Chaos and Crypto
When thinking about crypto prices and what drives them, I tend to focus on the big picture and the players. The last 9 months of 2020 saw several noteworthy events, and several noteworthy players, all throw their influence into the melting pot of market prices. Of everything that transpired in 2020, only a handful of events were bearish for BTC specifically. We had the indictment of BitMex officers and the reality of increased regulation and scrutiny, which barely caused a hiccup. The muted reaction to this event could be attributed to the fact that it came right in the middle of a plethora of bullish announcements from the likes of Microstrategy, Square, and PayPal. Around Thanksgiving, there was another pull back when markets were spooked about proposed regulations coming from the US and BTC shed $3,000 over the thanksgiving holiday, a move that now seems quaint.
These very few negative catalysts have been constantly drowned out by the relentless beat of the institutional drum. Until this music stops, it is against this backdrop that we must measure the impact of all new events and catalysts. And such was the story this week on Tuesday night going into the Georgia Senate runoff elections and the Wednesday afternoon certifying of the Electoral College votes to confirm Joe Biden as the official president elect.
The first event occurred sometime in the middle of the night, when it suddenly became apparent that Democrats would take both seats and in so doing wrest control of the Senate from the hands of Mitch McConnell. Markets knew immediately what that would mean on the margin: faster and more direct fiscal stimulus, larger deficits, and eventually down the road likely higher inflation, taxes, and interest rates. The yield curve steepened as long dated treasuries sold off, Russell 200 futures (representing smaller companies) rocketed higher while Nasdaq 100 futures took a breather. And BTC marched on: More fiscal stimulus from congress, desperately needed by many Americans, is exactly the story that offered solid confirmation to the original purpose of BTC and is what started this bull run to begin with.
The morning hours of Wednesday seemed to be a buyer’s paradise. Despite the rumblings of many Republican talking heads, risk markets love stimulus and spending more than they hate taxes, and they are perfectly happy with Democrats. Everything was going swimmingly, and I was even taking the time to watch the mind-numbingly boring process of the joint session of Congress certifying the state electors, when all hell broke loose.
I, along with everyone else, had known that Trump supporting protestors had gathered at the Capitol Building, but I paid them little heed. Even when they ignored the barriers and came inside the perimeter and started banging on the doors, I didn’t think much of it. But then I heard commotion on the live feed I was watching: Protestors had breached the building and were pouring inside.
While it might sound alarmist, this was one of those moments, where suddenly the possibility of something truly terrible was real. I remember when Captain Sully expertly landed that commercial jetliner on the Hudson. It was a benign act of heroism, but when you see a plane coming in low approaching lower Manhattan, what do you think of? And on Wednesday throngs of people, yelling and screaming and not going through any security checkpoints, stormed the building and headed for the room occupied by THE ENTIRE US GOVERNMENT, save for President Trump himself. I couldn’t help but think of Tom Clancy’s ‘Debt of Honor’ in which Jack Ryan becomes President when a joint session of Congress is attacked, taking out all of elected government. And then I heard a reporter announce that they had found a bomb on the grounds.
Thankfully, the IED’s that were recovered were not sophisticated terrorist weapons and were easily destroyed. Vice President Pence and all of congress were evacuated to a secure location, and it seems as though the violent mob were simply there to cause chaos and not to take out the government. But as a trader, what do you do when this is happening? What decisions do you make, how quickly, and how decisively? In general, in times of chaos and uncertainty, the dollar is king, and all other assets sell off sharply as fast and decisive traders quickly raise cash, either in anticipation of picking through the bones in a short while, or simply just to ensure that they will make it through the day and still be able to play the game tomorrow. To judge the sentiment in the crowd, there is no better asset to look at than E-mini futures on the CME which track the S&P 500. This chart is always front and center on my screen, whether I’m trading equities, crypto, or cupcakes.
During the siege, as protestors broke into the building, BTC prices shed a quick $1,250 from 35,750 to 34,500. The truth is, that in the markets we’re in the midst of right now, a $1,000 move in BTC isn’t exactly uncommon, but the move in conjunction with the event warrants a flash analysis. First, is this the end of our government as we know it? E-minis were dropping, but there wasn’t panic in their movement. So, apparently the market wasn’t quite as worried about a Tom Clancy moment as I was, I’ll take solace in that. Second, what does this say about the dollar and risk assets? It’s clearly bad for risk assets, which means it should be good for the dollar. But it’s also clearly bad for the dollar, which means it should be good for risk assets and other currencies and, of course, BTC.
The BTC chart up until that point had been a pretty steady march higher, which is price action that I usually associate with institutional buying. Institutions often make large OTC trades, and the trading desks that take the other side of those trades will spread out the large order using a trading algo like a VWAP. As I mentioned at the beginning of this article, that is the backdrop against which this day’s events were to be measured. So, we have a situation where uncertainty has entered the market, E-minis are worried but not panicked, and we are trading an asset that exists largely as a referendum on fiat currency. Buying a dip is always risky. The old adage of “don’t try to catch a falling knife” is a good one to heed. But way that the events and scenarios lined up on Wednesday to create a low-risk dip-buying scenario. As long as the Fed is there to backstop US markets, and as long as dollar liquidity doesn’t dry up in a massive rush for dollars, BTC will likely reign supreme and thrive on chaos.
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