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Market Lab Report - Digital is eating the world but…

Market Lab Report / Dr. K's Crypto-Corner

by Dr. Chris Kacher

The (R)Evolution Will Not Be Centralized™

Digital is eating the world but…

Despite digital eating the world, the physical world still has a huge influence on the metaverse which remains a highly risk-on space. Correlations between stocks and cryptocurrencies is substantial since a shrinking pool of capital tends to hit risk-on assets the hardest. So just because the major stock market averages have corrected at the time of this writing -31.5% on the NASDAQ Composite, -19.9% on the S&P 500 (peak-to-trough), -61.3% on BTC, and -63% on ETH does not mean the correction is nearly over. If bitcoin were to have any of its past bear market corrections of -94%, -87%, or -84%, it would be priced at $4140, $8970, or $11040 based on a high of $69,000. 

But let's say that because bitcoin did not have its typical bubble blow-off climax top exhibited in prior bull markets, it corrects -75%. This would suggest a price of $17250 which is another -42% from current levels. 

Meanwhile, the downtrend in the major stock market averages remains intact. FAAMG stocks have been hit hard, typically correcting -30% to -45% off highs.  

The Big Bad Crypto Bears of 2014, 2018, and 2022

2022 reminds me of 2014 and 2018 when virtually all talking heads with huge followings (though much smaller in 2014) kept telling their audience to BUYBUYBUY. As bitcoin continued lower, the need to believe the bottom is in continued to grow. Eventually, dire news caused capitulation events such as Jan-2015 when bitcoin hit $150 or Dec-2018 when bitcoin hit $3123. These huge selling spikes were pronounced. Indeed, 99bitcoins.com shows the death of bitcoin has been predicted hundreds of times over the last decade.

Bubbles as shown in the graphs below often overcorrect versus just settling back to normal levels as the emotion of fear can create oversold conditions lasting many months. In the stock market’s post-crash environment of 1929 and 2000, the bubbles were started by easy money which spurred buying which spurred increasing leverage before tightenings popped the bubble.

Today, we have soaring global inflation, some of the lowest rates of interest in thousands of years, and record levels of debt making the 1930s, 1970s, and 2000s seem somewhat tame. It could then be argued that what we saw post 1929 when the Dow Jones Industrial Averages lost -90% off peak or post 2000 when the NASDAQ Composite lost -80% could be repeated... or worse. But Fed chair Powell will unlikely let things get this bad. He is a politician with political friends all who own an appreciable amount of hard assets, real estate, and stocks. Thus, he is likely to find some excuse to start printing money again by the time the S&P 500 has lost at least 1/3 of its value. This suggests bitcoin could correct -75% to -80% down to a price of $17250 to $13800. From current price levels, this is a drop of -42% to -54%. Buyer beware...

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