bitcoin is a flight to quality assets.
The Crypto Investing Paradox
Yet another failure of U.S. brokerages was lost in Monday's August 5th crash. I hope you weren’t trying to trade during the most volatile day of the year!
It always takes a crisis for people to remember that the current trading and asset transfer system is deeply flawed. And, of course, that leads to everyone in crypto saying, “if only there were another way where you can transact on your own without a 3rd party blocker?” And in theory, this is correct. On-chain is better for many facets of financial transactions. It is incredibly frustrating when you can’t get money from your bank or trade stocks out of your brokerage account.
But therein lies the crypto investing paradox.
Crypto protocols all functioned fine last week. DeFi applications worked fine. This should have been the biggest onboarding day in on-chain history, with millions of financial professionals flocking to Uniswap and Aave to trade and lend, and using self-custodial wallets to protect their assets.
Except this didn’t happen.
Not because the protocols aren’t awesome (they are), not because the DeFi protocols aren’t awesome (they are), and not because self-custody doesn’t work (it does). No one flocked to crypto last week because very few care about the assets you can transact with on these platforms. Thus, the crypto paradox. We have this great technology (blockchain) and these amazing protocols (smart contract platforms) that do not work without the assets (tokens like ETH and SOL or UNI or AAVE) that run them. But regular investors just want to trade their NVDA or AAPL stock, they don’t care about trading crypto.
The technology would be so much more useful if it could be used with other assets. Imagine if investors were able to send their NVDA and AAPL stock to Uniswap to trade them there without interruption. Most of the financial world wants to use the tech, just not the assets currently available on it.
- Imagine if the government only let you use email to forward jokes. Sure, the idea of sending information instantaneously, globally, boundaryless, and for free would still make ideological sense. You could see a future where it would be used for things other than sending jokes, and a few people might invest based on that future promise… but there just wouldn’t be that many people actually using email. Forwarding jokes only goes so far.
- Imagine if the government only let you transport rocking chairs on airplanes. Again, most people would recognize the power and potential of airplanes, and many investors might invest based on the future of flying people and packages worldwide. Still, there wouldn’t be much interest in sending rocking chairs on airplanes, and very few airplanes would be flying.
- Imagine a world where the government said that the only food that could be delivered to your home or office was pizza (actually, this basically was the case 30 years ago). Same story. Sure, the idea of expanding food delivery would make sense. Many investors would invest in the future of food delivery apps. Many businesses would prepare and plan for future food delivery. But again, at the end of the day, there just wouldn’t be that much food delivery. Pizza can only take you so far.
This is the crypto paradox. We know that eventually, we will be trading stocks, bonds, deeds to homes, jewelry, cars, and many other assets on-chain. We know that eventually, the majority of dollars sent around the world will be stablecoins. We know so many things about what blockchain technology will do, which has caused this industry to balloon in terms of investment dollars and hype.
But on days like Monday, August 5th, when blockchain was needed more than ever, but alas, no one really cares about moving on-chain to trade SOL and memecoins.
And until that changes, we are stuck.
