What to Make of the Chaotic Crypto Carnage
Editor's note: It's been a tough couple of weeks for the cryptocurrency market.
Bitcoin prices fell 70% from their late December peak to their early February trough. Ethereum prices have dropped nearly 40% since mid-January. Thousands of other less-established cryptocurrencies have fared even worse.
Since we know many Stansberry Research readers have dipped a toe into cryptos, we thought you might appreciate hearing from our friend and crypto expert Tama Churchouse. Tama writes the excellent Crypto Capital newsletter for our Stansberry Churchouse Research affiliate.
In today's Masters Series essay – originally published this week in their Asia Wealth Investment Daily e-letter – Tama discusses the three catalysts that caused the pullback... and explains how he saw the correction coming and why it's no reason to panic...
What to Make of the Chaotic Crypto Carnage
By Tama Churchouse, editor, Crypto Capital
As I write, the Satoshi Roundtable – a gathering of some of the most prominent and renowned blockchain and crypto experts – is about to officially begin... And it kicks off amidst the backdrop of a bloodbath in the crypto market.
As a crypto analyst, I'm attending the gathering because there's no better place to be right now than amongst the people who have been fundamental to the development of the entire asset class.
Over the next couple of days, I'm looking forward to seeing how a collective of individuals – some with massive personal crypto portfolios – view the current crypto market correction.
The Roundtable is considered "off the record" and is under "Chatham House Rules." This means I can't share any details that would in any way identify a speaker.
However, recently, I've had messages from friends, readers, and Crypto Capital subscribers from all over the world asking for my thoughts on the crypto market. So I'm taking the opportunity to share my own observations with you now.
An Expected Surprise
One never knows when a bubbly market will pop its top. But in all fairness, I've been warning about this correction for a couple of months now. In November, I told Crypto Capital subscribers...
Dozens of crypto tokens are up hundreds of percent over the past few weeks.
Now, we're seeing a lot of self-congratulatory backslapping from crypto investors. Folks talking victory laps, bragging about their returns. Hubris.
This makes me uncomfortable... Make no mistake, large sums of money will be lost in cryptos in the year ahead. And cryptocurrencies will continue to be one of the most volatile asset classes on earth...
It's easy to feel like a "genius" in a raging bull market. But make no mistake, markets don't go parabolic forever...
And in December, I told subscribers...
Please stay conservative. Be ready to ride the volatility because we haven't really even gotten started yet. The big shakeout is going to come. Don't be even vaguely mistaken about that.
Finally, in early January, I warned subscribers...
[The altcoin market] continues to go fairly parabolic, I don't know how much longer it's going to last... the market is getting extremely ahead of itself in my opinion. And, when I look at this, it makes me somewhat concerned for many of the reasons I've talked about in the past with people not really knowing what they're buying.
Between the end of November and early January, the overall crypto market rose at an unsustainable pace, from around $240 billion to more than $800 billion in total market value in a matter of weeks.
Now, greed has turned to panic, and the market is down to around $415 billion... back where it was in early December.
Why? Well, the first reason is that the market was speculatively overbought.
This correction, while ugly, is simply a reversal of a market that flew too close to the sun... and is now suffering the burning aftereffects.
The second reason is what looks like a fairly monumental "risk off" sentiment is gripping global financial markets.
On Monday, the Dow Jones Industrial Average closed down 4.6%. That's a huge drop. And as the crypto market becomes increasingly (albeit slowly) institutionalized as an asset class, it will get treated like one.
That means instead of bitcoin and crypto being viewed as some kind of uncorrelated standalone asset class, it will instead be viewed as one that retains a link to global financial markets and will increasingly be traded in that context.
So in a heavy "risk off" market like we're seeing now, crypto will also suffer.
Third, regulatory scrutiny of the asset class is increasing. The days of shady initial coin offerings bait-and-switching millions of dollars from unsuspecting investors is likely drawing to a close.
On Tuesday, U.S. Securities and Exchange Commission (SEC) and Commodities and Futures Trading Commission (CFTC) chairmen Jay Clayton and Christopher Giancarlo addressed the U.S. Senate Committee on Banking, Housing, and Urban Affairs regarding the oversight roles for their regulatory bodies over the crypto markets.
In their prepared remarks, their general message to the committee was that they have things under control and that they will work to preserve innovation while continuing to use the Howey Test to determine whether a crypto asset falls under their purview (plenty will).
However, in my opinion, regulatory noise and uncertainty will continue to keep a chill on the market for the next few months.
At the end of the day, nothing that has happened in the past two months has altered my view that crypto is here to stay. But what this correction will do is require market participants to "force discipline on an otherwise broadly unsophisticated market."
In other words, the market will start to diverge and discriminate between projects with real fundamental potential, and those with little to no prospects at all.
The days of simply buying any old crypto and riding the wave of crypto euphoria are likely numbered.
Good investing,
Tama Churchouse
Editor's note: Whether you already own some bitcoin or you're simply thinking about buying cryptos for the first time... chances are, you have a lot questions right now. Next Thursday, February 15, at 8 p.m. Eastern time, Tama is hosting an emergency bitcoin briefing. He'll offer his latest thoughts on bitcoin and other cryptocurrencies... reveal a shocking prediction about the crypto markets... and explain how you can make a lot of money along the way. Save your spot for this free event right here.