What’s Going on With Cryptocurrencies: The Big Picture (Part 1)

(Please note that our senior digital analyst David Grider, who writes our weekly crypto column, is sitting in for Tom Lee in this particular note. This is part one of a three-part series. Tom will return to writing Tom’s Take shortly) Part 2 is available here. Part 3 is available here.

In the current market environment, with the sharp price volatility seen in Bitcoin (BTC) and cryptocurrencies generally in the past 12 months, it’s fair for investors to ask, “What’s going on?”

While follow on contagion and spillover from the global economic chaos is the easiest answer, I think that the situation deserves a closer look, as there might be market nuances worth examining in detail.

I see a number of potential issues that cryptocurrency investors need to better understand. Last month on March 12th and 13th we saw unprecedented panic selling, with exchange inflows spiking sharply and prices crashing by 50%.

Secondly, the trading infrastructure, the plumbing so to speak, saw liquidity evaporate and spreads blow out amid a huge surge in transactions, which created bottlenecks and backlogs that exacerbated the problem. Liquidity and spreads still remain well below pre-selloff levels.

In any big selloff, there are cascading effects, such as structural liquidations and deleveraging. Some sellers must get out at any price and that pressures prices to the downside more than might otherwise happen in a “normal” downdraft. This has reduced the credit leverage overall in the crypto economy to new low levels. While it puts prices on a healthier footing, the largest lender, Genesis Capital, has stated they’re taking a step back from extending credit during this time of uncertainty.

That may slow the releveling of capital back into crypto markets, while other newcomers like BlockFi have been expanding market share by lending to miners that would otherwise have trouble finding credit.

Looking at the supply dynamics, it appears that the turnover was mostly normal and that a good deal of selling came from recently moved coins. This tells us that the sellers in the last wave down came from (1) newer holders who entered the market over the last 6 months and (2) those that were active traders, possibly institutions that were margin called on crypto or broader portfolio positions and needed to raise liquidity.

What About the Macro Fundamental Perspective?

The smart investor takes a long-term perspective, but unfortunately, it’s not entirely comforting if your holdings are down 70% and more from their all-time highs, as might the case for some.

As the famous saying goes, price is what you pay and value is what you get, and in crypto investing, value matters more than price as well. The revaluation put cryptocurrencies prices in a “value buy” range after the sell-off that they hadn’t seen since December of 2019. Prices have recovered by 70% since, and while they’re not as cheap, investors who are underexposed to crypto could use these levels and pullbacks to accumulate their core ideal position.

History is often useful to consult, and investors should consider what is it telling us now about the current risk-reward. More on this below. Additionally, flows might matter more than fundamentals right now. Valuations are largely moving in unison and they look much cheaper across the board.

Part 2 is available here. Part 3 is available here.