Is This Crypto Rally Actually Different?
The importance of taking a wider view
👋 Welcome to the 46th issue of The Syllabus from Invisible College—a newsletter that helps you navigate the fast-moving world of web3. To get it delivered straight to your inbox, subscribe here:
If you’ve followed crypto price charts this year, you might be wondering if we’re at the beginning of another bull market run. It’s understandable since at the time of writing, BTC is up 29% and ETH is up 26% on the year. And, believe it or not, they’ve also gained back all of their post-FTX losses:
The rally has been largely fueled by a gigantic short squeeze, meaning traders took out leverage to short assets (i.e. betting they were going to go down in price) and they got liquidated because the price increased too quickly. The large red bars in the image below show that short positions have been getting liquidated at about twice the rate of long positions so far this year.
Crypto bulls will also point out other understandable things, including the fact that many of the largest sources of leverage (3AC, Alameda, and other CeFi companies) have been flushed out of the market, increased trading activity in the NFT sector, and how the total crypto market cap is over $1T again.
This all paints a fairly rosy picture of the current state of crypto. It took a big hit when FTX went down—even though FTX was not crypto—and it recovered fairly quickly. Most of the bad actors are licking their wounds. And Yuga Labs is back making waves in NFTs.
But they’re missing the forest for the trees.
It’s very easy to have a myopic view when following crypto. The markets are 24/7, prices are volatile on a day-to-day basis, crypto Twitter is constantly dishing out hot takes, and the news cycle is relentless. But crypto is also only a tiny part of a much, much larger overall market.
put it into perspective well during our last DeFi Friday talk on Twitter Spaces:The crypto market has been hovering around one trillion for the last month or so. That’s about the same size as Amazon—one US company.
To which I responded with:
The sad thing is that the crypto market used to be about three Amazons.
Sure, we’ll see random altcoins that pump in price and seem to defy the wider market narrative. But, for the most part, the crypto market will follow equity market movements.
How are the equity markets doing?
Well, at first glance they look healthy. The DOW is up a little over 1% on the year, the S&P 500 is up over 4%, and the NASDAQ is up over 9%. The good times are back then, right? Not so fast.
In 2022, we saw the Fed implement the fastest interest rate hikes in history:
Shout-out to for sharing this graphic in his recent Substack post.
You might look at the fine print in that chart and think, “Wait, this data is from September of last year. Hasn’t the Fed slowed down the pace of rate hikes?” And, yes, that would be true. But they are also still raising rates because inflation is still a huge problem. The U.S. inflation rate is at 6.454%, over 3x higher than the Fed’s optimal target of 2%.
The average American is feeling the pain of inflation at home. While overall inflation is 6.454%, food is over 10% and energy (i.e. gasoline) is over 7% from this time last year, hitting people hard on their most basic needs.
The vast majority of people are not thinking about dollar-cost averaging into Bitcoin or buying a Sewer Pass to play the new Yuga Labs Dookey Dash game.
The good news is that inflation is trending in the right direction, which is why the Fed has been easing off on the aggressiveness of their rate hikes. But it’s too early to celebrate and call this a bottom.
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Is this a bull trap?
A bull trap is another term for a short-term rally. In other words, a period of time when the market looks bullish but the overall long-term trend is bearish.
Remember the Coingecko screenshot at the beginning of this post that showed how ETH has regained the losses caused by the FTX blowup? Here’s what ETH looks like since it hit its all-time high of ~$4,700 back on November 9th, 2021:
Does this latest rally look like a true bull run to you now? The overall trend doesn’t look great—a steep downturn followed by a lot of choppiness. If anything, it looks like the markets have gone through a mean-reversion rally, which basically means we’re back to the levels we were at before the FTX mess, but it also means prices aren’t likely to head back up for a prolonged bull run.
Despite it feeling like we’re in a recession (stock prices are down a ton from all-time highs, the tech sector is laying off people left and right, etc.), we technically aren’t yet. But some macro market experts are predicting we will officially be in one later this year. And that doesn’t bode well for crypto assets since they’re some of the riskiest, most volatile assets you can invest in.
For a true bull run to happen, the crypto market needs new entrants—or even past investors, traders, and collectors to reenter. They could be institutions or your friends and family. But with stories such as a prominent crypto OG with millions of Twitter followers losing $2M+ in NFTs and tokens, don’t expect a large influx of new people anytime soon.
As always, none of this should be construed as financial advice. Please do your own research.
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