BitMEX founder: Bitcoin is highly correlated with the Nasdaq index and may test $30,000 in June

Original Title: "Arthur Hayes: The Stock Market May Decline, Bitcoin Will Test the $30,000 Level"

Written by: Arthur Hayes, Founder of BitMEX

Compiled by: Kyle, DeFi Path

Buy or Sell?

What is most shocking is that too much time is spent debating whether to buy or sell. The charts that provide guidance depict the emotional rollercoaster experienced by a group of people in pursuit of profit.

Electronic trading dominates most markets and is primarily determined by cold, calculating algorithms—but it is important to remember that these algorithms are constructed by bloody, irrational humans. Humans ebb and flow in a somewhat predictable cycle, and thus the markets we live in are also cyclical. It goes without saying that the madness of the crowd forgets that we move like a sine wave and uses straight lines up and down for inference.

We cannot identify the cyclicality of all markets, leading us to overlook the inconvenient fact that we wish to enter the upper tier of assets. One inconvenient fact plaguing cryptocurrency at this juncture is that cryptocurrencies are developing in sync with debt-based non-free risk asset markets, such as global developed market stocks. Loyal followers of Satoshi are doing their utmost to create a counter-narrative based on technological truth.

The lifeline of our hated debt-based non-free capital markets is fiat currency printed by central banks. As I have been impressing upon readers since the beginning of this year, the bankers who control the fiat currency Tower of Babel have finally awakened and decided to hit the pause button on the printing press. And in this silence, the ugliness of the TradFi asset markets has become apparent.

In a previously published article "Energy Cancelled," I argued that the oil/Eurodollar global financial architecture ceased to exist the day the West decided to seize the Russian central bank's legal reserve assets. This action ushered in an era where it is entirely reasonable for any sovereign nation outside the US or EU (a.k.a. the Global South) to "save" gold and ultimately "save" Bitcoin. Within a three to five-year timeframe, this possibility will lead Bitcoin to reach $1 million and gold to $10,000.

While this optimistic prediction is exciting, we live in the now, not the future. Many of us must now decide whether to sell fiat currency and buy cryptocurrencies. I continue to advocate for patience. So, lace up your running shoes, and let’s take a brisk walk down a street filled with infographics that clearly depict the disastrous outcomes of standing on the edge of a cliff.

Bad Tech Giants

Whether reasonable or not, the market conflates cryptocurrencies with large tech companies. The Nasdaq 100 Index (NDX) represents large tech companies.

Bitcoin 10-Day Correlation

Bitcoin 30-Day Correlation

Bitcoin 90-Day Correlation

Ethereum 10-Day Correlation

Ethereum 30-Day Correlation

Ethereum 90-Day Correlation

The short-term (10-day) correlation is high, while the medium-term (30-day and 90-day) correlation is moving upward and to the right. This is not what we want. For me, before the NDX crashes (a 30% to 50% retracement), I wave the flag in support of selling fiat currency and buying cryptocurrencies, and the correlation across all timeframes needs to be significantly reduced.

As long as the 10-day correlation remains high, we must maintain a defensive stance on our cryptocurrency positions. If you believe in unicorns, Loch Ness monsters, and the Easter Bunny, then you might believe that large tech companies will not be affected by rising nominal interest rates, deteriorating global fiat liquidity, and declining economic growth. But this is cryptocurrency, and the magical internet money can corrode the brain, so let me provide more pictorial evidence to try to wake you up.

Roaul Pal made a very compelling argument—I believe, at least in the long term, that computers and the internet have ushered humanity into an exponential age. In this age, valuations are not based on discounted future cash flows but rather on Metcalfe's Law (a principle when it comes to the internet: users = value).

I have no objection to this, but when money becomes cheap (or nearly free), investors like to act as if we are on the cusp of an astonishing technological utopia that is actually years away (see: the metaverse). Due to low interest rates, this behavior of predicting a bright future at a low price gives investors reason to pay crazy revenue multiples for various tech companies.

This is a chart showing the relationship between ARKK price performance (yellow) and the US 2-Year Treasury yield (white).

When the cost of capital for investors rises, seeing actual yields that can be converted into dividends suddenly becomes much more important. Look at the aesthetic of this chart depicting the 2-Year US Treasury yield against the ARKK Innovation Fund. Cathie Wood is a gangster betting on a group of companies—many of which are unprofitable—that thrive in the exponential age. ARKK cannot escape the shackles of the time value of money.

The performance of the NDX is not that bad, but that is only because it is weighted towards a few profitable tech companies that dominate the market. Apple, Microsoft, Amazon, Tesla, and Google account for just over 40% of the index, and their stock prices are slightly below the historical highs set a few months ago.

Ski Boots

The most important equipment for skiing is your boots. They are the direct connection between your body and the skis. When I was younger, participating in ski competitions, my ski boots were very uncomfortable (I couldn't afford better ones). Now I can afford boots that are both comfortable and perform well, and my feet do not hurt all the time.

Tight ski boots are uncomfortable, just like tight monetary conditions. The Fed and most other major central banks are currently putting on a "fight against inflation" Kabuki show. As I have said many times, the goal is not to truly fight inflation but to appear to fight inflation so that domestic politicians can continue to hold power among an angry populace. Central banks must tighten, tighten, and tighten some more, but not too much—because positive real interest rates will completely destroy the debt-based global economy. Recent Fed meeting minutes clearly indicate that even super-doves like Brainard are now calling for "aggressive" action to shrink the balance sheet and raise policy rates.

"Reducing inflation is critical. Therefore, the Federal Reserve Board will continue to methodically tighten monetary policy through a series of rate hikes and will begin rapid balance sheet reduction as soon as our May meeting. Given that the recovery is stronger and faster than the last cycle, I expect the pace of balance sheet reduction to be much quicker than the last recovery."—Fed's Brainard on inflation and recovery

This chart depicts the market's changing expectations for the number of rate hikes collected from federal funds futures expiring in December 2022. As you can see, the market's expectation for the total number of rate hikes in 2022 has increased from 3 to 9. The Fed is no longer playing.

China Can't Save You

After the 2008 global financial crisis, China stepped in and re-entered the world into expansion. China embarked on one of the largest pursuits in human history, which is printing money and building things. It's like paying people to dig holes and then fill them back in, and then dig them again indefinitely—a perpetual GDP growth machine. Yes! That is what China has done at a massive scale. Building bridges to nowhere, empty apartments—anything that can promote growth and employ workers. The externality is a significant increase in sovereign debt levels.

However, this time, Beijing is unlikely to repeat the same mistakes, and compared to its Western counterparts, it has done almost nothing to stimulate the economy post-COVID. We all know how that ends…

As global economic growth slows and enters a full-blown recession amid rising energy costs, do not expect Beijing to save Western capital markets with more fiat currency and economic "growth."

Look at the credit peaks of 2008/2009 and observe the much lower peaks after March 2020. Beijing knows it has a debt problem and seems to be trying to prevent things from getting worse. The West has to rely on itself.

Kuroda's Rocket Launcher

Japan reflects what tomorrow looks like for the rest of the world. (By the way, I highly recommend reading Professor Werner's book "Yen Prince." I have seen the documentary but have not read the physical book yet). The Bank of Japan is aggressively trying to create inflation to correct the fact that couples do not want to have children.

The "official" government inflation statistics depict a country deeply entrenched in deflation. However, most of Japan's energy is imported. Thus, while end consumers are paying more for food and travel, the official index of goods prices has hardly risen since COVID began. Other developed countries have not been so lucky.

This is a chart comparing the US Consumer Price Index (yellow line) and the Japanese Consumer Price Index (white line)

Inflation continues to remain below the Bank of Japan's target, which emboldens Haruhiko Kuroda (Governor of the Bank of Japan) to continue with yield curve control (YCC). To stimulate the ailing Japanese economy, the Bank of Japan limits the yield on 10-year government bonds (JGB) to no more than 0.25%. They achieve this by promising to buy an unlimited amount of government bonds with printed yen.

The trinity of interest rates, exchange rates, and open capital accounts is back. Japan has an open capital account, fixing the yield on its government bonds, which leads to a weaker yen (it has done so, pushing the dollar against the yen higher). The reason for the currency depreciation is that the market recently tested whether Mr. Kuroda had the courage to buy unlimited amounts of Japanese government bonds if yields exceeded 0.25%. He got the Bank of Japan's printing press going and bought bonds, bringing yields back to their original levels.

Japanese government bond yields (white line) vs. USD/JPY (yellow line)

In theory, the Bank of Japan could provide the cheap credit needed for global risk asset markets to continue overcoming gravity. The arbitrage trade is as follows:

1. Borrow yen cheaply. The 10-year yield on Japanese government bonds is 0.24%, while the 10-year yield on US Treasuries is 2.58%. You have already gained 224 basis points over 10 years—this is huge.
2. Sell the borrowed yen and buy dollars. But do not hedge the currency risk (you hedge on the left) because the yen is freely convertible. Due to covered interest rate parity, the forward points are negative. (If these terms are all unfamiliar to you, Google is your friend).
3. Buy stocks listed in the US, preferably some large tech companies.
4. You have now purchased stocks with cheaper money.
5. If the yen strengthens, you will lose money, but if you are a fiduciary, that is not your problem. When this explodes in front of you, just seek rescue from your obedient central bank. But you have already received the bonus—YAHTZEE!

If enough large financial institutions engage in this yen arbitrage trade, they can lower the cost of capital. As the cost of capital decreases, buying long-term tech stocks becomes more attractive. This activity, if done collectively, will create buying pressure.

I am a subscriber to Felix Zulauf's research. His views are very accurate. His overall argument is that the tightening of global liquidity will lead to a deep short-term correction in global stock markets.

I recently asked him whether the Bank of Japan's provision of unlimited yen liquidity at the lowest rates negates any argument about the tightening of global liquidity conditions. To paraphrase his answer, "No." He believes that the Bank of Japan's monetary support is insufficient to counter the liquidity drain initiated by the Fed.

Foolish Technical Analysis

Technical analysis is valuable if charts align with fundamentals. Otherwise, I mainly see it as a convenient tool to confiscate funds from traders eager to find a blueprint for quick profits. Unfortunately, there is no simple "profit" button.

The chart of the NDX is ugly!

On December 27, 2022, the Nasdaq 100 Index closed at a high of 16,567.50, then touched a local low of 13,046.64. Using the time-tested Fibonacci retracement levels, the NDX failed to break through the 61.8% retracement level during its rebound. A few days later, it attempted to break through that resistance level again but failed and has been declining since.

The chart tells me that the NDX will continue to decline, testing its local lows and significantly breaking below them. I believe the next stop after that is to test 10,000. Oh, where is the Fed?

The Fed no longer cares whether stock investors go up this year. That game is over. Everything is about credit.

Danielle DiMartino Booth runs another high-quality research firm, Quill Intelligence. She has worked at the Fed and conducted very high-quality research, with deep insights into the thoughts of various Fed chairmen. Last week, I spoke with her and asked what the Fed was prepared to do. She responded that Jay Powell is a lender and is deeply concerned about financial contagion in the corporate bond market. She reminded me that the Fed effectively nationalized the US corporate credit market by supporting BBB-rated companies during the COVID crash in March 2020. Without this support, the corporate lending market would become a fringe market.

She stated that when the 2-year and 10-year yield curve for BBB-rated US corporations inverts, the Fed will take immediate action.

As this chart clearly shows, at +1%, the spread has a little room to decline before inverting. When this curve inverts—I believe it will invert, due to rising commodity prices caused by the Russia/Ukraine conflict leading to weak global demand—how far will the NDX fall?

30%?…… 50%?…… Your guess is as good as mine. But let’s be clear— the Fed does not intend to expand its balance sheet again in the short term, which means the stock market will not rise.

When Will the War End?

Any compliant news agency in any country produces most of the mass media during wartime as propaganda. Instead, I rely on paid research publications that aim not to influence my views but to help me make informed investment decisions based on objective facts.

Zulauf provided an interesting perspective on the state of the war in his latest update for Q1 2022 in mid-March.

TLDR:

• The Russian army is slowly surrounding Ukrainian cities with sea access.
• Then, Russia will choose to maneuver rather than engage directly with Kyiv.
• How long can Ukraine hold out with supplies from the West before surrendering?
• How long can Europe hold out without Russian energy and food before they instruct Zelensky to step down?
• If the West escalates through actions like establishing a "no-fly zone" over Ukraine, then all of the above analysis becomes meaningless. Then, all bets are off, but this certainly will not lead to the end of the war.

On the other hand, if you believe Western mainstream media, how long can Russia hold out without the ability to trade with the West and obtain "hard" currency? This largely depends on whether global corporations cooperate with the West's sanctions on Russian energy and food exports.

Sri Lanka (cabinet resigned under public pressure), Peru (military asked to quell dissent), the UK, Spain, Belgium, Germany, Italy, Albania, Armenia, Bulgaria, Cyprus, Serbia, and Moldova (source 13 D Research). How long will this inflation-driven unrest spread to other countries? If you were a leader of such a country and cared about your life and the work of politicians, would you prefer to import cheaper Russian energy and food or sanction it and watch your people overthrow you?

After finishing the first draft of this article, I had coffee with my favorite volatility hedge fund manager. We spent 90 minutes discussing many of the topics in this article. He commented that every affected Asian government in power since World War II has fallen due to rising inflation triggered by crises after the 1997 Asian financial crisis. The only surviving government is Mahathir's in Malaysia, as he isolated the country from the world to maintain power.

The overly simplistic conclusion from the above analysis is that the war will not end anytime soon. If the war ends, it may mean Ukraine is divided into two parts—one Western and one Russian. If that happens, will the West reward Russia by immediately lifting sanctions? If you believe that, I have some Bitconnect you might want to buy.

Given that Russia exports a large amount of energy and food to the world, the trade disruptions causing rising transportation costs and prices will continue unabated. Please read the last two truly epic articles by Zoltan Pozsar to understand how difficult and expensive it is to reroute commodities to willing buyers globally in the absence of Russian exports in Europe. It will convince you that higher prices will persist, and global growth—which is a derivative of energy costs—will inevitably slow. Therefore, the slowdown in growth will negatively impact global stock markets unless supported by ample liquidity provided by central bank governors who should be combating inflation.

Crypto Safety Helmet

To summarize this article:

1. Bitcoin and Ethereum are highly correlated with the Nasdaq 100 Index. If the NDX declines, it will take cryptocurrencies down with it.
2. Like all long-term assets, the NDX benefits from falling interest rates.
3. As UST 2-year rates rise, unprofitable tech companies like ARKK are hit hard. Large tech companies (NDX) are temporarily saved by some profitable companies, but even its trading price is lower.
4. The Fed and all other central banks are fighting inflation, so they must tighten monetary conditions rather than loosen them. Japan, even with its loose monetary policy, cannot save the global risk asset market, as its heavy artillery is like a pea shooter compared to the Fed.
5. The NDX rebound failed at the 61.8% Fibonacci retracement level and will continue to decline below 10,000 points.
6. The Fed's bearish options are not based on stocks but on the US corporate credit market, which remains healthy… watch the spread between BBB 2s/10s for signs that the Fed is about to abandon its mission and push the market higher again.
7. Due to the ongoing and potentially escalating Russia/Ukraine war, global growth will decline due to rising commodity prices. This will also negatively impact stocks in the absence of a dovish central bank.
8. In fact, the NDX will fall, and cryptocurrencies will also fall.

Let me say it again—crypto capital markets are the only free markets globally. Therefore, when we enter a downturn, they will lead the stock market down, and as we struggle to emerge from the downturn, they will lead the stock market up. Bitcoin and Ethereum will bottom out before the Fed takes action and shifts its policy from tight to loose.

The great thing about a 24/7 market accessible to everyone via the internet is that things happen quickly. By the end of the second quarter this year, I believe Bitcoin and Ethereum will test these levels:

Bitcoin: $30,000

Ethereum: $2,500

These numbers have little scientific basis beyond intuition. The annoying part is that I have started accumulating some altcoins because the prices are very attractive. Although some of these tokens have dropped 75% from their historical highs, I do not believe they can escape the impending crypto massacre. Therefore, I am buying Bitcoin and Ethereum put options for June 2022.

Nothing is certain—I only attribute probabilities to outcomes and trade accordingly. I fully believe my market predictions could be wrong. That’s fine— in that case, I will only lose the premium paid for my crash protection. If the correlation between Bitcoin/Ethereum and the NDX starts to decline before a risk asset market crash, then I am wrong. I am completely fine with that outcome because I already hold long positions in cryptocurrencies. This analysis is purely an attempt to trade a short-term situation that I believe will occur in the risk market and hedge against buying attractive-priced altcoins.

Many crypto market experts believe the worst is over. I believe they overlook the inconvenient fact that the crypto capital market is currently just a 24/7 trading indicator and does not trade based on the fundamental principles of a peer-to-peer, decentralized, censorship-resistant digital network.