Examining the macro impact on crypto markets

31.08.22 01:10 AM By Stormrake

The Rake Review: August 2022

Watching the FED

What a huge month of news and events we have just had. The European Energy crisis is continuing to get worse, Inflation and Interest rates march on, as crypto markets edge closer to the ETH Merge. But all that takes a back seat to some unelected officials (Jackson Hole - Fed meeting) deciding the price of every asset market and money market in the world.

Strategies for Investment Alpha (performance above market):

Pick Randomly (Gambling)
Trade based on someone’s advice
Pick based on Trend (Technical Analysis)
Pick based on Analysis (Fundamentals)
Combine Trend and Analysis
Trade based on Early info
Trade based on Inside info
Trade based on Fed announcements

As I went from 16 year old share investor to my current abilities, I went through the stages above (all apart from #7 of course). As I grew in knowledge and experience I went from losing money to better and better returns, however I always had the feeling that I was missing out or leaving something on the table. Despite improving my technical and fundamental analysis skills and despite improving my speed of info capture and the quality of information I could crunch I realised that you can’t consistently beat the market unless….

...unless you were a fly on the wall at Fed meetings (FOMC) where 12 people decided the price of money.

They do this by setting interest rates and money supply. This action affects the relative price of all currencies but it also affects the price of all financial markets as a flow on effect. That’s Bonds, Stocks, Property, Energy - everything.

So if you are the world’s best crypto analyst and you know everything about crypto as well as have excellent technical analysis and you are in tune to market rumour, you will still get beaten by the trades of someone who has inside information on what the 12 Fed Board members are thinking.

This month saw a meeting of the financial elite at Jackson Hole. The Fed Chair J Powell, took only a few minutes of his speech to the media to smash worldwide markets for crypto, stocks and bonds and soon property. How is this considered capitalism? How is that fair? How is that acceptable?

Above is a graph showing how Stocks (SPX) and Crypto (BTC) have become highly correlated. Worse still, they are strongly (inverse) correlated to the price of dollars. This means you cannot trade one market in isolation. Again, 12 unelected people decide on the dollar price and that moves all other markets. The reason your stocks and crypto are falling is because the money printer has stopped.

Below is the money supply chart showing that the Covid-19 era money printing has ceased, strangling financial markets.

Europe faces an energy crisis

Let’s move on to what’s happening in energy. You may have heard of Europe experiencing an energy crisis. Here is what's happening in England, where consumers can no longer afford their energy bills:

There are calls to stop paying altogether as energy prices skyrocket and families and small business can no longer afford the bills. This is expected to get much worse in the Northern winter.

This is Germany where their love of Green energy is dwindling:

The tide seems to be turning against Green energy as people realise the feverish push for green energy may have caused or at least exacerbated the current problem.

Here is a German wholesale energy price chart:

Germany spent years adding wind and solar to meet internationally agreed green targets. This lowered prices during the day and squeezed out coal. No new coal or gas generation was built in part due to profitability and in part due to regulation and uncertainty. Now with gas shortages caused by the supply issues, linked to the Ukraine War, Germany is lacking energy heading into winter and prices are skyrocketing. This leads to higher retail bills and is followed by non-payment as people and businesses stop being able to afford energy. This in turn could lead to retailers of energy declaring bankruptcy or refusing to accept new customers as they are the ones that wear any bad debt from their customers. If that persists energy retailers go broke and the government steps in to be the retailer of last resort. Effectively that ends in full nationalisation of the energy industry and the end of retail competition. In this situation taxpayers would foot the bill for any subsidisation of energy by the government energy retailer. Of course the government could choose to bail out all the retailers but the affect is the same as taxpayers eventually foot the bill.

Higher prices for energy could also lead to complete demand destruction, industry will shut very soon if there isn’t a quick solution. With the whole world relying on German produced specialised tools and goods this is another supply chain issue for the world but a very real energy crisis for German families.

Not all Doom and Gloom

The developments above paint quite a grim picture of the world but as always, it's important to have a balanced perspective.

Here are 5 positive takeaways from the month:

The Bitcoin network is still strong. Bitcoin is still decentralised, largely unaffected by the energy crisis due to geographic spread and adding new users and traffic.
Last week we recorded a video looking at Energy and Bitcoin mining discussing how mining will move to the lowest cost location.
Australia’s mineral rich landscape coupled with plentiful sun and wind should protect us somewhat from German style issues and also cushion any world recession shock.
Australia is beautiful and heading into summer. Take a break and get outside this weekend. You can still have a great meal in Melbourne while watching the sunset or take a fishing trip and enjoy the waves. If you live in Sydney avoid public transport and get down to the harbour.
Shaq visited Melbourne and some of our clients got to see the NBA champ. The AFL finals are about to start and the footy is great to watch this season. The mighty Dees will be looking for back to back flags.

Market update

Here is the fast five of what you need to know about the crypto market in August 2022:

Correlation between BTC, SP500 & DXY is at an all time high. Basically there is only one market, which is the FED balance sheet.
BTC/USD is down 14.5% whilst ETH/USD shed 8.9% for the month
ETH has outperformed BTC on the back of speculative excitement surrounding the upcoming merge
Large liquidation cascade taking out a lot of leverage from the system - approx. $771M USD wiped in 24 hours
Football fan token CHZ/USD has been the best performing token - up over 62% in anticipation of the 2022 world cup

Video of the month

The Dollar Milkshake Theory accurately describes the ongoing macro climate and will help you understand why the US dollar is strengthening despite tough economic times.

In the news

An exciting project to scale Bitcoin to the billions has released its official website at https://fedimint.org. This looks to be a big deal in terms of scalability, functionality and privacy for bitcoin. We’ll be following this project closely and will certainly write it up in future
The US government passed a bill called the ‘Inflation Reduction Act’. It contained a budget allocation for 87,000 new IRS agents
The US has forgiven Student Loans at a significant cost. The move has a lot of critics but they are getting shamed by a tweet thread from The White House itself
Tornado Cash sanctioned which causes massive implications on free speech and open source software development
Huge institutional development with one of the worlds largest asset managers, Blackrock getting involved. This is a major player adding to adoption of BTC.

Education

The Ethereum Merge is fast approaching and is set to occur on Tue Sep 13 23:08:01 UTC 2022.
In our Thunder Trading updates we have already covered the merge in great detail, as well as understanding the difference between proof-of-stake and proof-of-work. We also covered the implications of a potential hard fork and what this means for the Ethereum.

Get up to speed via the articles below:

Memes

Trump made some outrageous claims about German energy at the UN — and the German delegation’s reaction was priceless pic.twitter.com/izpa2fKC3B
— NowThis (@nowthisnews) September 26, 2018