Spend a few minutes in reddit forums or on Twitter or TikTok or wherever you find your early crypto believers and you'll quickly get the sense that they aren't a very enthusiastic bunch anymore. If you didn't sell two weeks ago, you're a putz, is basically the sentiment.
Are they right? Is crypto over?
As an asset class, I'd argue definitely not. It's really only just starting. My husband, who is reading Dan Yergin's The Prize (one of the greatest books ever), just reminded me that oil was worth less than water for a long, long time. Then suddenly--especially once it could be used in cars--it took off. Crypto is probably going to be a lot like that, if you have the patience to wait it out awhile. It's almost way too early to play it right, not way too late.
The biggest difference between now and the Bitcoin bust of 2017 is that Bitcoin barely encapsulates the world of crypto anymore. It's just one piece of it. Meanwhile the crypto world is off to the races creating new payment tools and asset classes (CNBC is auctioning off our own NFT for charity today--the Haines bottom. More here if you're interested). There's no putting the genie back in that bottle.
Will regulators end the whole experiment? I doubt it. Yes, our Fed is looking into its own digital currency, which could undermine the appeal of a lot of stablecoins today. But that will take awhile. Yes, the IRS is cracking down on unreported gains from owning or using crypto, as they should--it's property, after all, not money. (Similarly, they may restrict the ability to use crypto as payment.) But I don't see how or why they would decide "no one can invest in (a.k.a. own) crypto." It would be like saying "you can't own the new mini oil contracts" because they're not physically deliverable. If anything, the feds seem to be tiptoeing towards codifying crypto as a permanent part of the asset landscape.
So why the sudden whoosh out of this asset class? For one, like I said last week, this is simply what happens when everybody gets bullish on something. It corrects. Secondly, there are signs that liquidity in general is starting to recede from its excessive recent highs. Money supply (M2, not M1) growth looks like it peaked in February at 27% year-on-year, and fell to 24% in March. The April figures should be released at 1 p.m. tomorrow, which could turn out to be a key data point.
And as Ben Emons of Medley Global points out, it's not just crypto that's reversed course since then. How about the speculative IPO market? The CNBC SPAC post-deal index peaked, coincidentally, on February 9th and is since down 30%. Have you seen the share price of Tesla? It peaked in January but was still around $850 in early February. It's under $600 today.
And that brings me to the ultimate case against owning crypto for the moment. Call it the "measured" case. It's Goldilocks. It's the Fed and Congress actually successfully pulling off the transition from their government-induced pandemic response to private-sector growth. The rush into crypto was driven by liquidity, yes, but also to hedge against The Collapse. Inflationary, Deflationary, whatever your worry, crypto was the hedge asset.
Mike Novogratz put this well in Goldman's big "crypto special" client note over the weekend. Interviewer Allison Nathan asked him "What would make enthusiasm for the asset class diminish?" His answer: "in the words of Ray Dalio, a beautiful deleveraging. If the Fed successfully taps the brakes, pulls back liquidity, and slows the economy down just enough to ensure inflation doesn't run away and deficits come down, then the impetus for having a store of value will fall."
But, he added, "this is the hardest macro environment policymakers have ever dealt with, and only a tiny window exists to get it right." That's the knife-edge we're all walking right now.
See you at 1 p.m!