On Wednesday, our investment team discussed recent market volatility; macro trends, and potential results of the Fed’s interest rate moves. Here are a few takeaways from our discussions to gain insights on how we think about recent market volatility and possible directions.
We don’t yet expect a huge crypto comeback.
The main reason is the US Fed’s decision to hike or not to hike moves; how many hikes remain unclear, but some experts peg the number at four rate increases. Due to this hawkish mood, market narratives and sentiment have shifted from risk-on to risk-off.
Why the change in the market narrative - Because investors often look beyond nominal rates (which means interest rates before taking inflation into account) and base their decisions on real rates (which means the interest rates that take inflation into account). This helps determine the yield on assets, and low real interest rates, induce investors to take more risks.
How crypto-assets, in particular, might perform if we enter a sustained period when central banks actively drain liquidity remains unclear because we have no historical precedent for this kind of market condition.
But one thing is clear - There could be unintended consequences if global financial conditions tighten substantially. A higher and sudden increase in interest rates could lead to a disruptive price revaluation and sell-offs in stocks and Crypto. (We believe this is what happened in January)
We do expect increased and persistent volatility.
Volatility means a need for the market to shift expectations. We are moving from an economic recovery into an expansion. And as the global economy transitions, monetary policies adjust from being accommodative to more normal. Investors are now pricing in their expectations of monetary policy. Once the market takes these expectations into account. We could see a reduction in volatility, possibly once interest rate hikes start to come through. It just takes time.
What does this mean for crypto?
We believe that: Crypto markets have stronger fundamentals now than they did during the prior market cycles. Many leading projects have come to market and have been able to rapidly increase users, usage, and economic fundamentals. As many equity investors are looking for a strong economy and earnings growth to take over once the Fed reduces accommodative policy, we see the same dynamics present within crypto. but with added secular growth tailwinds.
As we transit
We believe that: This is the beginning of the transition to a less exceptional / more normal market regime, and investors need to digest several variables as they navigate the bumps in the road. The transition itself is not a surprise, but how it unfolds is unpredictable. It pays to be a selective, patient, and knowledgeable investor at these moments.
Have a great weekend
These are meant for informational purposes only, are not intended to serve as a recommendation to buy or sell any security, and are not an offer or sale of a security. They are also not research reports and are not intended to serve as the basis for any investment decision and do not constitute a comprehensive description of ComiBlock’s advisory services.