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After a Long Hibernation
We have come to the end of the low interest rate era. A nearly 13-year bull market that saw massive economic expansion and covered nearly the entire existence of crypto—which sprang forth from the 2008 Bitcoin white paper. If you include the crash and recovery from the 2020 Pandemic, this is the longest bull market in history. But now it appears to be coming to an end.
The S&P 500 briefly entered bear market territory on Friday, crossing the threshold marked by a 20% drop from the trailing 12-month high on January 3rd. By the end of trading, the market had jumped back above the threshold, currently sitting just shy of 19% down from the previous year’s high.
A 20% drop from the previous year’s high is the traditional indicator of a bear market. But these times have been anything but traditional, which leads some to wonder if the 20% indicator signals anything except extreme volatility or simply an overheated equity market fueled by low rates.
The Pandemic Market Crash of 2020 caused a steep sell-off, crashing the market by 35.48% in less than two months. Equities rebounded seemingly overnight. The market recovered all losses within 147 days.
In the recovery from the Pandemic crash, Bitcoin saw its largest period of growth to date. The leading coin’s price shot up 1,057.78% in 392 days. The beginning of the blue window in the chart below is the lowest point of the Pandemic crash.
Notice the tight coupling between the bottom of the Pandemic crash, and the ensuing measures the U.S. government promised in order to prop up the economy and restore stability to the equity markets. Although the S&P 500 continued upwards in a nearly unbroken straight line, crypto experienced a sell-off from April ‘21 to June ‘21. Bitcoin tumbled back to $28,792 at the June ‘21 low, before exploding upwards to its all-time high of $69,044.77 in November ‘21.
By the time the S&P began its current downtrend (noted by the yellow line on the left half of the chart below), the total crypto market cap had already fallen over 24% (noted by the yellow line on the right half of the chart below).
The preemptive sell-off in the crypto market is largely attributed to the anticipation of the Fed raising rates and the effect that would have on high-risk assets, which categorically encompasses most if not all of crypto. In taking a step back to get some perspective, I consider the preemptive sell-off in crypto to simply be profit-taking and speculation around the performance of crypto as a risk asset in a higher-rate environment. I don’t view the euphoria of the last 24 months or the impending sell-off to indicate any structural risk to the long-term trend of digitization.
Digitization is crypto’s raison-d’être. We are not going back to an analog world, and much of the behind-the-scenes technology that controls the global financial system is so antiquated that it may as well be analog. SWIFT is outdated. Interbank transfers are slow and outmoded. These ancient systems carry the weight of our global economy. Meanwhile, distributed ledgers are decentralized, efficient, immutable, and anonymous. Any analysis of crypto as a risk asset misses the real narrative.
The only narrative worth investing in is digitization, and the analysis is simple. Is the world going to be more digitized than it is today in 10 years? 20 years? 30 years? 50, 100, 200 years? Hopefully, your answer is yes to all of the above. Another question: are nation-states, as an organizational concept, getting stronger or weaker? Will the future look like siloed economies within borders trading with each other?
If you believe in increasing digitization and a slowly dissolving nation-state, then the best technology we have to facilitate a global, distributed financial system is distributed ledgers—so if you have the appropriate investment horizon, there is no better narrative to bet on for the next 100 years.
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