November was a painful month for the crypto industry, and a recovery will likely take time due to long-lasting reputational effects.
Short term
This is not an environment where you want to be overly active due to unresolved contagion and a substantial slowdown in market activity. Still, the deep drawdown is in favor of maintaining and accelerating a dollar-cost averaging strategy in BTC. Correlations between BTC and U.S. equities have softened, but the next week will show if the reduced correlations are just a fad. Previous BTC bear markets have ebbed out into obscure directionless patterns, and in such an environment, correlations with U.S. equities will decline. December 13 and 14 will be eventful and telling days in the market, with a U.S. CPI release and the final FOMC press conference of the year. I expect these events to impact crypto markets, but to a lesser extent than important macro events earlier this year.
Leverage has been flushed out of derivatives, and so has the activity. A stint of active institutional participation in CME seems to fade, and overall, derivatives activity points toward a substantial slowdown in crypto onwards.
Get your funds out of centralized yield products related to crypto - the yields do not outweigh the risks of further contagion and potential bankruptcies. Overall, BTC and crypto seem eerily stable after absorbing the FTX shock, and potential contagion-related knock-on-effects loom. In essence, there are a bunch of arguments in favor of a cautious approach to the market, and 2-10% yields on your precious hard-earned capital are definitely not worth the associated risks.
Nevertheless, this is unfortunately not our first contagion rodeo. During the 3AC collapse, prices bottomed amid the height of the fear shortly after the news reached the market. A smooth period of nothingness ensued over the summer. I expect similar tendencies to follow the FTX collapse and thus find few reasons to provide any actionable trading ideas for the short term.
Medium to long term
FTX’s collapse will likely have implications on bitcoin in the medium to long term. Still, effects won’t be universally adverse, as we already see tendencies of traditional finance behemoths seeking to invest in crypto infrastructure due to suppressed valuations.
My November 9 article covering the FTX farce and its implications still aligns with my general market view in the foreseeable future, but certain adjustments and clarifications should be made.
The FTX meltdown will have regulatory and reputational effects on the crypto market, limiting crypto performance onwards. The market will need time to recoup from the disgraceful FTX shocker and adapt to the changing market structure. I thus expect a long-lasting consolidation phase, offering investors time to build reasonable BTC exposure.
Institutional participation related to crypto infrastructure has benefitted from the FTX collapse. Today, Goldman Sachs announced that they see interesting opportunities arise due to suppressed valuations. Previously, we’ve seen that Citadel, Schwab, Nasdaq, and Fidelity are flagging a ramp-up in their crypto presence. In due time, this will be reflected in further maturation of the industry and hopefully less short-term gain and long-term pain scenarios like the never-ending crypto credit crisis of 2022.
I do not expect BTC or other digital assets to be hastily bought by institutions, given the current state of the market. Still, increased adult presence in the industry should have long-term positive implications for the market, increasing the integrity, trust, and robustness of crypto markets. Bitcoin has a tendency to endure and recover from apocalyptic events. Mt. Gox was followed by the launch and growth of more secure and robust spot markets. Likewise, 2022 will likely be followed by more thoughtfully managed exchanges, funds, and lending platforms.
Incremental spot BTC purchases for the long term are attractive in light of the massive drawdown. Additionally, the slowing market activity indicates that we will be granted a longer opportunity for dollar cost average at muted prices. If you liked bitcoin at $60k, you should also like bitcoin at $17k, but bear in mind that massive drawdowns tend to be followed by a long-lasting directionless market filled with apathy and unfathomable second-guessing.
This article is a part of the section of our new market report: Ahead of the curve
