April 2023 - Monthly Market Update
/Monthly Update || April 2023
“The relationship between price and value hold the ultimate key to investment success.”
Opening Remarks
Greetings from Ikigai Asset Management¹ headquarters. We welcome the opportunity to bring to you our fifty-fifth Monthly Update and hope these are helpful in better understanding some of what we’re doing and what we’re seeing. We have the privilege of deploying capital on behalf of our investors into a new technology and asset class that already has and will continue to fundamentally change the world – continuing to create trillions of dollars of value in the process.
We believe we are obligated to be shepherds of this technology – to help the world better understand the powerful potential of DLT and crypto assets, and to fund and be an ambassador for DLT projects that will change our lives forever.
To that end, the second and third largest bank failures in US history occurred in March, and crypto was caught squarely in the crossfire. On March 10th, in the wake of Silvergate Bank closing down, Silicon Valley Bank, the 18th largest bank in the US, was forced to shut down due to a deposit run. $43bn was withdrawn from SVB in a single day and more than $100bn of assets were attempted to be withdrawn. Many other regional banks, including Signature and First Republic, experienced similar runs. The banking ecosystem hung in limbo over the weekend of March 11th and 12th. On Sunday evening the Fed announced the new Bank Term Funding Program to backstop regional bank balance sheets in order to facilitate and quell mass withdrawals. The BTFP was unlimited in its capacity.
In that same press release, the Fed announced the full backstopping of SVB deposits while also quietly announcing the closure of Signature Bank. Former Congressman Barney Frank, of Dodd-Frank fame, sat on the board of Signature Bank and immediately and loudly called for foul play by the FDIC in its decision to force Signature Bank into liquidation. By Monday March 13th, the US government had forced closure of the two primary crypto banks, effectively kneecapping the entire US crypto industry.
Over the back part of March, traditional financial markets teetered but ultimately remained relatively orderly. Certainly there was volatility. To the surprise of few, Credit Suisse finally collapsed once and for all and was rescued with an acquisition by UBS that was backstopped entirely by the Swiss government. The MOVE Index reached levels only previously seen at the peak of the global financial crisis.
Source: Tradingview. As of 3/31/23.
In the meantime, crypto continued to be hammered by negative idiosyncratic news - just check the Monthly Highlights below. After years of mild speculation and months of intense speculation, the CFTC brought a scathing case against Binance. The case was filled with allegations of widespread and egregious fraud. The general view is that SEC and DoJ cases against Binance are coming soon. The DoJ case in particular could have some serious teeth in it, based on the allegations of the CFTC suit.
If the DoJ case against Binance is indeed coming, it’s tough to know exactly how that’s going to play out. At this point, I would think Binance US is likely to be shut down relatively soon. That feels like almost a given at this point, and it’s a very small piece of Binance’s overall value. I doubt they’ll put up much of a fight for it. What exactly happens with Binance.com and Changpeng remains to be seen.
At the most punitive end of the spectrum, Binance.com could be seized by DoJ, all assets are frozen, Changpeng is arrested and Binance customers are locked inside a KYC/AML cage match with the DoJ to get their money back months down the road, if at all. I think that is unlikely, but possible. At the least punitive end of the spectrum would be a slap on the wrist, say a $100mm fine. I think that is also unlikely. So the reality will likely be somewhere in the middle. The size of the fine as part of the settlement is probably the least interesting part of this whole thing. It will likely be somewhere between $500mm and $5bn. The CFTC’s largest fine ever is $1.2bn. The DoJ’s largest fine is $2.3bn. The SEC’s largest fine is $13bn. Changpeng can prob come up with whatever cash is needed when the time eventually comes.
Probably the most critical factor in the Binance saga will be what happens to Binance.com customer funds and account KYC. You see, Binance has been going back and forth with regulators for YEARS. The lack of appropriate AML/KYC procedures was well understood by anyone paying attention. So, it bears asking, what took US regulators so long to bring action? And why does it seem like there was a significant acceleration in this situation post-FTX collapse? What is the bid/ask between the settlement demands of US regulators and what Changpeng is willing to agree to? This has been a topic of much discussion.
I think you start with the assumption that there are many billions of dollars of gray/black market money on Binance.com. If you disagree with this assumption, you can skip this next part because IDK what to tell you. Binance supposedly holds ~$56bn of reserves, excluding their own tokens. 10% gray/black market I think is a very conservative assumption and it could be multiples of that and I wouldn’t be surprised in the least. It has been surprising to see how sticky Binance’s reserves have apparently been. You saw hardly any outflows on the CFTC news. I’d be lying if I said this makes sense to me, but it does bring up a question of how much gray/black market money may not actually be able to withdraw from Binance. To be clear, this is pure conjecture on my part, but I can’t really come up with an intuitive reason why Binance hasn’t seen larger outflows recently. It's easy to imagine Changpeng and black market money account holders in a standoff of sorts, trying to withdraw assets in massive size, and Changpeng not processing those withdrawals while urging them to sit tight. Or perhaps those account holders now know that the long arm of the US law is hovering right above their head, ready to snatch them as soon as they try and take their cash and run. Again, just thinking out loud here, but there’s a LOT of situational evidence.
Binance.com could very easily represent the largest pile of gray/black market money the US government has ever come across. If that’s true, the jockeying going on behind the scenes between Binance and US regulators HAS to be circled up around what happens to these funds. Perhaps DoJ wants Binance to freeze all withdrawals and give them full access to account records, so the DoJ can sift through and seize the funds of bad actors. Perhaps the DoJ is willing to not seize these funds, but wants full open kimono on account records so they can use blockchain forensics to track the movements of these funds as they leave Binance wallets. Perhaps the bid/ask is simply whether Changpeng goes to jail.
It's hard to know for sure how this will play out in coming months, but the Binance regulatory situation is set to be a critical factor for the overall crypto markets. How this situation shakes out will significantly influence the shape of the crypto ecosystem in years to come. If Binance is able to continue operating like they have over the last several years and eventually pay a couple billion dollar fine, say 18 months from now, then they are set to continue their dominance in crypto price discovery - a stranglehold they’ve had for quite some time that has only grown stronger since the FTX collapse. This would be a bad thing for crypto. Should Binance operations be significantly curtailed or even shut down, the exchange landscape will open up a lot in coming years and price discovery will be much more distributed. This would be a good thing for crypto.
If you’ve been following me on Twitter and/or reading these Monthly Updates the last several months, you know I’ve been vocal in my opposition against Binance and Changpeng. In the wake of the CFTC allegations, its even more clear that opposition was well-warranted. After the FTX collapse, I looked at the setup for Binance, with their: 1) BNB token (with no real price discovery); 2) BUSD stablecoin (without full collateral backing); 3) large amount of wash trading (see here); 4) mostly fake BSC ecosystem (read this); 5) and general lack of transparency/truth from Changpeng (he participates in “transparency theater” but constantly lies), and it looked to me like a situation with a lot of systemic risk. A level of risk that could endanger the entire crypto ecosystem, just as FTX had done, but on an even larger scale.
Your hope for the outcome of the Binance regulatory actions likely boils down to what you think about Changpeng. As you think about where the crypto ecosystem is heading in the coming years, how do you feel about Changpeng driving that bus? As it currently sits, he’s the most powerful individual in crypto. How do you feel about that as it relates to this technology fulfilling its potential to make the world a better place? Different people feel different ways about that. I know how I feel.
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March Highlights
Binance and Changpeng Sued by CFTC Under Scathing Allegations
Silvergate Bank, Silicon Valley Bank and Signature Bank Are Liquidated; Fed Steps In to Ensure Depositors Are Made Whole; The Crypto Ecosystem Scrambles for Banks
US Government Seems to Have Intentionally Pushed Silvergate and Signature Into Liquidation, While Saving All Other Banks
SEC Sues Justin Sun for Selling Unregistered Securities
Coinbase Receives Wells Notice From SEC, Coinbase Defiantly Commits to Fighting SEC
Do Kwon Arrested in Montenegro
USDC Redemption Is Temporarily Halted and Price Depegs Over the Weekend After SVB Collapses
NYAG Sues Kucoin for Unregistered Securities Exchange, Alleges ETH is a Security
US Government Sells 9,800 BTC from Silk Road Seizure on March 14th, To Sell 41,500 More In Four Batches By YE
Bittrex Winding Down US Operations
Bybit Suspends USD Withdrawals
MicroStrategy Prepays Loan from Silvergate at 22% Discount to Par
Congressman Emmer Sends Letter to FDIC Chairman Claiming Attacks on Crypto
White House Releases Scathing Report on the Risks of Digital Assets
SEC Chair Gensler Claims Staking Is a Securities Transaction
SEC Objects to Binance US’ Acquisition of Voyager Digital in Bankruptcy; Judge Denies SEC Objection; DoJ Appeals the Objection; Judge Then Halts Acquisition After Binance CFTC Filing
Federal Reserve Announces FedNow Launch for July
ETH L2 Arbitrum Conducts Airdrop of New Token
State Street Cuts Ties with Copper Custody
Fireblocks Uncovers Vulnerability in BitGo’s Custody Protocol
Hong Kong Receives Tacit Approval from Shanghai to Support Crypto Companies
Law Firm That Litigated the Original Operation Chokepoint Publishes White Paper Explaining How Banking Regulators Are Doing the same Thing Now
FTX Estate Sues Grayscale for Recoveries
FTX Estate Considering Restarting FTX
FTX Estate Continues Selling and Clawing Back Various Assets
FTX Estate Send Out Creditor IDs to All Customers
Congressional Financial Services Committee Holds Hearing Entitled: “Coincidence or Coordinated? The Administration’s Attack on the Digital Asset Ecosystem”
PCAOB Advises Investors to Exercise Caution in Trusting Proof of Reserves Reports
Euler Finance Hacked for $193mm, Hacker Returns $101mm
Instagram Winding Down NFT Business
DeFi Protocol Sushi Served with SEC Subpoena
Telegram Integrates USDT Into App
| Asset Class | Mar | Feb | Jan | YTD | Q4-22 | Q3-22 | Q2-22 | Q1-22 | 2022 | 2021 | 2020 | Instrument |
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Bitcoin | 23% | 0% | 40% | 72% | -15% | -2% | -57% | -2% | -64% | 60% | 303% | BTC |
| NASDAQ | 9% | 0% | 11% | 21% | 0% | -5% | -23% | -9% | -33% | 27% | 48% | QQQ |
| S&P 500 | 4% | -3% | 6% | 7% | 7% | -5% | -16% | -5% | -19% | 27% | 16% | SPX |
| Total World Equities | 3% | -3% | 8% | 7% | 9% | -8% | -16% | -6% | -20% | 16% | 14% | VT |
| Emerging Market Equity | 3% | -8% | 9% | 4% | 9% | -13% | -11% | -8% | -22% | -5% | 15% | EEM |
| Gold | 8% | -5% | 6% | 8% | 10% | -8% | -7% | 6% | -1% | -4% | 25% | GLD |
| High Yield | 1% | -2% | 4% | 3% | 3% | -3% | -11% | -5% | -15% | 0% | -1% | HYG |
| Emerging Market Debt | 1% | -3% | 4% | 2% | 7% | -7% | -13% | -10% | -22% | -6% | 1% | EMB |
| Bank Debt | -1% | -1% | 3% | 1% | 2% | 0% | -7% | -1% | -7% | -1% | -2% | BKLN |
| Industrial Materials | 0% | -8% | 13% | 4% | 9% | -8% | -25% | 16% | -13% | 29% | 16% | DBB |
| USD | -2% | 3% | -1% | 0% | -8% | 7% | 7% | 3% | 8% | 6% | -7% | DXY |
| Volatility Index | -10% | 7% | -10% | -14% | -31% | 10% | 40% | 19% | 26% | -24% | 66% | VIX |
| Oil | -1% | -3% | -1% | -5% | 7% | -19% | 8% | 36% | 29% | 65% | -68% | USO |
Source: TradingView. As of 3/31/23.
Macro? Tighten Till Something Breaks… Crypto? Burn It To The Ground.
A lot happened in macro in March and a lot happened in crypto in March, so I think it’s worth diving deeper into both of these.
A month ago on March 1st, before the banking crisis occurred, I said:
So, as it relates to crypto prices (it’s still All One Trade in my book, the negative idiosyncratic crypto headlines notwithstanding), the big question is-
Assuming a backdrop of the Fed raising rates to 6% between now and September. And while that's happening, the market's expectation shifts to rates staying at 6% for months or quarters thereafter. And while that's happening, inflation goes from 6% to 3.5% or 3%. And while that’s happening, the labor market starts to loosen up some and the economy is slowing… Given all that, what’s the NASDAQ going to do?
You can probably boil the answer to that question down to the exact glide path of decelerating inflation. Inflation is already projected to decline a ton in the next six months, to sub-3%. If the trend for inflation indeed ends up that pleasant, it’s easy for me to imagine Fed messaging as relatively dovish and the market pricing in rate cuts in 2024. This is a backdrop that I think would be supportive for QQQ. NASDAQ is +10% YTD and with that backdrop, I could imagine it up 20% for 2023. If inflation proves stickier than current projections, perhaps reaching 3.5% and stalling, the Fed would be forced into a standoff of sorts against the labor market and overall economic activity. They can’t cut rates with inflation stuck at 3.5%. All they can do is continue to squeeze the economy in hopes of bringing down inflation to their 2% mandate. This standoff scenario would not be supportive to QQQ, and I could imagine the index giving back most or all of its YTD gains.
I think that’s a good place to pick up here, in light of the banking crisis that unfolded last month. I won’t go into deep detail about what happened to US banks in March as you’ve likely heard plenty of it already. To summarize, banks took in a lot of deposits in 2021 as the monetary and fiscal policy excesses in response to Covid flowed into bank accounts. Banks, as is their business, took those deposits and bought Treasuries and Agency-backed securities. The Fed then embarked on the most rapid tightening campaign in 40 years. This caused the price of those Treasuries that banks held to decline, so banks were sitting on large mark-to-market losses in their bond portfolios. This normally wouldn’t be a big deal, except interest rates finally got high enough that depositors, who were earning very little on their bank deposits, started withdrawing cash to put it into higher yielding money market funds and Treasuries. This squeezed the banks and in the age of social media, the information of underwater banks was rapidly disseminated. Mass bank runs at regional banks ensued.
Regional banks were singled out because they are only ensured by the FDIC up to $250k, whereas SIFI (Systemically Important Financial Institutions) banks have the full backing of the US government. So if you had $1mm sitting in say, First Republic, and you also had an account at Chase, the game theory was very clear - you move your money to the SIFI bank. The Fed realized this game theory conundrum and thus introduced the BTFP to fully backstop banks that were sitting on large mark-to-market losses on their bond portfolios, thus being able to entirely meet withdrawals.
What was the result over the last three weeks? The BTFP has loaned a total of $54bn to banks. Discount Window borrowing has totaled $110bn. Fed loans to FDIC bridge banks have totaled $180bn. That lending flows through to a Fed Balance sheet that now looks like this –
Source: Tradingview. As of 3/31/23.
When the Fed’s balance sheet is expanding, we colloquially refer to that as the “Brrrr”. That begs the question, is what just happened the Brrrr? Is the above chart Brrrr? It’s a funny thing to ask but totally appropriate given what we’ve witnessed in the last few years. When Covid happened, monetary and fiscal policies went berserk and the price of EVERYTHING mooned - from coffee to stonks to JPEGs. Should that be the same expectation this time around?
I think it comes down to the actual mechanics of what just happened vs the mimetic reflexivity. Mechanically, I do not believe this is QE and thus not Brrrr. At the heart of my view is, what happens to the dollars after regional banks borrow them from the Fed? Overwhelmingly, those dollars are going to depositors that are then withdrawing their cash from regional banks and putting it in a money market fund or Treasuries or just an account at a SIFI bank.
What has happened to money market funds?
Whoah. What about Treasuries?
Source: Tradingview. As of 3/31/23.
Also whoah. So is that mechanically Brrrr? I don’t think so. It’s not expansionary. The increase in the Fed’s balance sheet isn’t going to pay for PPP loans or mortgages or SMB loans or gambling on unprofitable tech stocks. It’s ending up sitting in Chase or money market funds or Treasuries.
My guess is the occurrences of the last month in macro have been slightly, immediately deflationary on the margin as it relates to US CPI. I don’t think this is a massive deflationary shock, but it’s possible, especially if it metastasizes further, which it could. It does not make intuitive sense to me that the events of the last month would be immediately inflationary as it relates to US CPI. Banks are cutting lending aggressively. Layoffs are increasing. A commercial real estate bubble looks like it may start collapsing in the next 12 months. These are deflationary. So as it relates to the glide path of inflation through year-end, the Fed probably just got a little help in the form of a banking crisis.
So that’s the mechanics of the thing. Now for the mimetic reflexivity of the thing. This is more qualitative but it’s a subject I’ve spoken about often for years. The market sees the willingness of the Fed to step in when there was going to be a full-on regional bank run. “Tighten till something breaks”. Something just broke. Tightening eased. Backstop provided. Market is relieved at the sudden emergence of the Fed put. “Markets stop freaking out when central banks start freaking out”.
In a reflexive response to all this, the market begins rapidly repricing the Treasury curve and a stunning amount of Treasury volatility appears. There is currently a high degree of uncertainty about the path of future rate hikes and cuts. Powell took to the microphone on March 22nd and held the line on inflation. He stated the banking system was being closely monitored and unlimited accommodation was going to be available for banks that needed it. And he stated the Fed still has a job to do on getting inflation down. Since that 3/22 press conference, QQQ is +5%. In my view that speaks to the strength of the reflexivity present when finding the stopping point on “tighten till something breaks”.
Meanwhile, US regulators seem to be trying their best to burn crypto to the ground. I continue to believe US politicians and regulators know they can’t actually kill crypto entirely. But they can give it a really solid gut punch, and they’ve done that. US regulators watched the events of crypto over the last year, with the FTX collapse apex, and decided to go hard and fast - through pretty much any and all available avenues of attack. SEC. CFTC. DoJ. NYAG. FDIC. Treasury. OCC. White House. They’ve all gotten punches in, some of them more like mafia-style beatdowns. There’s a range of outcomes for the various enforcement actions that have been brought. Coinbase v SEC will likely be years. Other cases will have shorter timelines. The SEC appears to be executing a strategy whereby they get precedent case law established in smaller cases in order to build up a body of evidence for larger cases, like Coinbase.
A big piece of that body of case law will be what happens with Ripple vs SEC, which may come to a resolution in the next month or two. Legal experts seem to be divided on how this case will break. Most people believe that if Ripple loses, they will immediately appeal to the Supreme Court. There’s actually a decent chance the Supreme Court hears the case too, and we get a “Ripple Rule” as an update to the Howie Test. Lol.
With the liquidation of Silvergate and Signature, US banking is significantly impaired. There are some domestic banks that have taken on new crypto transactional clients (not just crypto-related startups that need to pay payroll, opex, etc) in the last month, but I’m not sure how much remaining appetite there is from those banks to continue taking more clients. There’s also a chance the US government pressures those banks still servicing crypto clients to reduce or entirely cease offering services to their crypto clients. Lastly, I haven’t heard of any banks that are looking to spin up a tech offering comparable to the Silvergate Enterprise Network or Signet. 24/7/365 immediate fiat transfers were a cornerstone of the funding infrastructure in crypto. Stablecoins help but you can’t hold stablecoins at a bank. The kneecapping of US crypto banking serves to push US crypto companies abroad, but US regulators and politicians do not seem to be concerned with that at the moment as it relates to America “winning” crypto. Hong Kong appears to be opening its doors to crypto – US appears to be saying good riddance.
There is clearly an interagency fight over whether Ethereum is a security. The NYAG named ETH as a security in its case against KuCoin in March. CFTC claimed ETH was a commodity in its case against Binance in March. In February, the SEC sued Kraken because ETH was a security, and Gensler repeated this view publicly in March. What a mess. I don’t know how it’s going to turn out. It could easily take years. The Ripple case will matter.
Politics matter in all this for sure. Pro-crypto politicians lost the political will to fight for crypto in DC after the FTX collapse. That’s not surprising. So the floodgates opened and we’ve been getting hammered with enforcement actions for months. Politicians might scramble to get legislation passed before mid-terms, but I don’t have much confidence you could get anything passed through both houses in the next 12 months, and by that time you’re bumping up against elections. So the way things may be shaping up, Gensler and Co. will go as hard as possible now and in the coming months and get all these judicial timelines rolling. If Democrats win in 2024, there’s a decent chance Gensler gets named Treasury Secretary. If there’s a red wave, Gensler is out of the SEC. In either case, Gensler isn’t around to fight all these enforcement actions he’s brought – they’re someone else’s problem to win.
So What?
Is it bullish or bearish for crypto that the Fed tightened until something broke? Is it bullish or bearish for crypto that US regulators are trying to burn crypto to the ground? Well, in a vacuum, BTC was +23% in March. ETH was +14%. That’s honestly astonishing performance given what unfolded in the month. Is it possible that the market saw the instability of the banking system and was reminded of the need for an alternative form of money?
Source: Tradingview. As of 3/31/23.
Is it as simple as one of my all-time favorite axioms – Bitcoin loves QE and detests QT? That while the mechanics of the bank backstop isn’t exactly real QE, the mimetic reflexivity is close enough to Brrrr that number go up?
We shall see. I’m not totally convinced on that yet.
Market Update – Liquid Crypto Asset Investing
| Symbol | Mar | Feb | Jan | YTD | Q4-22 | Q3-22 | Q2-22 | Q1-22 | 2022 | 2021 | 2020 |
|---|---|---|---|---|---|---|---|---|---|---|---|
| BTC | 23% | 0% | 40% | 72% | -15% | -2% | -57% | -2% | -64% | 60% | 303% |
| ETH | 13% | 1% | 33% | 52% | -10% | 24% | -67% | -11% | -67% | 399% | 469% |
| XRP | 43% | -7% | 19% | 58% | -29% | 45% | -59% | -2% | -59% | 278% | 14% |
| BCH* | -7% | -2% | 27% | 16% | -18% | 7% | -67% | -13% | -75% | 6% | 71% |
| EOS | 3% | 8% | 23% | 38% | -27% | 28% | -67% | -7% | -72% | 17% | 1% |
| BNB | 5% | -3% | 27% | 29% | -13% | 30% | -49% | -16% | -52% | 1269% | 172% |
| XTZ | -2% | 8% | 48% | 56% | -49% | 0% | -62% | -14% | -84% | 116% | 49% |
| XLM | 26% | -4% | 28% | 55% | -38% | 2% | -51% | -15% | -73% | 108% | 184% |
| LTC | -4% | -1% | 35% | 28% | 31% | 0% | -57% | -16% | -52% | 17% | 202% |
| TRX | -13% | 11% | 14% | 10% | -11% | -6% | -12% | -2% | -28% | 181% | 101% |
| Aggregate Mkt Cap | 12% | 0% | 32% | 49% | -16% | 7% | -58% | -5% | -64% | 186% | 301% |
| Aggregate DeFi* | 1% | 10% | 36% | 50% | -24% | 25% | -74% | -8% | -77% | 581% | 1177% |
| Aggr Alts Mkt Cap | 4% | 1% | 27% | 33% | -16% | 12% | -58% | -7% | -64% | 479% | 274% |
Source: CoinMarketCap. As of 3/31/23. BCH includes SV. Aggregate DeFi from Coingecko.
BTC finished March +23% after being down as much as 15% at the peak of the banking crisis fears mid-month. That’s a lot of volatility. But it came on relatively low volumes.
Source: Tradingview. As of 3/31/23.
As you can see, a massive amount of coin traded hands at the peak of the FTX collapse in early November. Approximately two months later, a big chunk of buy volume went through that pushed price back above $20k. Since then, volumes have been relatively light. There was some decent buying as the Fed stepped in with its backstop for banks but that has died off a lot since then. So where does that leave us? At the moment, we’re bumping into one of the most significant resistance levels on the entire chart-
Source: Tradingview. As of 3/31/23.
Could we punch through it in April? Maybe. I get the sense we’ll get some help from traditional this month, and BTC’s correlation to NASDAQ is high at the moment, so that might be enough.
NASDAQ is highly likely to get help from CTA’s in the coming month.
Source: Ollari Consulting. As of 3/29/23.
BTC’s correlation to gold is also very elevated at the moment. Perhaps that’s an indication BTC is trading with gold on a “flight out of traditional money” trade? Maybe. Where is gold heading?
Source: Tradingview. As of 3/31/23.
At the moment, gold is at the top end of a range that’s held since the September 2011 highs. Would it make sense for gold to break ATH’s right now? Not sure. Gold hasn’t really worked all that well lately. The Fed printed trillions in 2020 and 2021 and gold couldn’t even make new all-time highs. So I don’t think my immediate expectation would be for the breakout to happen right now. But we could hang around these levels for a while.
DXY is another way to look at this situation-
Source: Tradingview. As of 3/31/23.
After punching through a major point of control around 100, DXY is now retesting that level as support. As you can see, DXY has punched above 100 only once since 1987, and was unable to hold the support at 100 once it was tested again. Will 100 serve as support now? It will depend on how the banking system holds up in the US, and how the US holds up relative to the rest of the world. We saw Credit Suisse collapse and get absorbed by UBS, and DXY was down in March. Saudi Arabia, Russia and China are in talks to use Yuan for oil sales and as a reserve currency. Are we about to see ultimate descent of the dollar? Honestly I doubt it. It could easily just range around here for a while though. That’d probably be my base case. Every country that makes up the basket of currencies in the DXY is in worse shape than the dollar.
Treasury yields are another great way to look at this. This is a busy chart but bear with me-
Source: Tradingview. As of 3/31/23.
Orange is the SPX. White is the 2s10s. When white gets inverted, a recession occurs. Notably, the SPX tops at the same time or shortly after the curve is done inverting and is heading higher. As the 2s10s curve turns positive, stocks go down for a while. The current setup sent the 2s10s into the deepest inversion in 40 years, which coincidentally was the last time the Fed hiked this aggressively. This chart in a vacuum would make you think the SPX is heading to new lows in the coming quarters. But this is a new ballgame. The Fed has asset prices by the balls in a way never before seen. This ain’t 06 and this ain’t the dot com. I don’t think. Interest rates and the SPX will go more or less in the direction the Fed wants them to. That will work until it doesn’t. Part of Bitcoin’s value proposition is a call option on that.
ETHBTC remains in its two-year range-
Source: Tradingview. As of 3/31/23.
The Shanghai upgrade is set to occur April 12th. ~18mm ETH, worth ~$32bn, will be unlocked in the process. The question is how much sell pressure will that present? ETH lagged BTC meaningfully in March, likely an expression of this concern. It’s easy to imagine ETH lagging badly again in April as the market chews through whatever supply comes to market on the unlock. ETH also has the Kucoin NYAG case to deal with. Yet on the other hand, the CFTC called ETH a commodity. So there’s a push and a pull in price action right now. I’ve long held the view that this two-year range will eventually break higher and ETHBTC will go test ATH’s. There is a small chance the regulatory actions against ETH are so severe that this range breaks down, but it wouldn’t be my base case.
Let’s check in with It’s All One Trade. Yeah, it was heavily present in March-
Source: Tradingview. As of 3/31/23.
Lastly, I want to highlight Stablecoin flows-
Source: Tradingview. As of 2/1/23.
Tether dominance rose from 54% to 62% in March. That’s a real move. That came at the expense of USDC (given their SVB scare) and to a lesser extent BUSD (as it is forced into wind down due to regulatory pressure). That Tether dominance increase happened as total Stablecoin market cap declined 6% over the month. So the pie got smaller and Tether got more dominant. Nice.
Overall, I struggle to be strongly bullish on BTC through year-end from current levels. We could go higher in the near-term for sure. Maybe macro can carry us for a while longer because it seems like stocks are heading higher near-term. But the negative idiosyncratic crypto news feels like too much of a weight in my opinion. Binance DoJ. US government selling 41,500 BTC. Mt Gox selling. No banking rails. US regulators firing left and right... It feels too overwhelming for us to just walk up to $40k or $50k this year. It’s not my base case BTC will make new lows or even test the $15.5k lows. But I think $20k will get tested again.
Closing Remarks
A month ago, in the wake of Operation Chokepoint 2.0, I opened the Closing Remarks with the following –
It would have been naïve to think that after the last year’s worth of damage done, we wouldn’t get a significant regulatory crackdown.
The guy that gave all the politicians all the money committed Madoff-level fraud. The money he GAVE was fraudulent. Just ponder on that for a second. What did you think regulators were going to do?
A month later, the above statements hit even harder. We’re in the thick of it at the moment. Realistically, I’m not sure how much harder the crackdown can get from here. Pretty much every major exchange has received a Wells Notice from the SEC. Many unregistered securities cases are already in motion. US regulators have stepped outside the borders of the United States to come down on all sorts of offshore businesses and individuals. Perhaps the regulators could come even harder for US crypto banking and try to wipe it out entirely, but with Silvergate and Signature already gone, most of the damage has been done at this point.
“It can’t get much worse than this” is a usually a pretty good time to buy crypto. Historically, the best time to buy crypto is when it feels the worst to buy it. Kinda feels like we’re there right now, right? And yet, we’re still not done with the immediate knock-on effects from the damage of 2022. Add to that the US government selling 41,500 BTC in four tranches through year-end. Add on top of that Mt Gox BTC finally being returned to creditors, and some amount of that supply coming for sale. All of that adds up to 2023 feeling like a wash for crypto, yet BTC is +72% YTD. That’s not exactly a wash. That’s gangbuster performance – best quarter since Q1-21. Where does that leave us for the remainder of 2023? I don’t see compelling reasons to believe we’ll see meaningful inflows into crypto through year-end. It just doesn’t make sense to me. We need more time to pass and the dust to settle more. Domestic institutional capital has pulled back almost entirely from crypto at this point, and it’s going to take a while (quarters? Years?) for those inflows to resume.
As discussed earlier, the most likely way crypto heads higher from here in 2023 is if it gets carried by the mimetic reflexivity of the Brrrr in traditional markets. If the banking crisis is contained. If inflation comes down rapidly over the next six months. If this allows the Fed to go on pause. If the market starts to solidify its expectations for rate cuts in 2024. That could take QQQ from its current +21% to +30% or even higher. There is precedent for that.
So in light of the events in March, I think that will be the push/pull for crypto through the remainder of 2023. A potentially brrrr-y macro backdrop (with risks to the downside) vs a sluggish, negative news-driven crypto market. BTC is +72% through Q1. It’s not my base case at the moment that price will end the year higher than these levels. Whatever happens, it’s not going to be boring.
“Knock on a stone bridge before crossing it.”
– Japanese Proverb
Travis Kling
Founder & Chief Investment Officer
Ikigai Asset Management
P.S.
Included below is an incomplete list of memorable tweets from the last month. Twitter is not investment advice and my views could easily be wrong. That being said, like it or not, Twitter matters for crypto. I have no interest in being a talking head for a living and babbling about on Twitter is a long way away from being a good steward of investor capital. However, this is a community with open-source software in its DNA, and participants want to crowd-source the truth. We are shepherds of this technology. Answers to fundamental questions about this asset class are not currently clear, so having a public platform to share your views with the community is important. After all, you’re helping shape the future :)
1. Ikigai Asset Management is the trade name for a collection of advisory and consulting businesses operated by Travis Kling, Anthony Emtman, and their team.
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