Crypto Based Monthly Market Update
Did the Fed just get a little help in the form of a banking crisis?
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. 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.
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!
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 - 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?
Which brings me to the question; Does Bitcoin love QE and detest QT? While the mechanics of the bank backstop isn’t exactly real QE, the mimetic reflexivity is close enough . . .
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