Rapture #160: Moment of truth for crypto

Rapture #160: Moment of truth for crypto

We are shortly going to figure out if the crypto industry has been able to successfully convince the broader markets that it is a censorship-resistant inflation hedge. In fact, we are even getting called out by ex-Goldman Sachs CEO Lloyd Blankfein for the lack of positive price action.

Lloyd has a point. If crypto is not able to rally in this environment, then there will need to be some serious narrative reconstruction to once again convince the traditional financial world of BTC's value. Currency restrictions are being put in place globally as a war tool, countries like Canada have given their banks the right to prevent their citizens from making certain transactions, commodity prices are spiking, and inflation is raging. If we have successfully convinced the world of BTC's value prop via the inflation/censorship hedge narrative, now is the time to see the market embrace BTC.

Personally, as I have outlined before, I view BTC as a hedge against fiat collapse and complete loss of faith in central bankers more so than just a basic inflation hedge.

Yet the price action of BTC in the short term might indeed be saying that it is successfully convincing the broader market that it is an inflation/censorship hedge. The next few weeks will be critical for BTC.

Correlation with US equities market seems to still be breaking

Today's price action is even crazier than the price action 6 days ago. BTC is up on the day while the S&P 500 is down 1.58% and the ARK Innovation ETF is down more 1.6%. The Pearson 30 day correlation between BTC and S&P 500 now sits at .3, which is still relatively high, but it is now dropping on a daily basis.

On the other hand, the Pearson 30 day correlation between BTC and Gold is spiking, and now sits at .34. As you can see from the graph above, BTC's correlations are about as consistent as a manic depressant degen trader. I have a difficult time using the correlation data right now.

What use is correlation data if it is so manic

Yet there is some useful secondary insights to glean from the correlations. Sam Bankman-Fried has posted in the past that the more crypto moves independently on any given day, the less various algorithmic traders will statistically arbitrage the relationship, which can lead to the further breaking of the correlation. Effectively, in low volume environments when algorithmic traders are the only players in the market and their historical models show correlation between traditional markets to crypto, they will bet on the relationship to hold, which has a dramatic effect on the market since there aren't many other market participants on those days as indicated by the low volumes.

If other market participants, such as investors who think BTC is an inflation/censorship hedge, comprise a larger portion of the daily volume, then their purchasing power will outweigh the algorithmic trading, pushing up the market even if the S&P 500 is down. When this happens, then the algorithms adjust themselves to effectively not bet as much on the correlation between the S&P 500 and BTC holding, meaning that if the inflation/censorship hedge bid remains strong it will continue to have an even larger effect on daily price action.

A bit complicated, but this framework perfectly describes the market battle that is occurring right now in my opinion.


The Content on this email is for informational purposes only, you should not construe any such information or other material as legal, tax, investment, financial, or other advice. Nothing contained on this site constitutes a solicitation, recommendation, endorsement, or offer by Rapture Associates or Mattison Asher or any third party service provider to buy or sell any securities or other financial instruments in this or in in any other jurisdiction in which such solicitation or offer would be unlawful under the securities laws of such jurisdiction.

All Content on this site is information of a general nature and does not address the circumstances of any particular individual or entity. Nothing in the Site constitutes professional and/or financial advice, nor does any information on the Site constitute a comprehensive or complete statement of the matters discussed or the law relating thereto. You alone assume the sole responsibility of evaluating the merits and risks associated with the use of any information or other Content on the Site before making any decisions based on such information or other Content. In exchange for using the Site, you agree not to hold Rapture Associates, Mattison Asher, and  its affiliates or any third party service provider liable for any possible claim for damages arising from any decision you make based on information or other Content made available to you through the Site.