So we have seen over the past few days the shouts of victory across crypto twitter as everyone celebrates the institutions flooding in.
Spot ETFs being filed. Blackrock. WisdomTree. Invesco Galaxy. Bitwise. Not to mention Citadel, Fidelity, and Charles Schwab launch a crypto exchange.
We will soon all be laughing in our lambos as we unload our bags on these foolish, unsuspecting institutions.
But it is they who have the last laugh.
And in fact, this very "we will dump our bags on those fools" attitude is what contributes to much of the pestilence in this space.
It gives confidence to those with unsavoury practices to keep on running their shams. Unsustainable APRs on stablecoins? Commingling customer deposits? Unsustainable carry trades on maxxed out leverage? Don't worry bro, BTC will be half a million bucks when the institutions come and we'll just dump our bags on them!
Do you really think they're not already thinking about this?
While I was ranting out the stems of this article (ok well this is still a rant) in the antechambers of Telegram, one of my alfa compatriots replied that a banker he knew once said:
"You crypto people are so easy to fool. Just like a herd"
(not that the bankers are much better but we really do like to show our colors in public)
And while all of crypto twitter is dancing victory laps that the institutions are coming, I'm convinced this is a sucker’s rally.
1.
Macro is ugly. Markets have not yet accepted the fact that Powell is going to keep raising rates, and recessions come after rate hikes. The first cracks have started to appear in equities. If you zoom out far enough, it’s only a matter of time.
Unless AI miraculously generates enough economic activity to lift us out of these trenches, we're likely to see some red candles on both equities and crypto. But markets can always remain irrational longer than you can stay solvent.
2.
The Treasury needs money. After the debt ceiling deal they need to replenish their account. Where does that money come from? Powell already made it clear they're not giving away any more for free.
3.
Simple logic. Ok let’s walk through this one. So the reason for bitcoin printing nearly 20% this week is because there's a tidal wave of capital that wasn't allowed to buy crypto before now that is now just itching to buy the dips until those dips don't exist anymore…
a) The ETFs have only been filed for not yet approved. While it is very likely that they will get it through (Blackrock has an approval rate over 99%), until they do, all that capital is still sidelined. This could take months until it actually comes in.
At the moment the only institutionally friendly option for buying bitcoin on the market is the Grayscale Bitcoin Trust (GBTC). While it has recovered slightly, it is still sitting at an ugly -30% NAV. And you can't redeem it for actual bitcoin. Not exactly where I'd be parking my money.
There are also futures contracts on the Chicago Mercantile Exchange (CME) but those are speculative...
b) ...and most of this buying action has just been speculators trying to frontrun those ETF approvals. There's no way it can hold this kind of price action for that long. It costs money to keep leverage open...
c) ... and the volumes don’t match. Zoom out, way out and you will see that volume and momentum is dismal for this type of price action. Spot volume, which typically signals longer term holders, is not tracking price.
Now of course our favorite elephant in the room is getting blamed for this. I drop this tweet below without comment, other than that I know this account has a strong bias against Tether and I do not have deep enough knowledge to really dig into the exchange CVD flows.
Nevertheless, there has been something fishy going on with TUSD as well. Since they halted redemptions because of issues with Prime Trust—which also shows that contagion is still not over from the FTX fallout—and Binance announced zero fees for TUSD pairs (gee I wonder why), there’s been some funny flows going on.
Sounds sustainable, right?
So don't believe the hype. The intoxicating whirlwind of "we are so back" max bullish sentiment is usually a pretty good counter-indicator.
All obstructions that generally block progress fall away here. Things proceed with remarkable ease. Unhesitatingly one follows this road, in order to profit by one's success. Seen from without, everything seems to be in the best of order. However, no promise of good fortune is added. It is a question how long such unobstructed success can last. But it is wise not to yield to such misgivings, because they only inhibit one's power. Instead, the point is to profit by the propitiousness of time.
— I Ching, Richard Wilhelm translation
Addendum
Counter arguments. As with any argument you have to question yourself.
First, there is still a lot of liquidity left in the system from the decade of QE, and covert market operations are moving liquidity back to the end of the risk curve (i.e. crypto). This would be “The Repo Market Put”
Second, the Bank Term Funding Program (BTFP) is still going strong (and the Fed actually isn’t tightening for the moment) which means there’s still money floating around. But this could very quickly reverse.
Third, increases in stablecoin supply are natural during periods of market expansion and supply of BUSD and USDC has been decreasing.
Is this time really different? Is there still enough money swirling around the system for us to avoid a recession? We’ll probably find out soon.