by Zain Jaffer
Editor’s note: Zain Jaffer was interviewed by Jordan Smith of CNBC Crypto World last January 27, 2023 regarding why the price of Bitcoin rose early in the year. The link to that interview, which begins at 3:40 is at Bitcoin retakes $23,000, and Sen. Cruz wants U.S. Capitol to accept crypto for food: CNBC Crypto World. This article reflects the views he expressed, but this is not a word for word transcript of his interview.
Bitcoin, like other cryptos and stocks, fluctuates and is volatile. The reference to Bitcoin’s price rise in this article was correct at the time of publication.
As I discussed in my January 27, 2023 interview with CNBC Crypto World, Bitcoin’s strong rally for the month of January was unexpected by many experts. We are in a sea of bad news for crypto in general. The Securities and Exchange Commission (SEC) under Gary Gensler just filed 30 lawsuits last year against various crypto projects worth tens of millions of dollars in fines. The Department of Justice (DOJ) is out arresting everyone. Recently a Russian national living in China was arrested for running an obscure crypto trading site called Bizlato.
Then there are also the layoffs in tech and crypto. In the tech sector the big names like Microsoft, Google and others are laying off 5-6% of their workforce. In crypto, Digital Currency Group’s (DCG) Luno exchange recently laid off 35% of its workforce while Genesis cut 30% of their jobs and Silvergate as well at 40%. That’s around 27,000 jobs axed since April 2022 last year.
These are bad news reports, and more bankruptcies are expected to come. There’s also DCG’s problems with Gemini and the Winklevoss twins which might force it to liquidate its crown jewel, the Greyscale Bitcoin Trust (GBTC) just to pay its debts. That’s 600,000 Bitcoin that they might need to liquidate, and that will definitely have an impact on the market as it will change the supply.
So in all this sea of bad news, it’s hard to make sense of why Bitcoin is rising this January 2023. The obvious is that it is tactical, it’s a good start to the year. Assets are behaving the way you want those to. We’ve had weird behavior these past few years with assets not behaving the way you’d expect them to.
You can also say that the markets are reacting to interest rate expectations. The market expects the Fed to cut interest rates because CPI numbers for December 2022 are lower than November which looks like inflation is lowering, and because it looks like we’re going to have a weaker economy.
When you look at crypto, let’s take Bitcoin as an example. There’s some correlation to the S&P, to gold, and to the NASDAQ. It’s up roughly 40% to date. We’re looking at S&P 6%, gold at 6%, so not much correlation, just some.
Where things get interesting in my view is the story that crypto is full of speculators. Look at the fund, stock, and crypto indices. I’m an investor in Ark, the fund run by Cathie Wood. Ark is up 26% year to date, and Bitcoin is up 40%. So there seems to be some obvious correlation here, where Bitcoin is correlated to high tech growth, and maybe that means speculators are back.
CNBC asked me about institutional investors buying Bitcoin and causing the surge. I agree with that observation. The reason that crypto has wiped out a lot of retail investors. Volumes are down 31% year over year, so trading volumes are pretty thin right now.
Some retail investors had access to crazy amounts of leverage. I personally know some people who levered up to their necks. Anytime you’re in a bull market you can make quick money doing that. But people got greedy. When you go into any type of investment whether crypto or stocks with a lot of leverage, and it goes the wrong way, it can wipe you out.
To my surprise even the most hardcore of crypto fans that I’ve known since it began are now capitulating with huge losses and tapping out of the market. I think the retail base is getting tired.
When the Fed printed so much money during the pandemic (through the CARES Act), that money had to go somewhere. It generally went to risk-on high growth assets like tech stocks and crypto.
Take a step back and consider who are the people behind crypto, at least in the past. Generally in wealth management you’re supposed to put some of your money in fixed income, in stocks, you’re supposed to have a diversified portfolio.
Gen Z, Millennials. They don’t want to hear about balanced portfolios. They just want to go all-in on risk-on high tech growth, and crypto is part of that. I think that’s the mistake that a lot of these people are feeling. What happens when you enter a recession? What happens when you see huge declines in your portfolio? Many retail investors were wiped out with leverage.
I do think institutions are coming in. There’s a lot of arbitrage opportunities. The future still looks uncertain where it’s going to go.
To the CNBC question about what investors should watch for, in the short term I said there can still be possibly more negativity. It’s extremely bullish that Bitcoin is rallying despite all this negativity.
I think what’s really happening here is that the washout in the long term will be good for the fundamentals of Bitcoin and the crypto sector.
Let me quote Senator Elizabeth Warren as she describes crypto. “Full of junk tokens and unregistered securities. Rugpulls and Ponzi schemes. Pump and dumps, money laundering and sanctions evasion,” Warren says. When you put it that way, crypto sounds pretty scary.
So a lot of people see bad news coming. Like I said, the DOJ is arresting people and the SEC is filing lawsuits. People are trying to figure out if cryptos are commodities or securities, if these will be regulated.Here’s the good news. If cryptos are regulated, if there’s more clarity, Wall Street will come in. We need Wall Street to come in so we can see some real infrastructure to be built out.
Today around 80% of central banks around the world are considering some form of central bank digital currency (CBDC). Big banks like JP Morgan, Goldman Sachs have some type of blockchain initiative. One of the CNBC guests recently said that crypto and blockchain should not be decoupled, that both have their uses.
There’s a lot of good news that’s going to come but initially it will be perceived badly. Our view, meaning our Western view here, we overreact to any bad news that involves the US government. But crypto is larger than the U.S. Crypto is much larger than that. It’s decentralized. There are people all over the world who actually want to see crypto succeed despite what the US government thinks. There are people stuck in dictatorships where they can’t get their money out. Inflation in some countries runs up to 60%, and interest rates are also very, very high.
What we’re dealing with here in the U.S. is a walk in the park in the grand scheme of things.