4 messages cryptos are sending to equities

James Gerrish

Market Matters

As bond yields have surged in 2022 “risk off” has been one of the clearest trends over recent months, the previously high flying US tech names are already in a bear market with the NASDSQ down 29% in just 6-months. The markets had the kitchen sink thrown at it from a macro perspective and its finally succumbed to these negative influences as the Fed has gone from a supporting factor to a major headwind i.e. Quantitative Easing (QE) is being replaced with Quantitative Tightening (QT).

  • Investors aren’t confident central banks can engineer a soft landing as they hike rates while trying to avoid a recession i.e. an extremely tough balancing act.

Over the last year MM has described Bitcoin as an excellent leading indicator for both liquidity and by definition equities and the trouble is the Feds turning the liquidity tap off which is hammering this new speculative asset class – sometimes it’s hard to describe some of these cryptos which look more like a blackjack table than an investment vehicle:

  • There are around 180 different currencies traded around the world, its not just $US, $A, Pounds and Yen in FX land.
  • However, there around 18,000 cryptocurrencies in existence being traded/punted by a huge number of people who in many cases have no idea what blockchain even is!

The most widely quoted crypto is Bitcoin and it’s down almost 60% from its late 2021 high, basically double the NASDAQ losses. This month alone has seen a 30% plunge again mirroring moves in very high beta, or “risky”, stocks. One thing which has been confirmed to all but the staunchest believers is cryptos have no value as a safe haven. 

Millennials are the most likely traders of cryptocurrencies, these punters who were born between 1981 and 1996 have also been opening vast numbers of share trading accounts post-COVID, unfortunately, they are now learning that making money isn’t particularly easy – it reminds me of punters before the tech wreck in 2000.

The path of least resistance is clearly down for the likes of Bitcoin and we can easily see it halving again through the 2nd half of 2022 which is a sobering thought for risk in general. At MM while we are not Crypto traders, we will be watching it very carefully as a measure of market liquidity, something that’s obviously required for equities to advance or recover some of their losses.

Message 1 : Bitcoin is a leading indicator for that important investment ingredient liquidity and for now it’s missing from the menu.
Bitcoin

Bitcoin

Coinbase Global (COIN:US)

Some of the stories of paper wealth destruction across the crypto space are already astounding e.g. Coinbase Global founder Brian Armstrong has seen his fortune plunge from $13.7bn to $2.3bn. This illustrates that it’s not just the digital currencies themselves that are falling with the largest cryptocurrency exchange Coinbase Global (COIN US) plunging ~85% in just a few months. The maths is simple – the more people who lose money punting cryptos the lower volumes are likely to fall. Plenty of comments are already surfacing on Twitter questioning solvency across the industry, only a few months ago these same keyboard warriors were calling Bitcoin to ++$US100,000.

Even famous investors (The Social Network movie) Tyler and Cameron Winklevoss co-founders of rival crypto exchange Gemini have lost over $US2bn this year, or 40% of their wealth. These moves are delivering another clear message to MM:

Message 2: Easy money whether tulip bulbs or cryptocurrencies have a habit of vanishing as fast as they arrive – this thought should not be forgotten when evaluating new growth stocks in particular.
Coinbase

Coinbase

Huobi Technology (1611:HK)

Following on from the mainstay declines in Bitcoin and the crypto exchanges this week has seen the collapse of Tethers TerraUSD stablecoin which triggered a huge sell-off in digital-asset markets most popular tokens e.g. DeFi favourite Avalanche plunged 34% and Solana 30%. I can imagine a number of subscribers are asking what are stablecoins:

Stablecoins are digital assets which are designed to retain their value. Tether for example sells their tokens / coins for $1 which it then guarantees to buy back for $1 if customers want to redeem. Theoretically, they do this by pegging the coin to the $US and crypto assets using hedging algorithms.

The trouble is hedging can only go so far when consumer confidence stampedes in one direction and in the case of TerraUSD (UST) the result has been frightening this month with prices plunging to 45c, I would hate to be a forced buyer of something for $1 that was trading at 45c! There are currently dozens of stablecoins whose market value was over $185bn late last year. They exist simply as a bridge between crypto land and traditional finance, they should be a streamlined and efficient way of using bitcoin etc through different exchanges but so far this is an unregulated marketplace and problems like this weeks are likely to expedite changes on this front.

The short term issues with giant Tether who reportedly have $US69bn in assets is around whether they keep their promise to maintain the 1:1 exchange rate, something which is really hard to comprehend in a free market world especially as the company is backed by large short-term loans out of China!

Message 3: only invest in assets/stocks that you fully comprehend.

Asian listed Huobi (1611 HK) has its own stablecoin which has certainly not helped performance over the last year.

Huobi Technology

Huobi Technology

The first half of 2022 looks set to deliver a huge relative performance victory for defensive style investments – definitely not crypto currencies! While there will be twists in the road we believe this trend will be maintained into 2023 hence any strong bounce in high growth / valuation stocks should be considered as selling opportunities.

Message 4: Keep it simple in the current volatile environment, quality businesses are the way to invest i.e. portfolios should almost have a boring bias.

The Bottom Line

MM likes our 4 messages from today’s brief look at the volatile but interesting crypto space:

Message 1: Bitcoin is a leading indicator for that important investment ingredient liquidity and for now it’s missing from the menu.

Message 2: Easy money whether tulip bulbs or cryptocurrencies has a habit of vanishing as fast as it arrived – this should not be forgotten when evaluating new growth stocks in particular.

Message 3: only invest in assets/stocks that you fully comprehend.

Message 4: Keep it simple in the current volatile environment, quality businesses are the way to invest i.e. portfolios should almost have a boring bias.

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Portfolio Manager
Market Matters

James is Portfolio Manager & Primary Author at Market Matters, a daily investment report with over 2500 subscribers that offers real market insight. He is also Senior Portfolio Manager within Shaw and Partners heading up a team that manages...

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