Crypto just went vertical and as I type this it is going back vertically…with a bounce as I edit.
What is happening?
There are four possibilities.
We have seen the bottom of cryptocurrencies.
Something bad is about to happen.
US debt ceiling.
Let’s take a look at each.
1. The bottom
With DCG and Gemini in disarray and in the spotlight with 600,000 bitcoins
in the frame of Greyscale and billions of who owes whom and how much still unresolved, linking two top ten US crypto players, with regulators barking at their heels, how can this be the bottom? The counter-argument is classic: it’s already in the price.
2. Something evil comes like this
For me the previous second peak of the bitcoin double top was caused by Afghanistan and the US withdrawal to prepare for the Ukrainian invasion. So many corrupt officials heading to the airport with bags of cash were the key to that spike because bitcoin is the perfect flight capital. A minister left $5 million on the asphalt and you can imagine he was cursing himself for not being in bitcoin. Without that emergency, the high of that bubble would have been $40,000 and the subsequent crash would have brought us back to where we were last week, $15,000 without a deviation at $60,000.
So a sudden bull run could be such a geopolitical emergency. A big Russian push into Ukraine, a regime change in Russia, a big escalation with Russia, or even worse, a Chinese invasion of Taiwan. There is also always North Korea making a mess.
Let’s hope that’s not the case and if you check US military contractors, they’re not sky high.
3. Short squeeze
One trade that comes close to the sort of thing that sunk FTX or that “bucket shops” will often play is to short clients’ positions based on their fall and they will profit from the fall. Imagine a cryptocurrency exchange that sold its depositors’ cryptocurrency in stablecoins, a big short. When the market goes down, they make huge gains on the fall in value. Now say the regulator starts breathing down his neck. Then they might frantically try to cover that short and appear to hold depositors’ crypto in the crypto that customers thought they had. This will create a powerful short squeeze. This is my favorite explanation right now.
4. The US debt ceiling arrives.
Apparently, the US Treasury thinks the mandatory debt ceiling will be reached in a matter of days and has introduced many extravagant mechanisms to stop the US from defaulting. Those cash hoards, which are huge, can last until June before the government runs out of money to pay the bills. Interestingly, the Fed stopped tightening before Christmas and at the same time a lot of money flowed into the reverse repo system at the Fed, suggesting that there was money flowing into the economy at the time as well. for no apparent reason. As far as we know, this has continued into the new year. Could this be cash entering the system for the US Treasury to use in case the debt ceiling vote turns into complete chaos, like last time? The recent election of the new president has turned into a farce worthy of South America, so raising the debt ceiling could also be a disaster, so it is better to get liquidity into the system now.
When money flushes the system, so do resources, especially stocks and the bubbly bubbly asset class: bitcoin and then everything else in cryptocurrency. This is also a good speculation about what is boosting cryptocurrencies and the markets.
Could the market predict the return of happy days instead? It’s not impossible but it seems unlikely. If there are 3 or 4 it will be short-lived. If it’s 2 or especially 1 it’s up, up and away.
In the meantime I’m not playing these train tracks and took this opportunity to re-order some loose cryptocurrencies and turn them into stablecoins.