1-2 weeks ago I sold all my altcoins into ethereum and USDC, sold my last bitcoin, and shorted Cardano (on dydx). The only crypto I own at this point is my big stash of staked ethereum, which are long-term holdings. My reason for shorting Cardano was initially moreso to hedge my long eth position (as described in my last post), but as I’ve researched the macro environment more, I’ve become increasingly bearish and have increased my short position ($0.53 average entry), though without any leverage. I’ve stopped dollar-cost averaging into ethereum since I’m already overexposed crypto, but I’ll resume DCAing into buying ethereum below $1,500 and/or when the macro sentiment starts looking promising again, ie. when inflation is under control.
I don’t have a crystal ball, but I personally see markets crashing significantly further in this cycle. My guess is S&P 500 to $3,300, ethereum to $1,400 (or below), and bitcoin to $24,000 (or lower). If this happens, then altcoins will continue to get slaughtered as they already have, dropping another 50%+. Once things feel like a bottom, I will close my shorts, and buy back hard with my profits – probably mostly ethereum but also any altcoins that look particularly undervalued. (note my numbers are just general guesses and not intended to be precise estimates)
Bear Market
There is no question we are in a bear market. S&P 500 has declined for 7 straight weeks off a string of poor corporate earnings, and the Fed shifting towards raising interest rates and Quantitative Tightening (beginning June 1) due to inflation growing to a whopping 8.5% in March (CPI), though down to 8.1% in April (and we all know official numbers underreport real inflation). The Fed has gotten universal criticism from the public and even the president for allowing inflation to go so high, and is committed to bringing it down even if it means crashing the stock market. With the labor market so strong at 3.6% unemployment, the Fed has plenty of leeway to raise interest rates and reduce its balance sheet.
Sentiment in the crypto markets has also turned very bearish particularly since the Luna collapse, with subsequent regulatory implications and people questioning the value of crypto when there’s so much Ponzinomics.
Crypto follows stock market
Crypto, like it or not, is highly correlated with the stock market. There can be so much innovation going on in crypto, but if the stock market is tanking, then crypto tanks too.
I’m no macro investor prodigy, but the smarter macro guys I’m following (eg. David Rosenburg) all seem to think the bear market is far from over. Stocks are still overvalued by historic measures with P/E ratios above historic averages, made worse by corporate earnings that have drastically underperformed.
Real Estate Bubble
Real estate is more overvalued than in 2006-7, with prices having risen 20% over the last year, and with workers now needing to pay an average of 8 years of their income to buy a house, vs. the historic average of 5. Real estate is highly sensitive to interest rates, and rising mortgage rates coupled with increases in supply could pop the bubble. Sales declined 16% in April, though prices have yet to decline.
Sentiment has become super bearish
Before it felt like everyone was trying to buy the dip. Now, and especially since the Luna crash, investors are more spooked than ever. But despite that, investors still seem convinced that we’ll see a relief rally – which to be fair would make sense given 7 straight weeks of declines.
Here’s the front page of MarketWatch today (May 26, 2022)
Top headlines include:
- Opinion: Don’t believe the hype: The economy isn’t headed toward a recession, and the Fed isn’t ‘behind the curve’ on interest rates”
- “Opinion: Strong insider buying suggests a 15% rally in the S&P 500 from here”
- “U.S. stock futures point to more gains, as Twitter rises, techs shake off warnings”
Clearly there’s still a lot of optimism.
When will we know its a bottom? I think the bottom is when headlines are screaming Armageddon. We’re definitely not there yet.
Shorting Cardano
I decided to play the short by shorting Cardano (ADA), another blockchain led by a cult of personality. Its valuation is straight nonsensical given that nobody actually uses it. Its market cap is currently at $16b (was >$18b last week) making it worth more than Solana’s $14.7b or Avalanche’s $6.5b, blockchains with actual usage. Cardano’s total value locked is $121m vs $4b in Solana and $4.3b in Avalanche.
Cardano is considered a laughingstock in the crypto community and has developed at a glacial pace, yet somehow still manages to command a $16b valuation making it the 8th ranked crypto by market cap. They invest heavily in Youtube and digital marketing, which may explain the hype. But amidst the Luna crash, I think there will be more scrutiny on vaporware crypto projects and ludicrous valuations, particularly those led by cult of personalities.
I started entering the short at 56c, and loaded up closer to 51c, putting my average close at 53.2c. I easily see ADA falling down to 15-30c. I’ll close the position around that point and/or when it feels like sentiment is turning bearish again. I’ll then probably take those gains and dump them into eth, at which point eth would probably be trading between $1-1.4k. (note these numbers are off of my head so not intended to be precise, just the general idea)
Crypto Long Term
I’m very bullish ethereum and the crypto ecosystem long-term. The Luna fiasco makes me even more bullish ethereum because its highlighted the importance of decentralization/security and quality. The success of the “merge” would still be very bullish for ethereum – making ethereum deflationary (triple “halving”) and improving ethereum’s “green” narrative.
That being said for prices to go up, that money has to come from somewhere, and in a poor stagflationary macro environment with the Fed committed to raising interest rates and a recession likely coming later this year or next, people will be selling risk assets for cash and stable assets.
Despite all the innovations of crypto, its still mostly used for speculation, and there are no cash flows tied to the real world. Most altcoins don’t even have cash flows tied to the crypto world (eg. governance tokens).
I believe that layer 2s with their fast transaction times and cheap gas fees, coupled with privacy (through zero knowledge proofs, which ZCash and Monero use), will be a catalyst for making crypto mainstream for normies, but that’s going to happen over years, not weeks.
What we need for sentiment to turn Bullish again
For sentiment to turn around, the Fed has to pause its tightening, which means inflation has to get under control. Right now this doesn’t look likely amidst rising energy prices, Putin’s war, and supply chain constraints – none of which the Fed has any power over fixing other than by trying to blunt aggregate demand via making borrowing more expensive. The Fed can pop the housing bubble though, which now constitute around 35% of household budgets vs. 27% in the late 1980s and 24% in the early 1970s.
If inflation drops significantly more than expected in the next release then that would be a bullish sign, but I’m not holding my breath.
Risks
A relief rally is definitely possible in the short-term. If we get a strong rally, then I will potentially increase my short position. Again, my view is that we trend much lower before we bottom out. It’s not about crypto Twitter sentiment, it’s about the Fed, inflation, stocks, and the macroeconomy.
If inflation remains high, then the Fed will continue tightening, crashing stocks and crypto. If inflation subdues quicker than anticipated and unemployment spikes, the Fed will back off on tightening which could support the markets, working against any short positions.
Conclusion
I’m very bearish, sold my alt coins (a couple weeks ago), and shorted Cardano. I will start buying back into ethereum under $1,500 and/or when sentiment turns positive again.
Macro sentiment and the Fed rule everything now, and will dictate where markets go. Of course if you’re a long term holder with a solid stash of cash savings and/or good income, then none of these short-term fluctuations matter.
Note: None of this is financial advice. These are just my thoughts. Do your own research.
J. Savage 