One of the questions I hear most often these days is: “Nick – if crypto is so different, why does it sell off with pretty much everything else?”
And you know what? It’s a legitimate question with far-reaching implications for every crypto investor.
On Monday, we saw anti-COVID-lockdown protests spread in China (where the government has banned crypto – just sayin’), and the markets sold off; they’re worried that trouble in China will lead to trouble in China’s economy, which is already looking iffy, which will lead to trouble in every market.
And sure enough, crypto sold off along with everything else – because, again, of trouble in a jurisdiction that’s banned cryptocurrencies. It’s a kind of pseudo-correlation.
Of course, absolutely nothing has changed about crypto. Sam Bankman-Fried, Celsius, China – none of it matters. None of it. The case for owning digital assets is as strong as it ever was.
So, let me show you what’s really happening with these crypto selloffs and this correlation.
Major Investors Are Majorly Exposed
Gigantic market players with tens, hundreds of billions in capital to throw around like Bridgewater, or JPMorgan Chase, or Citadel, own a lot of everything. Their portfolios are so “diversified” it would make a regular investor’s head spin.
Stocks, ETFs, mutual funds, oil, coffee, platinum, corporate and sovereign paper – if you can trade it, they own it, and lots of it.
They also own plenty of cryptocurrency – about 3.3% of institutional capital is at work there. Some of that will never be sold, but a lot of that crypto is “in play.”
Now, “in play” is relative here – remember, crypto is a new asset class, and as markets go it’s pretty illiquid and volatile.
So, when these institutions don’t like the way the wind’s blowing they sell – everything from stocks to crypto. They don’t think about it in the same way as you or I do – as the ultimate long-term investment and hedge against the future – and they don’t care to recognize the huge difference between a share of AAPL, or British gilts, or Cardano (ADA).
Is it fair? No – and Monday’s China-powered selloff is a strong example of that. Is it all that logical? Not really. You can’t even legally buy or own crypto in China. It’s a non-factor, but because the institutions that own crypto along with everything else are freaked out about China, they sell.
But, like I hinted at earlier, that pseudo-correlation works both ways. When investors get happy, they buy crypto, too, and I expect buying to pick up again within about two weeks.
A New Year with New Crypto Possibilities
Some folks call it the “Santa Claus rally.” Maybe it’s holiday cheer, or maybe it’s the promise of a new year and a fresh start. Maybe it’s the relentless greed from Wall Street types to collect fat year-end bonuses.
But in the last two weeks of December, investors tend to get optimistic, and there, I expect to see a reprieve from unfounded doom and gloom.
That’s good, but in the long term, the reason we’re even in crypto in the first place is because it’s not like other assets. We don’t expect it to just track the broader market forever.
The turning point I’m expecting is going to be when all of the Bitcoins owed to former Mt. Gox users are finally paid out in early 2023. That new-year promise is going to be realized directly because that’s when the prospect of these coins will no longer be holding back crypto as a whole.
The basic idea is simple: These Mt. Gox users were Bitcoin early adopters. They owned Bitcoin long before the 2017 peak. Many of them theoretically became millionaires years ago, and have never gotten the chance to actually use any of it.
They’re not going to HODL. They don’t have “diamond hands.” What they have is a burning desire to use the fortune they’re supposed to own at some point before they die. They’re going to sell. It doesn’t matter if Bitcoin is nowhere near its all-time high because these people have Bitcoin buy-ins measured in the low- to mid-hundreds of dollars.
After they do, crypto as a whole will be in the clear. The anticipation of the Mt. Gox drop is holding back all of crypto. People are refusing to buy, knowing that a massive sale is coming.
Once the sale is over, the entire crypto sector will be open to new growth, which, in the case of fundamentally sound coins, will be able to outpace anything the traditional market can do.
That’s going to be growth that the Xi Jinping dictatorship won’t be able to affect or prevent. I’d keep a careful eye on early 2023.