Thursday, Nov 10, 2022
“The curious task of economics is to demonstrate to men how little they really know about what they imagine they can design.” – Friedrich Hayek ||
Hi all! If you’re reading this premium Crypto is Macro Now email, I imagine it’s because you find the recent drama totally fascinating, you want some cathartic doom and gloom, you’re looking for signs of a turnaround, or you’re here for a bit of all of the above. I hope to oblige. If you find this newsletter useful, please consider sharing with friends and colleagues.
MARKETS
A hurricane hit the Bahamas yesterday. Literally, tropical storm Nicole did some damage to the island before heading for Florida.
Also figuratively, a hurricane hit the Bahamas yesterday. Binance has backed out of the FTX purchase, leaving the market unsure as to what will happen next. Apparently SBF is working on raising funds from others, but given the approximately $8 billion shortfall, success on that front is not looking likely, especially given the hit to FTX’s reputation and the difficulty of getting payback on an investment of that size.
This tragically means that an FTX bankruptcy is looking likely, which will freeze funds on the platform for weeks or even months, leaving businesses and investors less able to cope with the market gyrations and their own nervous clients.
Many of us are eager for some sign of an end to the waves buffeting the crypto shores, but often things need to get worse before they can get better, and it seems like that is where we are in this timeline. Today will most likely bring more uncertainty and liquidity reduction, and perhaps a few ugly rumors and revelations, but each bad day brings us closer to the turning point.
Unfortunately, we can expect some sad news from the following crypto segments:
Crypto hedge funds – those weakened by the asset price slump after the 3AC collapse but who managed to survive could see that fragility snap as a result of the recent leg down. More hedge fund closures = more asset sales and lower prices.
Bitcoin miners – with BTC down to $15k at time of writing, even more will end up switching off machines and/or selling their BTC to cover expenses. Some may not be able to meet their loan obligations, and mining rigs are not an easy or necessarily profitable collateral to call.
Crypto lenders – while decentralized platforms seem to be holding up well, some centralized books are likely to be hit by outstanding obligations from miners and hedge funds that will not be met. Loan risk was no doubt reined in after the 3AC collapse, but probably not enough to emerge unscathed from the price drops and probable cascading closures.
BTC and ETH have recovered slightly from the local lows reached yesterday, however, raising questions about whether the bottom was reached. Some are looking at historical drawdowns for a clue as to how much lower prices could go, although relying on an exact repeat of previous patterns is generally not a reliable strategy. Nevertheless, for the curious, BTC would need to drop to $12,500 to reach the max drawdown achieved during the last bear market (82%).
(chart via glassnode)
On-chain data is also spinning off some intriguing signals, but with so much uncertainty on the bad news front, it makes more sense to look at those charts once things have quietened down a bit.
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There are some other important things impacting overall markets (really, there are), and it is refreshing to drag our attention from the crypto drama for a short while:
The US CPI data for October is out this morning, with average expectations for an increase of 7.9% vs September’s 8.2%. Expectations are more often than not on the low side, however, and signs from elsewhere in the world are not promising: both Egypt and Norway reported accelerating CPI increases earlier today.
Yesterday, Charles Evans – the outgoing president of the Federal Reserve Bank of Chicago – talked about the dangers of maintaining the current pace of rate increases.
Earlier today, however, Neel Kashkari – president of the Federal Reserve Bank of Minneapolis – stressed the need to do whatever is needed to bring down inflation.
NEWS
So far, the following investment firms have disclosed a negative impact from the FTX collapse (there may be some I have missed):
Genesis Trading (my former employer, sniff)
Also:
A year ago today, BTC reached its all-time high of $69,044 (according to CoinGecko). Sigh.
A good read from BitMEX founder Arthur Hayes.
A compelling look at some of the on-chain moves that tell part of the FTX story, from the team at glassnode (video).