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Crypto Meltdown, Who Crashed the Party?

By Andrew Aziz  |  
Andrew's Newsletter  |  
May 12, 2022

Dear Traders,

As I am writing these words, crypto’s death spiral continues, with Bitcoin below $27,000. Everyone is now looking for the person responsible to point fingers at. To me, this crash was caused by tech bro hubris and degenerate gamblers who were pouring money into tokens named after dogs, digital drawings of monkeys, and algorithmic stablecoins promising 20% payouts. They’re the same people who make fun of you or bully you for asking a question about crypto. Ask a tech crypto bro like Pomp what is the intrinsic value of a cryptocurrency like Bitcoin, and why it should have such market capitalization, and then see how they respond by humiliating you and accusing you of being illiterate and “super” stupid. All being said, this market meltdown is nonetheless really fun to trade! Unfortunately though, I am not in front of my PC and station, but I can see some very nice trading by Thor and Jarad at the Open. Tomorrow, I promise that I will be in the office! For the time being, please watch their recap on our YouTube channel.

Today’s Global News and Financial Recap

The European Central Bank has lagged behind in the global race to raise interest rates, but it may be starting to catch up. President Christine Lagarde yesterday joined the pack of euro-zone policy makers potentially willing to lift borrowing costs in July, with officials in Frankfurt increasingly open to getting them above zero before the end of the year. With inflation approaching four times the bank’s 2% target, Lagarde signaled yesterday a readiness to enact in two months’ time the first rate increase since 2011. She also said the process of increasing exiting subzero monetary policy will “be gradual”. There is a brutal sell off underway in the EU right now with an over 2% drop as of writing this newsletter.

Crypto’s current bout of volatility, which saw Bitcoin drop as much as 10.5% this morning before recovering, continues amid uncertainty over the fate of stablecoins. Terra, one of the more exotic offerings, has dropped 99.95% from the 1:1 peg with the dollar in the last week. The much more widely used Tether stablecoin, which claims to be backed by actual assets including the US dollar, has also seen its peg come under pressure. The drop in Bitcoin, coming amid a much wider global risk-off move, again brings into question the cryptocurrency’s function as a hedge against inflation.

At Bear Bull Traders…

Today, for Thursday Mentorship, John is leading his mentorship session starting at 11am ET, Ed’s mentorship session begins at 4:30pm ET (with 30 minutes of after-hours trading commencing at 4pm ET), and Thor is up at 8pm ET. These are excellent opportunities to learn from three exceptional traders.

And Finally…

Are we in the midst of the biggest meltdown of the financial markets and, similar to frogs in a pot of boiling water, we can’t feel it? Perhaps. One can compare the collapse of stablecoins such as Tether, which were supposed to be stable toward the USD, and COIN’s near bankruptcy, to the situation Bear Stearns and Lehman Brothers were in back in 2008. The bond market is the biggest market of all and can tell us many things. COIN’s bonds are now trading at almost 65 cents on the dollar, meaning people are accepting a 35% loss in order to get out of this junk bond. It’s exactly like the subprime mortgage crisis of 2008.

Who is responsible for such a meltdown? Definitely the US central bank and, to some extent, Washington politicians. Controlling inflation is on the minds of all politicians in this election year, but reports are showing a persistent inflation that is mostly externally enforced. John Carter posted that the Fed better accept this normalized inflation or they’ll blow up the financial system. An aggressive rate hike does not solve supply chain issues, or end the war in Eastern Europe, or lower energy prices. It only destroys the financial system in a way that leads everyone to run toward safe havens such as US Treasuries. When your risk-free return becomes 3-5%, why would you keep your money in risky assets such as the stock market? You don’t. You will get rid of them, as is happening now, and buy Treasuries.

Real inflation is not 8.5%, after all, considering the 5% average wage growth that’s been reported. It is really around 3.5%, which is still elevated but more manageable. The sell off of markets will catch up with Washington, and November’s election results, just like it did in 2008. As recently reported in Politico, the current Administration has yet again emphasized that they do not see the stock market as the state of the economy and they do not follow it daily. But, in reality, the stock market is the state of the economyand everything is interconnected. Killing the stock market by aggressive financial tightening in order to control inflation, while knowing that this inflation, with some justification, is being mostly externally enforced by Putin and China, is like chopping off your stubbed toe to end the pain you are suffering from in your foot.

The Federal Reserve’s only way ahead is to be less aggressive in rate hikes and support stability in the financial system. Washington also needs to accept that inflation data has shown a level of persistence to the domestic policy that is now mostly external. They need to plan for the new “reverse-globalization” path ahead so that a war in Eastern Europe won’t send your grocery store purchases through the roof. And, by the way, Saudi Aramco is now the largest company in the world. It’s ahead of the jewel of the west, Apple, for a reason.

To your success, and see you on Friday in the office!
Andrew

PS: If you have not already, I urge you to try out our free web-based trading simulator at stocktradingsimulator.com. It’s conveniently available 24/7, whenever you have time to practice honing your trading skills.