This is an opinion piece by Adam Taha, host of an Arabic Bitcoin podcast and contributor to Bitcoin Magazine.
Luna’s infamous collapse was followed by an implosion at Celsius, then suddenly Tron showed signs of disappearing and now The capital of the three arrows is in serious financial difficulties. No one knows Who is so, but one thing is for sure: there will be more pain. Current market conditions reveal capital and technology problems in the cryptocurrency world. The Web3 cap does not work well.
What about bitcoins? For the sake of clarity, bitcoin is not a crypto. It is important to distinguish between the two. When I say “crypto”, I am referring to digital products and innovations that rely on the use of blockchain technologies to run their projects. As of this writing, there are 19,939 cryptocurrency projects, most of which have emerged within the last 12 months. Why are many of these companies struggling today? How do they fail at a relatively similar time? Are all these projects and companies scams? Has the Federal Reserve caused this? The answer is simply no. As I said, the market gave no problems in web3 and crypto projects, the market simply revealed rotten below. The problem is a liquidity problem and not necessarily a technical problem. We saw a “gold rush” during the last market run from autumn 2020 to spring 2022. This euphoric market rush meant increased competition. Higher competition created an environment where two things emerged:
Advertising
- Unrealistic promises: Projects that promise unsustainable rewards (high returns, fundamental upgrades, consensual changes, etc.) to attract buyers.
- Pure fraud: projects with economic exploitation (fraud, false marketing, theft, etc.).
In the case of Luna (who is still under investigation) we saw unrealistic promises. In retrospect, its promises of high yields were a clear red flag. Few people noticed it because there was a liquidity party. No project was innocent. Ethereum is still over-promising and under-delivering. As an outsider, I feel that Ethereum developers are being pressured by venture capitalists and investors to deliver “The Merge”. Many Ethereum users are tired of losing faith in the network itself.
What has made the soil of the cryptocurrency market so fertile for the aforementioned problems? Granted, there was a level of risk to institutional money, but in a liquid market with interest rates close to zero, it was acceptable. Therefore, the risk-on mode has been activated for retail and institutional participants. But as the race became uneven and the Fed began to change its tune as stock and housing markets began to signal an increase in risk, risky assets were the first to be sold. Therefore, risk-on mode is disabled.
To repeat, the problem with most cryptocurrencies is generally not a technical problem, it is a liquidity problem. The Fed’s announcement of quantitative easing (QT) at the end of 2021 shook the market, and the effects were almost immediately apparent to all observers. This is when over-promising projects and projects with unsustainable returns cracked under pressure from cash.
What is a liquidity problem? What is quantitative easing and tightening? Quantitative easing is how the US Federal Reserve “prints” money. The Fed credits Fed accounts for sellers of Treasury bills and mortgage-backed securities (MBS), thereby expanding its own balance sheet in the process. Support for the Treasury’s debt market allows the Treasury to issue more debt, which is financed by future taxes and must be paid by future generations. In other words, kick the can on the road. Since 2008, the Fed’s balance sheet has grown by about $ 8.5 trillion. Quantitative tightening occurs when the Fed stops or slows down the purchase of government bonds and MBS and at the same time sells these assets on the open market. Since the beginning of June 2022, the Fed has let $ 45 billion in assets fall due without replacement, but their balance sheets have only shrunk by $ 23 billion. This is increasingly creating liquidity pressure in the market, and in particular in risky markets – starting with the cryptocurrency market, of course. The Fed wants to fight inflation, and it can do so by raising interest rates and sucking liquidity from the market. Until something breaks – most likely the real estate market.
Until the beginning of 2022, the market was a block party with a cascading fire hydrant that openly supplied the market with easy cash. This liquidity fire hydrant was started by the Fed itself. Now the Fed is back to shut down the bubbling fire hydrant. The party is over.
As mentioned, they will drop the current assets limit on their balance sheet by $ 47.5 billion in assets by the end of this month. Then they will do the same with another $ 47.5 billion in July and another $ 47.5 billion in August. Then they will increase that amount to $ 95 billion from September, or at least that’s what they promised. Keep in mind that the Fed has $ 8.9 trillion in purchased assets on its balance sheets, which can take years if not interrupted by political, financial or other macro factors.
Crypto’s problem is not technical, it is a liquidity problem. Surprisingly, the party was happy and went “oh so well”, even when the scam schemes were widespread and obvious. Clearly, all the market needed was free money, who would have known? (Bitcoiners knew this.)
Where do we go from here? Jerome Powell announced an increase of 75 basis points on June 15, 2022. The same day, he admitted that US inflation is directly affected by macroeconomic factors “beyond our control” and that the Fed could change course if inflation showed signs. of decline. Other Fed members like Jim Bullard and Christopher Waller signaled a more hawkish stance going forward. However, I think there will be other liquidity problems. More pain in the short-medium term, then a long-term focal point. The party is back.
Markets will not rally until the Fed turns or brings inflation under non-catastrophic control (“soft landing,” as Mr. Powell puts it). Remember that historically, the Fed has always been successful in fighting inflation with rate hikes when they hit less than 2.5% of the annual inflation rate. Also note that the Fed has never been able to reach the previous record high interest rate since 1982. Why should it do so now?
What about bitcoins? In times of stress, I always ask myself the following questions: has what is happening changed Bitcoin in any way? The answer is always no. So I buy more. That is when generational wealth is created for you, your family and your future. Now is the time to buy because the Fed will turn, the Fed will not create a soft landing, the Fed will affect the dollar and the bond market. The Bitcoin offering is still limited to 21,000,000. Bitcoin is still rare, decentralized, unchanging, solid and focused. Crypto is doing its accounting, while Bitcoin is doing its own thing since January 3, 2009.
Every token in this latest bull market was dependent on the Fed’s easy money (liquidity). The current crash is caused by the Fed’s policy, and the same Fed policy will change again – they will be left to open that fire hydrant. So ask yourself: why invest in or repay a token or market that is subject to volatile Fed policies? While bitcoin is here and still relevant, unphased and unaffected by Fed policy. Of course, those who have come in the last few months do not believe me, but let this idea marinate in your head: the price of Bitcoin in USD at the time of writing ($ 21,800) has risen more than 100% since June 20, 2020. It is a more than 100% return in just two years. Can the Fed tighten up for two years? It is certainly not possible.
You and bitcoin will surpass the Fed. So buy more and be happy.
This is a guest post by Adam Taha. The opinions expressed are entirely their own and do not necessarily reflect those of BTC Inc. or Bitcoin Magazine.