Trading Desk: “Crypto Winter” And How The Fed Caused It

At this point, everyone on Wall Street is braced for tomorrow’s Fed statement. We could see “shock and awe” if Jay Powell and company decide to raise the stakes with a 0.75 percentage point interest rate hike . . . the first since 1994. And either way, the reaction could be relief.

After all, 1994 wasn’t great for investors, but it wasn’t terrible either. At worst, you would have broken even holding the S&P 500 while the Fed was making its big moves.

And with the market currently priced for disaster, if 2022 plays out the same way, people who buy the dip here will do extremely well in the coming six months.

The downswing was savage. The turning point will be extremely profitable when it comes. It always is.

You just need the courage to buy on the way down or the superhuman insight to call the bottom. If you have the insight, you don’t need the courage. But courage is in extremely short supply right now.

Whether the Fed gives us a huge rate hike or only a big one, history is clear. The year after the huge hike was a great one, with the S&P 500 soaring triple its normal annual rate.

But there isn’t a lot of logic in buying quite yet. We won’t miss that rebound when it comes. The relief will be apparent to everyone who’s paying attention . . . and in the meantime, there’s no reason not to stay liquid.

Crypto Winter

One thing that’s clear is that as the Fed hits the brake on dollar depreciation, alternatives to fiat currency are reeling under the assault. Gold peaked in March, before the Fed got serious, and is now down 12%.

And bitcoin now has only 13% of support level below it before traders see the value of their crypto accounts back where they were in 2017. As grisly as it might sound right now, you would have been much better off holding the S&P 500 over that five-year period.

You’ve probably heard that $2 trillion in paper value has been erased from the crypto universe in the last few months, leaving traders in the aggregate feeling only 35% as rich as they did in February.

That’s a serious challenge for sentiment. Traders with wavering conviction or pressing liquidity needs will fold their hands and go back to USD, accelerating the downside.

The Fed isn’t helping. One side effect of vacuuming excess cash out of the economy is that USD has gotten a lot stronger . . . rising to a 20-year peak against other fiat currencies, arguably too strong for comfort.

It’s definitely too strong for people who were betting on the dollar to keep declining. Over the past month, the mood at crypto exchanges like Coinbase (COIN) has swung from guardedly optimistic to pure defense.

Back in May, Coinbase CEO Brian Armstrong told shareholders he was happy to keep investing in his platform’s long-term reach. At the time, he said a bigger staff meant more resources to capture accelerated growth opportunities.

He said he was “pleased” with his ability to attract and retain top talent. Now, however, he says anyone who criticizes corporate strategy needs to get out . . . and even if you’re loyal, he’s cutting 18% of the staff to save money.

These layoffs feel rushed and more than a little desperate. Armstrong says this is “crypto winter.” He’s retreating from his business plan to survive it. And he says a recession is imminent.

Maybe it’s a recession for him. A slowdown is definitely part of the Fed’s plan, but bank after bank says the dollar economy is doing just fine. It’s still summer in dollar country. Winter for crypto, but not yet for us.