BitMex CEO: What will the trend of cryptocurrencies be next year? How should we make decisions?

Article written by: Arthur Hayes

Article translation: Block unicorn

The price of anything is the most powerful signal I have gathered of human will. As a society, we utilize a form of money as an abstraction of the energy expended in producing the things that sustain us. Prices tell us how much energy is expended to balance the supply and demand of a given good or service. When society distorts pricing signals, supply and demand become imbalanced, resulting in wasted energy. Waste enough energy and civilization degenerates; hopefully replaced by a new social structure that is organized to conserve energy in a better way. With all the exciting developments in cryptocurrencies currently and in the future, we must not lose sight of the most important factor in the current excitement…BOOLMARKET.

Yes, the technology has to work and it does… sometimes. However, if we are heading towards a tokenized world, then the price of a token representing a particular crypto technology or community is the easiest way for a layman to understand if it is successful. However, if the unit of account is tied to a money-printing central bank/government, then the PRICE = SUCCESS identity can easily be distorted.

How can we judge the true energy value of a thing if the quantum of scale is increasing every year? Or worse, if the standard of measurement is just a political drama based on the whims of fallible people who only care about their own survival in office. While many crypto natives measure their wealth in terms of Bitcoin (and increasingly, Ethereum), the vast majority of humanity considers their net worth to be some derivative fiat currency pegged to the US dollar.

The incredible growth of all cryptocurrencies since being priced out in March 2020 would lead some to believe that superior technology is winning. This technology is so amazing and transformative that adoption will not only increase but accelerate. With this success, the prices of many assets will continue to rise exponentially. You think to yourself, “this shit is so shiny, I only look at charts on logarithmic scales.”

But the easiest way to generate buzz and clickbait news articles and draw eyeballs to a particular item is price. The $69 million purchase of an NFT artwork at a Christie’s auction earlier this year set the stage for an explosion of interest in this tech-enabled art form. The talent and technology have always been there, but it took a big purchase to capture the world’s attention on all things NFT.

Any token price is a combination of technical and monetary conditions. The difficult part is determining the percentage weight of each factor. The decisions made by the U.S. and Chinese economies in the next quarter will determine the extent to which the monetary landscape supports further price appreciation of the cryptocurrency complex.

The technological improvements offered by crypto are becoming irrelevant at this point because current expectations are so high. Many TradFi Research analysts who previously pooh-poohed various aspects of the crypto market are now singing crypto’s praises and hailing it as a transformative advancement. Many politicians around the world recognize the inevitable upcoming shift in how companies, governments, and individual actors interact as a result of cryptocurrencies. The good future is already here, and only disappointment awaits. This doesn’t mean I’m not bullish on cryptocurrencies being up in the short term, but it does mean that adding users at the expected rate won’t yield huge returns.

There are three types of cryptocurrency allocators, each of which will change its portfolio based on its outlook for the first quarter of 2022.

1. Some people have to decide whether to allocate more fiat to crypto. They focus primarily on the amount of currency devaluation that will or will not occur. “Do I sell USD and buy Bitcoin or Ethereum?” Their benchmark outperforms the growth of the fiat money supply.

2. Some people have to decide whether to allocate more of their Bitcoin or Ethereum to other types of tokens. They are mainly focused on finding projects whose technological impact or user adoption will grow rapidly, causing the price to exceed Bitcoin/Ethereum. "Will I sell my Bitcoin/Ethereum to buy Solana, Cosmos, Terra, etc?"

3. Finally, some people must decide if it is time to liquidate their crypto assets and return to fiat/government bonds. They must determine if this is part of a cycle where the crypto complex falls 75% - 90%. They want to protect the value of their wealth in units of commonly used hydrocarbons such as oil and gas.

Monetary policy decisions by the U.S. and China affect groups 1 and 3. The second group can create independent value to offset bad monetary conditions, but this will only happen if larger self-sustaining economies emerge, such as the open metaverse and the plethora of DAOs. These forms of crypto organizations are still in their infancy, so they cannot completely eliminate the conditions that favor cash and bonds over financial assets.

It may sound repetitive, but this iterative process of getting in and out of this dilemma is consistent with the cyclical nature of human society. Our collective actions follow a predictable wave-like progression. It’s as if human society exists purely in a carnival. A known set of baselines adds a melodic progression that leads us from introduction to breakdown, then decline, leading to nirvana, then death and rebirth into a new orbit. After completing this circle millions of times, we hope that the overall trajectory is progress, but we cannot consider stagnation and decline as impossible.

Andrew Collier provides excellent bottom-up data on the Chinese economy, showing that wealthy Chinese are heavily invested in real estate. The central government supports developers and speculators with cheap loans. Large state-owned banks (often called state-owned enterprises, or SOEs) are happy to lend to developers and homebuyers . In the face of real estate problems, the People's Bank of China lowered reserve requirement requirements and reduced the cost of credit , which we can interpret as a signal that cheap credit flowing into China (and subsequently the world) will boost the prices of various risky assets.

If the East joins the monetary easing spree, this would be a positive development for the Fed. Because as I will explain in the next section, the political heat the Fed feels over the need to control inflation could force the high priests to raise rates in the first quarter of next year. If China remains aggressively easing to keep its economic growth pattern going, the Fed can tighten monetary policy without negatively impacting U.S. and global risk asset prices. It can start working more aggressively to curb inflation and address related concerns among certain voters without hurting the wallets of the wealthy.

I have 99 problems, and deflation is not one of them

You know it's bad when you have to completely change your "inflation is temporary" narrative on a dime -- because the government realizes that the Jedi can't fool the civilians 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 Chain Reaction, I believe the Democrats have a two-step path in the 2022 midterms thanks to fiscal and monetary inflation. Like a good government employee, the Fed Chairman always does what the big guy asks, regardless of his party. The President needs to whip up inflation now, and he has called on the respected Fed Board to change their tune.

Now, the Fed Chairman is alarmed to announce that the pace of “tapering” will accelerate.

Markets fall as Powell vows faster tapering

Many market participants naively believed that the fundamentals of the stock market - and risk assets in general - were supported by actual economic strength, not wanton money printing. Whenever the Fed hinted that it would slow the pace of its indiscriminate bond purchases, the market reacted negatively over time.

One could argue that the more than 20% loss in value of Bitcoin and Ethereum on December 4 was a signal from the crypto markets that risk asset prices were headed for a major decline. Given that crypto capital markets are the only remaining free markets in the world, they are the only working smoke alarms. The S&P 500 also fell, but in the five-day period from the close of November 29 to December 6, it fell by about 1.55% (while Bitcoin fell 16%).

To put these returns in context, I counted the number of times the 5-day return (assuming it was negative) was greater than the 5-day negative return, starting on November 29th and using data from 2021. For the S&P 500, 31% of the 5-day negative returns were greater, while for Bitcoin, only 5% were greater.

I believe Bitcoin has more predictive value for future monetary conditions than any other asset. That’s because Bitcoin is not subject to direct manipulation by global central bank purchases (like stonks and government/corporate bonds). Any financial asset that exists on a central bank’s balance sheet is ripe for politically motivated price targets. Given that the Fed is still buying over $100 billion in bonds per month, the negative price impact of stopping bond purchases and potentially raising rates will only become apparent in the coming months.

One could argue — and many have — that the surge in leveraged crypto positions contributed to the weekend plunge. While it is undeniably a contributing factor, you can’t ignore the forward-looking value of how Bitcoin can predict changes in global fiat liquidity regimes. The fact that global retail and institutional market participants can all come together in a free-market Bitcoin and express their beliefs about whether fiat currencies will become more expensive or cheaper suggests that Bitcoin provides a good signal of how the market interprets changes in the Fed’s rhetoric and its forward-looking monetary policy.

The Fed’s not-so-secret mission is to make global investors feel rich by propping up the S&P 500. But they can only do that to a certain extent — the politics of inflation have to do something. Something is changing the narrative, acknowledging that inflation is not going away quickly but will be with us for a while, and signaling to the markets that the Fed is serious about changing its strategy to keep inflation in check over the medium term. Hopefully there is some time before the Democrats lose Congress and the Senate in November 2022.

If the Fed follows through on their comments at the December meeting and increases the pace of taper from $15 billion per month to $30 billion per month, the March 2022 meeting suddenly becomes an opportunity for a possible rate hike. While a small rate hike may not seem like it would do that much damage, when you start from zero interest rates, bond prices react violently in ways that are very unfavorable to long-term holders. It's just the depressing nature of bond math at the zero bound. Likewise, I cannot fathom 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 that is more conducive to success than protecting investor capital.

It's just as bad for stonks. Again, plug a 0% or very low discount rate into any terminal value calculation in a discounted cash flow model, and your lousy nonprofit company will look like it should be owned by Berkshire Hathaway. But even a small change in the rate (on a percentage change basis) will reduce the "fair value" of your steam appliance company.

We all thought the meme stonk crowd couldn’t do math, but they reacted to negative real rates as diligently as any trained market professional. They bought, bought, and then bought some more. Diamond hands, bitches!

Moving on to crypto, it’s the same story. Easy monetary conditions have facilitated the already staggering growth in adoption across all aspects of the ecosystem after March 2020. The technology won’t have changed dramatically by March 2022, but monetary conditions and the market’s general tilt toward any risky assets — lest they get stuck in rapidly depreciating fiat currencies — will deteriorate rapidly.

Politically, America can’t keep stimulating the economy with free money. High gas prices and empty store shelves provide voters with concrete evidence that stimulus checks and the Fed’s money printing press have gone awry… policies that directly hurt their wallets. Most of them don’t have enough stonks to benefit from the cheap money flooding the market. Their wages are stagnant and costs are rising; a toxic mix that will lead to anger at the ballot box. So the Fed got a new hymn book and they’re singing spirituals like Mahalia Jackson.

In the room above [POTUS]

Sitting at His blessed feet

I confess my sins there every day

Sweetly pray for His mercy

Squid Games

The East is starting to ease monetary conditions. On the other side is the United States, which needs to appear to be fighting inflation because of electoral politics in 2022 so that the ruling party has a chance to stay 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 corporations and ruling class can continue to earn above-average returns, keep labor’s share of income low, and keep its asset markets thriving.

The Fed will continue to tighten monetary conditions until the stonks fall (I think the Fed is selling 20% ​​below the all-time high of the S&P 500), or some part of the Treasury market stops functioning properly. While the central bank is easing policy at the same time, it allows the Fed to reverse the effects of the largest expansion in the money supply and fiscal deficits since World War II.

As we head into the end of the year and the first quarter of 2022, I don’t know how we can buy Bitcoin at $69,000 or Ether at $5,000. However, I can imagine a chaotic, sideways, boring market with small downside swings followed by a modest recovery. So, this is how I feel when I go back to the three types of crypto investors.

1. For those deciding whether to allocate more fiat to crypto, it is worth waiting. I do not think money is going to get freer or easier. So it is worth staying on the sidelines until the dust settles after the Fed rate hike in March or June 2022. If the Fed hikes, followed by a quick return to 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 is time to back up the trucks.

2. For those who will maintain macro crypto exposure but have to allocate between various coins, the coins that perform well may be Metaverse, Play-2-Earn or NFT related. The success of these themes does not depend on the global monetary situation, but on actual changes in the behavior of actors whose lives can be significantly improved by adopting new forms of technology.

3. For those who like to trade around their crypto and fiat currency positions, I think it is wrong to think that a stronger dollar and longer-term bonds will do well in the medium term. Likewise, monetary conditions will be stagnant in the best case and become tighter in the worst case.

It's a draw, but don't get too cocky or you might end up on fire and wrapped in a box with a big pink bow.