'Full Capitulation' Could Mean Opportunity Knocking

These data require close attention. One of the biggest unspoken risks at present is of civil unrest. Lots of people have ample reason to be unhappy with the way the economy is working. The post-pandemic environment has acted to counteract a number of the inequalities that have so damaged society in recent years — but rising inflation could still negate such improvements.

Cracking the Crypto Code

Amid all the excitement in the stock market, Bitcoin is recovering. Indeed, it’s gained about 30% in barely a month. That comes after a disastrous fall, in which it tumbled far more than the S&P 500 index.

None of that stopped a number of crypto-titans from showing up at Bloomberg’s crypto conference and sounding formidably bullish. Isabelle Lee offers some analysis from the summit:

Bitcoin gives its investors a bumpy ride. Just in the last 12 months, it has gone from massively outperforming the S&P 500 to trailing the benchmark index. The world’s largest digital asset has now fallen 24% in that time frame, while the S&P 500 has slipped just about 8%.

Even so, Bitcoin’s correlation to US equities has continued to strengthen and even tends to be stronger in the midst of crucial macro events, data from Arcane Research show.

Its 90-day correlation with the S&P 500 peaked at 0.655 last week, near the all-time highs from early May, Arcane added. Meanwhile, its correlation with gold — the asset that many see as being replaced by Bitcoin — remains minimal.

This implies that the latest rebound for Bitcoin, which crossed the $23,000 level on Tuesday to move out of a narrow trading range, and even break through its 50-day moving average for the first time since April, might at least have contributed to the mini-rally in equities. Despite the rampant bearishness among big fund managers, it seems that there is still some optimism in the cryptoverse.

How to explain this? It’s easy to make sense of why equities rise. The trajectory of the stock market can be determined primarily by two things: earnings per share and the price-to-earnings multiple that investors are prepared to pay for them. When shares of companies rise, it means investors’ view of the their future profits are improving — more profitability for those involved.

But what can we extrapolate from the uptrend in cryptocurrencies? Perhaps this, too, might be attributed to investor optimism on the ecosystem’s future profits. Though for now, this has been challenging to quantify save for the small number of publicly-traded crypto firms, including mining companies.

Here’s Sam Bankman-Fried, the cherubic crypto billionaire who tried to bail out firms during the industry’s implosion this year, during the Bloomberg Crypto Summit, “Building the Future,” on Tuesday:

“Profitability was sort of a dirty word for a number of years, and it has returned to investor parlance… There’s been a substantial re-rating toward looking for at least a likely or plausible pathway toward profitability being a core component of an investment thesis.”

Note that there are few if any other fields of investment where profitability is ever regarded as a dirty word. Quite the opposite. Arguably, it’s an important moment when the sector is grappling with operating profitably, and not just hoping to see prices grow.

But that leads to a critical and difficult question. Why, then, do digital assets rise, and how?

The past few weeks have been terrible for the broader ecosystem, as the implosion in crypto prices has forced a number of firms to seek rescue. Bitcoin fell nearly 65% from its peak and was stuck in a narrow trading range between $19,000 to $22,000 as optimism evaporated in the space driven in part by the tightening monetary policy, and a few spectacular collapses.

Bitcoin has been trading around the $30,000 level for weeks now, defying predictions of a potential further decline but also struggling to gain upward momentum as the broader US market has also taken a beating.

The mood music changed over the weekend when Bitcoin, the largest virtual coin, jumped around 10% to above $23,500, a level it was last at in mid-June. The Bitcoin spot volume on Monday saw $10 billion worth of coins changing hands, while the seven-day average trading volume sits at $6.6 billion, Arcane Research data show.

Smaller, lesser-known tokens — commonly referred to as altcoins — also gained. Ether, the second-largest, at one point edged higher by 11%.

For Mike Novogratz, founder of Galaxy Digital Holdings, the “worst is over.” During the Bloomberg summit, the billionaire investor compared the recent crypto crisis, which saw roughly $2 trillion vanish, to the collapse of Lehman Brothers in 2008. (At its peak last November, the entire cryptoverse reached about $3 trillion in market value before nosediving to less than $1 trillion currently.)

It remains to be seen whether crypto’s mini-rally will hold and whether companies will ever be profitable. However, with prices stabilizing, it does at least seem fair to hope that the worst of the excesses have been wrung out. And it’s reassuring that crypto bosses are now focusing on managing their business so that it makes a profit.

Survival Tips

It’s hot in New York, and it’s very much hotter at home in the UK, which has just suffered through the hottest day on record. Britain is not set up to deal with temperatures of 104 degrees Fahrenheit (40 degrees Celsius).

So, some music to get through the swelter might include: “Cold As Ice” by Foreigner, “You Have Placed a Chill in My Heart” by the Eurythmics, “Cold” by Maroon 5, “Love Is A Wonderful Colour” by Icicle Works, “Frozen” by Madonna, “Cold Heart” by Elton John and Dua Lipa, “Shivers” by Ed Sheeran, “Southern Freeez” by Freeez, “The Freeze” by Spandau Ballet, “Let It Go” or more or less anything from Disney’s “Frozen,” “Cold” by Crossfade, “Stupid Girl” or anything else by Cold, anything by Coldplay, like their collaboration with BTS, or “Cool Monsoon” by Massive Attack.

Please note that I got through this list without resorting to “Ice Ice Baby” by Vanilla Ice. If you feel listening to that, try listening to Queen’s “Under Pressure” instead.

***

John Authers is a senior editor for markets and Bloomberg Opinion columnist. A former chief markets commentator and editor of the Lex column at the Financial Times, he is author of “The Fearful Rise of Markets.”

(Image: Shutterstock)

Copyright 2022 Bloomberg. All rights reserved. This material may not be published, broadcast, rewritten, or redistributed.