BitMex CEO: How will the cryptocurrency trend next year, and how should we make decisions?

Author: Arthur Hayes

Compiled by: Block unicorn

The strongest signal for the price of anything is the collection of human will. As a society, we use the form of currency as an abstraction of the energy spent to maintain our production. Prices tell us how much energy can balance the supply and demand of a given good or service. When society distorts pricing signals, supply and demand become unbalanced, leading to energy waste. Waste enough energy, and civilization will decline; hope will be replaced by a new social structure that organizes energy savings in a better way. With all the exciting developments in cryptocurrency, both current and future, we must never overlook the most important factor in the current excitement… BOOLMARKET (market).

Yes, the technology must work and indeed… sometimes. However, if we are heading towards a tokenized world, then the price of tokens representing specific crypto technologies or communities is the simplest way for outsiders to understand if it is successful. But if the unit of account is tied to the money printing of central banks/governments, then PRICE = SUCCESS is easily distorted.

If the quantum of scale is increasing every year, how do we judge the true energy value of something? Or worse, if the metrics are merely based on the whims of those who only care about their survival in the office, the political drama of fallible individuals. While many crypto natives benchmark their wealth against Bitcoin (and increasingly against Ethereum), the vast majority of humanity views their net worth as some derivative fiat currency pegged to the dollar.

The astonishing growth of all cryptocurrencies since being eliminated in March 2020 has led some to believe that superior technology is winning. This technology is so amazing and transformative that adoption rates will not only increase but accelerate. With this success, many asset prices will continue to rise exponentially. You might think to yourself, "This shit is too bright; I only look at logarithmic scale charts."

However, the simplest way to generate buzz and clickbait news articles and draw eyeballs to specific projects is through price. Earlier this year, an NFT artwork was purchased for $69 million at a Christie’s auction, laying the groundwork for an explosion of interest in this technology-supported art form. Talent and technology have always existed, but getting the world’s attention on the big purchases of everything NFT has been the challenge.

Any token price is a combination of technological and monetary conditions. The difficult part is determining the percentage weight of each factor. The decisions made by the two economies in the US and China in the next quarter will determine the extent to which monetary conditions support the further appreciation of the cryptocurrency complex.

The technological improvements offered by crypto become irrelevant at this point because current expectations are so high. Many TradFi research analysts who previously scoffed at various aspects of the crypto market are now singing its praises, calling it a transformative advancement. Many politicians around the world recognize that the way companies, governments, and individual actors interact is inevitably about to change due to cryptocurrency. A bright future has arrived, with only disappointment waiting. This does not mean I am pessimistic about cryptocurrency completing its mission in the short term, but it does mean that increasing users at the expected rate will not yield huge returns.

There are three types of cryptocurrency allocators, each of whom will change their portfolios based on their outlook for Q1 2022.

1. Some must decide whether to allocate more fiat currency to cryptocurrency. They are primarily focused on the amount of currency devaluation that will or will not occur. "Should I sell dollars to buy Bitcoin or Ethereum?" Their benchmark performance exceeds the growth of the fiat currency supply.

2. Some must decide whether to allocate more Bitcoin or Ethereum to other types of tokens. They are primarily focused on finding projects where technological impact or user adoption will grow rapidly, thus pushing prices above Bitcoin/Ethereum. "Should I sell Bitcoin/Ethereum to buy Solana, Cosmos, Terra, etc.?"

3. Finally, some must decide whether it is time to liquidate their crypto assets and return to fiat/government bonds. They must determine whether this is part of a cycle where the cryptocurrency complex declines by 75% - 90%. They want to protect the value of their wealth in terms of commonly used hydrocarbons like oil and gas.

Monetary policy decisions in the US and China affect groups 1 and 3. Group 2 can create independent value to offset a poor monetary environment, but this will only happen if larger self-sufficient economies emerge, such as open metaverses and excess DAOs. These forms of crypto organization are still in their infancy and cannot fully eliminate conditions favoring cash and bonds over financial assets.

This may sound repetitive, but this iterative dilemma aligns with the cyclicality of human society. Our collective actions follow predictable wave-like progressions. It’s as if human society purely exists in a carnival. A known baseline increases the melodic progression, guiding us from introduction to collapse, then descent, leading to a rebirth, and death into a new orbit. After completing this cycle millions of times, we hope the overall trajectory is progress, but we cannot dismiss stagnation and regression as impossible.

Andrew Collier provides excellent bottom-up data on the Chinese economy, showing that wealthy Chinese are heavily investing in real estate. The central government supports developers and speculators with low-interest loans. Large state-owned banks (often referred to as SOEs) are eager to lend to developers and homebuyers. In the face of real estate issues, the People’s Bank of China lowers reserve requirement ratios and reduces credit costs, which we can interpret as a signal that cheap credit flowing into China (and subsequently the world) will boost the prices of various risk assets.

If the East joins the monetary easing frenzy, it would be a positive development for the Federal Reserve. Because, as I will explain in the next section, the political heat felt by the Fed regarding the necessity to control inflation may force senior officials to raise interest rates in the first quarter of next year. If China continues to ease aggressively to maintain its economic growth model, the Fed can tighten monetary policy without negatively impacting the prices of US and global risk assets. It can begin to work more aggressively to curb inflation and address certain voters' concerns without hurting the wallets of the wealthy.

I have 99 problems, and deflation ain't one

You know it’s bad when you have to completely change your "inflation is transitory" narrative on a dime—because the government realizes it cannot fool the masses into believing that the highest inflation readings in nearly 40 years are benign and temporary.

Jerome Powell says it’s time to stop describing inflation as "transitory"

As I mentioned in the chain reaction, I believe the Democrats will split their approach in the 2022 midterms due to inflation driven by fiscal and monetary factors. Like a good government employee, the Fed Chair always does what the big shots want, regardless of his party. The President now needs to whip inflation, and he has called on the respected Federal Reserve Board to change their stance.

Now, the Fed Chair is alarmingly announcing that the pace of "tapering" will accelerate.

Powell vows to speed up tapering, markets drop

Many market participants naively believe that the fundamentals of the stock market—and general risk assets—are supported by real economic strength rather than reckless money printing. Whenever the Fed hints at reducing its indiscriminate bond-buying pace, the market reacts negatively over time.

One might argue that Bitcoin and Ethereum losing over 20% of their value on December 4th is a signal from the crypto market indicating a significant drop in risk asset prices. Given that the crypto capital markets are the last remaining free markets globally, they serve as the only functioning smoke detectors. The S&P 500 also fell, but it dropped about 1.55% over the five days from November 29 to December 6 (while Bitcoin fell 16%).

To put these returns in context, I calculated the number of times the 5-day returns (assuming they are negative) exceeded the 5-day negative returns, starting from November 29 and using 2021 data. For the S&P 500, 31% of the 5-day negative returns were higher, while for Bitcoin, only 5% were higher.

I believe that Bitcoin has greater predictive value regarding future monetary conditions than any other asset. That’s because Bitcoin is not directly manipulated by global central bank purchases (like stonks and government/corporate bonds). Any financial asset on a central bank's balance sheet is subject to price targets for political motives. Given that the Fed is still purchasing over $100 billion in bonds monthly, the negative impact of halting bond purchases and potential interest rate hikes will only manifest in the coming months.

One might argue—and many already have—that the surge in crypto leverage positions led to the weekend's crash. Undeniably, this is a contributing factor, but one cannot overlook Bitcoin's forward-looking value in predicting changes in the global fiat liquidity regime. The fact that global retail and institutional market participants can congregate in a free market Bitcoin and express their beliefs about whether fiat currency will become more expensive or cheaper indicates that Bitcoin provides a good signal of how the market interprets changes in Bitcoin. The Fed's statements and its forward-looking monetary policy.

The Fed's non-secret mission is to make global investors feel wealthy by supporting the S&P 500. But they can only do this to a certain extent—the political demands of inflation must take some action. Something is changing the narrative, acknowledging that inflation will not dissipate quickly but will accompany us for a while, signaling to the market that the Fed is seriously considering changing its strategy to control inflation in the medium term. Hopefully, the Democrats have some time before losing Congress and the Senate in November 2022.

If the Fed follows up on their statements in the December meeting and raises the tapering pace from $15 billion to $30 billion per month, then the March 2022 meeting will suddenly become an opportunity for potential interest rate hikes. While a small rate hike may not cause significant damage, when starting from zero interest rates, bond prices react sharply in a way that is very unfavorable for long-term holders. This is just the frustrating nature of bond math at the zero bound. Similarly, I cannot understand why anyone would continue to hold government bonds with negative real yields. It must be because most asset managers are good at having the necessary pedigree and respect for orthodoxy, which is more beneficial for success than protecting investors' capital.

The situation is equally dire for stonks. Similarly, inserting a 0% or very low discount rate into any terminal value calculation in discounted cash flow models makes your lousy nonprofit look like it should be owned by Berkshire Hathaway. However, even a tiny change in rates (based on percentage changes) can significantly lower your steam appliance company's "fair value."

We all think the meme stonk crowd doesn’t do math, but their response to negative real rates is as diligent as any trained market professional. They buy, buy, and then buy some more. Diamond hands, bitches!

Continuing with crypto, it’s the same story. Loose monetary conditions have facilitated an astonishing growth in adoption across all aspects of the ecosystem since March 2020. By March 2022, technology will not have changed significantly, but monetary conditions and the overall tendency of the market towards any risk asset—lest they fall into rapidly depreciating fiat currency—will rapidly deteriorate.

Politically, the US cannot continue to stimulate the economy with free money. High oil prices and empty shelves provide voters with concrete evidence that stimulus checks and the Fed's money printing have become very detrimental… policies that directly harm their wallets. Most of them do not have enough stonks to benefit from the cheap money flowing into the market. Their wages are stagnant, and costs are rising; a toxic mix that leads to anger at the ballot box. So the Fed gets a new hymn book, and they sing spirituals like Mahalia Jackson.

In the room above the [POTUS]

Sitting at His blessed feet

Confessing my sins there every day

Sweetly asking for His mercy

Squid Game

The East begins to ease monetary conditions. On the other side is the US, where due to the electoral politics of 2022, the US needs to show a stance against inflation so that the ruling party has a chance to remain in power.

Chi-Merica is the Janus of the world economy. The economic models of both sides are interdependent. China needs the US consumer market to sell its exports. The US needs cheap Chinese labor so that its businesses and ruling class can continue to earn above-average returns, keep labor's share of income low, and maintain the prosperity of its asset markets.

The Fed will continue to tighten monetary conditions until stonks drop (I believe the Fed's sell price is 20% lower than the historical peak of the S&P 500), or until certain parts of the US Treasury market cease to function normally. By easing policy simultaneously, it allows the Fed to reverse the largest expansion of the money supply and fiscal deficits since World War II.

As we approach the end of the year and the first quarter of 2022, I don’t know how we buy Bitcoin at $69,000 or Ethereum at $5,000. However, I can imagine a chaotic, sideways, boring market, accompanied by slight downward fluctuations, followed by a mild recovery. Therefore, when I return to the three types of cryptocurrency investors, this is my feeling.

1. For those deciding whether to allocate more fiat currency to cryptocurrency, waiting is worthwhile. I don’t think money will become freer or easier. Therefore, it’s best to remain cautious until the dust settles after the Fed raises rates in March 2022 or June 2022. If the Fed raises rates and then quickly returns to a zero interest rate policy and aggressive bond buying, watch for a surge in risk asset prices. When the Fed signals a return to business as usual, it’s time to back the truck up.

2. For those who will maintain macro exposure to cryptocurrency but must allocate among various coins, standout coins may be related to the metaverse, Play-2-Earn, or NFTs. The success of these themes does not depend on global monetary conditions but rather on actual changes in the behavior of actors whose lives can be significantly improved by adopting new forms of technology.

3. For those who enjoy trading around their cryptocurrency and fiat positions, I think it’s a mistake to believe that a stronger dollar and long-term bonds will perform well in the medium term. Similarly, at best, monetary conditions will be stagnant, and at worst, they will become more restrictive.

It’s a draw, but don’t get too cocky, or you might get burned, wrapped in a box with a big pink bow.