Why did ‘crypto’ go risk-on from risk-off?

On January 3, 2009, the Genesis block of Bitcoin was constructed by Satoshi Nakamoto.

“The Times 03/Jan/2009 Chancellor on brink of second bailout for banks,” the recorded data in the block said.

At that time, we were going through the Great Financial Crisis and early adopters thought the technology could offer salvation from the excesses of central banks printers running in overdrive. Thirteen years later, we’re witnessing the ‘crypto’ industry becoming correlated with the stock market and meme industry.

Institutional Money

Before 2020, the digital currency was not affected much by the financial condition of Wall Street. Significant correlation started when a few institutions (that got rich by the quantitative easing season during the coronavirus pandemic) began pouring money into the Bitcoin industry. Michael Saylor’s MicroStrategy (NASDAQ: MSTR) remains the top example because its balance sheet is holding tons of BTC. However, due to the financial constraints created by the Federal Reserve recently, the institutions are having a tough time pouring more money into the industry.

Instead of investing more, the companies like Tesla seem to be selling back the BTC holdings to give their Balance statement and Cash Flow a better view. So what’s next? It’s simple. If the Fed creates a less restrictive environment, institutions will start pouring money again into the digital currency industry. But if Fed continues to fight inflation with aggressive rate hikes and quantitative tightening, it is quite clear that BTC will remain in a bear market or trend sideways (in the best-case scenario).

Furthermore, Grayscale BTC (GBTC) is currently trading at a record discount, which proves that institutional investors’ interest in BTC has severely decreased. Barry Silbert of Grayscale Digital Assets seems to have tried his best to get the SEC to approve the ETF, which could prevent the discount. But apparently, Gary Gensler, current chair of the SEC, seems firm with his decision and won’t be ready to approve any ETF due to several factors, including the significant Tether dominance propping up BTC and manipulation across digital currency markets.

Level of risk-on asset class that BTC has achieved

The whole crypto industry seems to be reaching the point of a maximum risk-on asset class. BTC is now being influenced by the number of iPhones sold (i.e. Apple earnings). Fed raised interest rates by 75 basis points instead of 50 basis points? Dump it. Microsoft’s earnings exceeded expectations? Pump it. Less Tesla cars sold than expected? Dump it. MicroStrategy bought more BTC? Pump it. More jobs were created than expected, which might lead to a greater interest rate hike in the upcoming Fed meeting? Dump it. This is far from what Satoshi wanted to happen when he created Bitcoin, especially when you think of it as a purely peer to peer electronic cash system designed to send small casual micropayments frictionlessly.

Excessive Leverage

Binance offers 125x leverage; Bybit has 100x. FTX offers 20x leverage; BitMEX has 100x. Leverage levels of this size only pave the way for more volatility, ultimately leading to more risk. In addition to all these crazy leverage levels across centralized exchanges, there are on-chain lending (and borrowing) platforms like Aave, along with publicly viewable liquidation prices that enable the whales to manipulate markets and spread fear, especially in cases of hundreds of millions worth of crypto-collaterals.

In the last several months, we witnessed the aftermath of extreme greed and lack of risk management within this industry. Three Arrows Capital never thought of a very fast Terra/LUNA collapse despite the Terra ecosystem having a heavily leveraged so-called stablecoin (UST), so they (and all of the market) had to pay the price of their greed. Similarly, big, centralized lending platforms like Celsius, BlockFi, and Voyager never imagined such a fast drawdown and unraveling would happen. They were all caught off-guard, along with the influx of panic withdrawals. Unfortunately all the new real punters were wiped out as the crypto whales dumped on the fresh liquidity taken profits after hype marketing campaigns ran their course.

At this point, it is hard to imagine that the crypto industry will ever stop tracking the performance of risk assets. Is crypto going to be forever correlated with the stocks and other risk-on assets? With an utter lack of utility coming from the crypto tokens and the gamblers backing them, the answer is a resounding “YES”!

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