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Still in Italy, so this is a quick update to my June 30 post which highlighted the amazing correlation between the price of bitcoin and the S&P 500. The correlation persists, and I am still searching for an explanation for what's going on.
Tuesday, July 19, 2022
Dancing couple update
Still in Italy, so this is a quick update to my June 30 post which highlighted the amazing correlation between the price of bitcoin and the S&P 500. The correlation persists, and I am still searching for an explanation for what's going on.
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The stock market reacts to a variety of factors, but for the past few years, the number one has been Fed policy and real interest rates. That's not only driving the stock market, but housing, Bitcoin, art, Rolex watches, etc.
The longer term problem with crypto is that it has not entered the "real" (non-crypto) world. Bitcoin is 14 years old. I don't know of a single non-crypto organization that keeps its data on a blockchain rather than a SQL-type database. I don't know of a major company that has a material part of its revenue in crypto. In fact, outside of stunts like El Salvador, I don't see it at all.
Both are risk capital funded
I dunno about bitcoin, and its correlation to Wall Street. Just mood, is my guess.
But...earnings have been pretty good, though still early in the season.
American publicly held companies are perhaps the best-run large organizations on the planet.
So...they can capitalize on inflation, not get injured by inflation.
Sure, a recession will hurt most companies. But higher inflation...maybe not.
The market is slowly coming to terms that Bitcoin (NOT CRYPTO) is a RISK OFF ASSET. As this continues people will begin to realize that Bitcoin is the leading indicator for everything since it is the most dominant form of property that has ever existed.
Monetary property(energy) can now be safely stored digitally and is protected by Proof-of Work Mining throughout the world. All other property is subject to government confiscation and destruction.
I have an unconventional theory. Hear me out.... Bitcoin was created by the Fed as the most unconventional monetary policy. It allowed the Fed to expand the "money supply" through the wealth effect on the segment of the population that has the largest propensity to consume, youth. It was a form of secret helicopter drop. At its peak it created $2.9 trillion in wealth without printing. It was ingenious. It is why no creator has been identified.
When the Fed wanted to tighten it started with BTC before it raised rates.
We have all seen the charts showing the Fed's balance sheet and the S&P being correlated. Same thing here.
Two things:
(1) There was no logic to the Bitcoin price rise, therefore there is no logic to the fall either. There is simply no reason to think there's no logic here either
(2) Bitcoin is "lame" and investors are looking for the New New Thing. Whatever that is to be
(3) Did you notice that gold too is going down
(4) Someone mentioned that the correlation between Bitcoin was even higher with the Wilshire 5000...
(5) Finally, and this is my favourite You sell what you can. And despite the price drop Bitcoin is still relatively liquid
For my money, the price fall of Bitcoin is caused by capital raising for options margin coverage. All my friends who invested in crypto were aggressive players in the options market, and if you are on the wrong side of a price movement in this market there are margin calls.
Bitcoin follows the Elliott Wave. The E-$ market is contracting and so is AD.
“The M2 Inflation Myth”
http://dlthornton.com/images/services/The%20M2%20Inflation%20Myth.pdf
AD = M*Vt
Money has no significant impact on prices unless it is being exchanged.
Link: The G.6 Debit and Demand Deposit Turnover Release
https://fraser.stlouisfed.org/files/docs/releases/g6comm/g6_19961023.pdf
Non-transaction deposits have very little turnover. 95:5 at best.
That leaves DDs and currency:
https://fred.stlouisfed.org/series/DEMDEPNS
Link:
https://marcusnunes.substack.com/p/misleading-monetarist-views
“Clearly, it´s not “all about money”. In fact it is, but not only about money supply. We must take into account money demand (or its inverse, Velocity).”
Bitcoin is the ultimate risk asset given you can trade it with almost 100% leverage. It is not a replacement of fiat currency or a store of wealth. It is pure speculation.
When a fully leverage trade goes against you, you need to get liquidity from somewhere ... and that somewhere seems to be from selling equities.
It stands to reason investors in Bitcoin would be holders of risker assets, so this theory could be supported by checking to see if bitcoin correlation is even higher to the NASDAQ 100 (or some other basket of bandwagon tech).
Hi Tio, Here is my theory:
1) The big banks and the market makers (Citadel, Morgan Stangley, blackrock) have been relying on PFOF (Payment for order flow) for the past several years.
2) With the rise in trading apps like Robin Hood, Etrade(bought by Morgan stanley in 2020), new traders and new money have entered the market.
3) So many stimulus checks, unemployment checks and "free money" found their ways into Robhin Hood and other types of free trading accounts. these accounts sell everyones data to the big banks.
4) Big crypto exchanges became public (Coinbase for example) and Robhin hood introduced crypto trading into their platforms.
5) ETFs were created for the "normal" investor to put parts of their 401Ks into crypto (GBTC, ETHE, and all the other greyscale trusts ETFS) so now the normal banks had exposure to crypto, even though they dont actually allow trading of crypto currencies.
6) As the price of crypto began to drop, so did the price of the crypto exchanges, such as coinbase. all of the banks had Coinbase in some sort of exposure via ETFs, etc or other mutual funds.
7) As traders began to get liquidated, stimulus ran out, these trading apps lost a tremendous amount of their value. The Payment for order flow model has gone to the dumpster, so now its much harder for the big banks to see where the new money or the flow of funds are coming from.
HOOD, COIN, ARKK, all relied on growth to continue to feed the big banks. All of the new money that entered the market was trading Growth and tech. MARA, RIOT, and all the SPACS created a huge amount of trading volume and revenue. That is all gone now and is spilling over into the S&P 500.
That is my theory.
Also: bitcoin and other cryptos bottomed a couple of months after the March 2020 bottom of the S&P and the NASDAQ. Just as COVID stimulus kicked in, and just as the unemployment checks started rolling out. Also the CARES act was an additional $2.2 trillion of free money that entered the market. A lot of it went into the rise of bitcoin, bitcoin trading apps. Growth fueled by the FED and the big banks.
few more good but relevant posts:
https://www.coindesk.com/business/2022/07/22/three-arrows-capital-founders-says-terra-gbtc-trades-led-to-fund-blowup-report/
These grayscale ETFs like GBTC and ETHE blowing up had major spill over affects.
Ask State Street:
https://wallstreetonparade.com/2022/06/has-crypto-endangered-federally-insured-big-banks-ask-state-street/
everyone is too scared to admit: This stock market crash is worse than 2001 and 2008.
To me, the crypto/blockchain currency systems seemed to have self-contradictory logic built in.
It's encrypted and very "private", but they want it to be universal to protect the "little-guy". The privacy goes away as soon as the billions of little guys get involved since all the records are electronic/digitized. People like criminals, as is currently the case, will try to use the electronic/digital systems to outwit regulators. I don't see the value here.
The whole idea of expensive mining, which is like digging a (deep/expensive) hole and filling it back up (no intrinsic value), also seems just a shiny object to divert from the true lack of value.
Could some kind of blockchain system be used to better verify traditional transactions? Probably, but that is a small, but potentially significant, step forward.
I truly hope the mainstream financial firms have not made over-sized investments in this.
If there is value, I obviously don't see it yet.
more crypto fall-out related news just from today! The bitcoin/crypto spill-over effects are REAL.
https://twitter.com/unusual_whales/status/1552085054653730816?s=21&t=mu98CJ1szKpkn06_rAA6SA
"Cathie Wood of $ARKK just sold nearly 1.41 million shares of Coinbase, $COIN, at all-time lows of $53.
The average cost average that $ARKK purchased $COIN at was $254.65."
Hi Scott,
Adding to my theory here. Robin Hood pre-announced earnings today. They literally said exactly what I was thinking:
Vlad, CEO of $HOOD: … we have seen additional deterioration of the macro environment, with inflation at 40-year highs accompanied by a broad crypto market crash. This has further reduced customer trading activity and assets under custody.
https://twitter.com/unusual_whales/status/1554565762840268801?s=21&t=ESnKZ7fHfyM5PD0ad-OXGQ
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