{"id":12768,"date":"2022-06-15T03:29:57","date_gmt":"2022-06-15T03:29:57","guid":{"rendered":"https:\/\/crowdfundjunction.com\/blog\/the-crypto-market-downturn-explained-by-coinbase-jun-2022\/"},"modified":"2022-06-15T03:29:57","modified_gmt":"2022-06-15T03:29:57","slug":"the-crypto-market-downturn-explained-by-coinbase-jun-2022","status":"publish","type":"post","link":"https:\/\/crowdfundjunction.com\/blog\/the-crypto-market-downturn-explained-by-coinbase-jun-2022\/","title":{"rendered":"The crypto market downturn explained | by Coinbase | Jun, 2022"},"content":{"rendered":"<p><b>(Originally posted on : Bitcoin in The Coinbase Blog on Medium )<\/b><br \/>\n<\/p>\n<div>\n<figure class=\"gr gt kg kh ki kj gn go paragraph-image\">\n<div role=\"button\" tabindex=\"0\" class=\"kk kl dq km cf kn\">\n<div class=\"gn go kf\"><\/div>\n<\/div>\n<\/figure>\n<p id=\"6659\" class=\"pw-post-body-paragraph kq kr ji ks b kt ku kv kw kx ky kz la lb lc ld le lf lg lh li lj lk ll lm ln jb gc\"><a class=\"au lo\" href=\"https:\/\/blog.coinbase.com\/aroundtheblock\/home\" rel=\"noopener ugc nofollow\" target=\"_blank\"><em class=\"lp\">Around the Block<\/em><\/a><em class=\"lp\"> from Coinbase Ventures sheds light on key trends in crypto. Written by <\/em><a class=\"au lo\" href=\"https:\/\/twitter.com\/Cdempsey44\" rel=\"noopener ugc nofollow\" target=\"_blank\"><em class=\"lp\">Connor Dempsey<\/em><\/a>. <em class=\"lp\">Data by <\/em><a class=\"au lo\" href=\"https:\/\/twitter.com\/burningw0rds\" rel=\"noopener ugc nofollow\" target=\"_blank\"><em class=\"lp\">Mike Cohen<\/em><\/a><em class=\"lp\">.<\/em><\/p>\n<p id=\"8a97\" class=\"pw-post-body-paragraph kq kr ji ks b kt ku kv kw kx ky kz la lb lc ld le lf lg lh li lj lk ll lm ln jb gc\"><strong class=\"ks jj\">TLDR:<\/strong><\/p>\n<ul class=\"\">\n<li id=\"4f4c\" class=\"lq lr ji ks b kt ku kx ky lb ls lf lt lj lu ln lv lw lx ly gc\">Central Banks and governments responded to the March 2020 COVID market shock with unprecedented interest rate cuts, money printing, and stimulus<\/li>\n<li id=\"871d\" class=\"lq lr ji ks b kt lz kx ma lb mb lf mc lj md ln lv lw lx ly gc\">These easy money policies kicked off a multi-year bull run for equities and crypto, before eventually causing inflation that was further exacerbated by COVID supply shocks<\/li>\n<li id=\"00cb\" class=\"lq lr ji ks b kt lz kx ma lb mb lf mc lj md ln lv lw lx ly gc\">BTC, ETH, the NASDAQ, and S&amp;P each peaked at the tail end of 2021, when it became clear that inflation was not under control and that Central Banks would have to unwind the same policies that propelled stocks and crypto to new heights in the first place<\/li>\n<li id=\"2649\" class=\"lq lr ji ks b kt lz kx ma lb mb lf mc lj md ln lv lw lx ly gc\">This cycle crypto has been broadly correlated with tech stocks, and has traded like risk assets<\/li>\n<li id=\"439d\" class=\"lq lr ji ks b kt lz kx ma lb mb lf mc lj md ln lv lw lx ly gc\">While not immune to Central Bank policy in the short run, the prospects of crypto and Web 3 in the long run remain stronger than they\u2019ve ever been<\/li>\n<\/ul>\n<\/div>\n<div>\n<p id=\"7a5f\" class=\"pw-post-body-paragraph kq kr ji ks b kt ku kv kw kx ky kz la lb lc ld le lf lg lh li lj lk ll lm ln jb gc\">Financial markets are, in essence, one giant information processing machine. A machine that responds to new information not directly, but as it affects the decisions of millions of individual buyers and sellers. Or as Benjamin Graham <a class=\"au lo\" href=\"https:\/\/fs.blog\/mr-market\/\" rel=\"noopener ugc nofollow\" target=\"_blank\">famously put it<\/a>, \u201c<strong class=\"ks jj\"><em class=\"lp\">in the short run, the market is a voting machine.\u201d<\/em><\/strong><\/p>\n<p id=\"e242\" class=\"pw-post-body-paragraph kq kr ji ks b kt ku kv kw kx ky kz la lb lc ld le lf lg lh li lj lk ll lm ln jb gc\">With the S&amp;P 500, NASDAQ, BTC, ETH, and most crypto assets significantly off of their all-time-highs, that begs the question: what information has market participants predominantly voting to sell?<\/p>\n<p id=\"5f41\" class=\"pw-post-body-paragraph kq kr ji ks b kt ku kv kw kx ky kz la lb lc ld le lf lg lh li lj lk ll lm ln jb gc\"><em class=\"lp\">In this edition of Around The Block, we take a look at the overall macro downturn with an eye towards the crypto markets.<\/em><\/p>\n<\/div>\n<div>\n<p id=\"f88c\" class=\"pw-post-body-paragraph kq kr ji ks b kt ku kv kw kx ky kz la lb lc ld le lf lg lh li lj lk ll lm ln jb gc\">As of June 2022, US equities have shed roughly 20%, or $10 Trillion in value. For US stocks, the selloff has not yet approached the severity of other historically noteworthy downturns, but it\u2019s certainly in the conversation.<\/p>\n<figure class=\"mm mn mo mp gz kj gn go paragraph-image\">\n<div role=\"button\" tabindex=\"0\" class=\"kk kl dq km cf kn\">\n<div class=\"gn go ml\"><img alt=\"\" class=\"cf ko kp\" src=\"https:\/\/miro.medium.com\/max\/1400\/0*ENLFXVHkHoIwRCM2\" width=\"700\" height=\"475\" loading=\"lazy\" role=\"presentation\"\/><\/div>\n<\/div>\n<\/figure>\n<p id=\"0613\" class=\"pw-post-body-paragraph kq kr ji ks b kt ku kv kw kx ky kz la lb lc ld le lf lg lh li lj lk ll lm ln jb gc\">Crypto meanwhile, has shed nearly 60%, or $1.7 Trillion. For comparison, it shed 87% of its total market cap after the peak of the 2017 bull run.<\/p>\n<p id=\"2642\" class=\"pw-post-body-paragraph kq kr ji ks b kt ku kv kw kx ky kz la lb lc ld le lf lg lh li lj lk ll lm ln jb gc\">BTC, ETH, and the NASDAQ all peaked in November, with the S&amp;P 500 peaking at the end of December. <strong class=\"ks jj\">So what changed during the last two months of the year?<\/strong> To understand this market downturn, it\u2019s helpful to start at the beginning of a historic bull run that both stocks and crypto experienced in 2020.<\/p>\n<p id=\"703e\" class=\"pw-post-body-paragraph kq kr ji ks b kt ku kv kw kx ky kz la lb lc ld le lf lg lh li lj lk ll lm ln jb gc\">Entering 2020, Bitcoin was rallying from the depths of the 2018\/19 crypto winter, from $7,500 to nearly $10,000. Meanwhile the S&amp;P and NASDAQ each stood at all-time highs. Then COVID hit.<\/p>\n<h2 id=\"21ce\" class=\"mq mr ji bn ms mt mu mv mw mx my mz na lb nb nc nd lf ne nf ng lj nh ni nj nk gc\"><strong class=\"ba\">COVID shock of March 2020<\/strong><\/h2>\n<p id=\"9ee9\" class=\"pw-post-body-paragraph kq kr ji ks b kt nl kv kw kx nm kz la lb nn ld le lf no lh li lj np ll lm ln jb gc\">On March 12, 2020, the World Health Organization declared the Coronavirus a pandemic and governments around the world placed entire countries on lockdown.<\/p>\n<p id=\"a8eb\" class=\"pw-post-body-paragraph kq kr ji ks b kt ku kv kw kx ky kz la lb lc ld le lf lg lh li lj lk ll lm ln jb gc\">As the magnitude of COVID-19 set in, it became clear that our global economy was not adequately prepared to handle the shock, sending all markets into a panic. The S&amp;P and NASDAQ each declined around 30<strong class=\"ks jj\">%, <\/strong>with crypto markets getting hit harder (in absolute terms). When the dust settled, BTC briefly dropped below $4,000, shedding over 60% of its value.<\/p>\n<figure class=\"mm mn mo mp gz kj gn go paragraph-image\">\n<div role=\"button\" tabindex=\"0\" class=\"kk kl dq km cf kn\">\n<div class=\"gn go nq\"><img alt=\"\" class=\"cf ko kp\" src=\"https:\/\/miro.medium.com\/max\/1400\/0*Ck5oSQk-5CPgV2sj\" width=\"700\" height=\"475\" loading=\"lazy\" role=\"presentation\"\/><\/div>\n<\/div>\n<\/figure>\n<p id=\"022d\" class=\"pw-post-body-paragraph kq kr ji ks b kt ku kv kw kx ky kz la lb lc ld le lf lg lh li lj lk ll lm ln jb gc\">In short, COVID sent panicked investors to rush for the safety of cash, sending all liquid markets down sharply. Then the US Federal Reserve stepped in.<\/p>\n<h2 id=\"97a5\" class=\"mq mr ji bn ms mt mu mv mw mx my mz na lb nb nc nd lf ne nf ng lj nh ni nj nk gc\"><strong class=\"ba\">The Fed response<\/strong><\/h2>\n<p id=\"5952\" class=\"pw-post-body-paragraph kq kr ji ks b kt nl kv kw kx nm kz la lb nn ld le lf no lh li lj np ll lm ln jb gc\">As the Central Bank behind the world\u2019s largest economy, the US Federal Reserve plays a unique role in financial markets. Mainly, it controls the supply of the US dollar, which is the world\u2019s reserve currency.<\/p>\n<p id=\"3580\" class=\"pw-post-body-paragraph kq kr ji ks b kt ku kv kw kx ky kz la lb lc ld le lf lg lh li lj lk ll lm ln jb gc\">The money printer and interest rates are the Fed\u2019s main tools for supporting the economy in times of extreme turmoil. By digitally printing money and buying financial assets like bonds from financial institutions, they can introduce <a class=\"au lo\" href=\"https:\/\/www.youtube.com\/watch?v=ff6SDsaS7rI\" rel=\"noopener ugc nofollow\" target=\"_blank\">new money<\/a> into the economy. By lowering interest rates, they can make it cheaper for other banks to borrow money from the Fed, which also introduces new money (in the form of credit) into the economy.<\/p>\n<p id=\"7d8d\" class=\"pw-post-body-paragraph kq kr ji ks b kt ku kv kw kx ky kz la lb lc ld le lf lg lh li lj lk ll lm ln jb gc\">After COVID, the Fed dropped the cost that banks pay to borrow money from the Central Bank, known as the Federal Funds Rate, to essentially zero. This allowed banks to, in turn, lower the cost at which their customers borrow money. These cheap loans could then be used to finance homes, businesses, spending and other investments.<\/p>\n<figure class=\"mm mn mo mp gz kj gn go paragraph-image\">\n<div role=\"button\" tabindex=\"0\" class=\"kk kl dq km cf kn\">\n<div class=\"gn go ml\"><img alt=\"\" class=\"cf ko kp\" src=\"https:\/\/miro.medium.com\/max\/1400\/0*eXRSaec-amswE5_e\" width=\"700\" height=\"475\" loading=\"lazy\" role=\"presentation\"\/><\/div>\n<\/div>\n<\/figure>\n<p id=\"432b\" class=\"pw-post-body-paragraph kq kr ji ks b kt ku kv kw kx ky kz la lb lc ld le lf lg lh li lj lk ll lm ln jb gc\">By digitally printing new money and using it to buy treasury bills and other securities from financial institutions (this is known as <a class=\"au lo\" href=\"https:\/\/www.bankofengland.co.uk\/monetary-policy\/quantitative-easing\" rel=\"noopener ugc nofollow\" target=\"_blank\">quantitative easing<\/a>), an unprecedented amount of US dollars was introduced into the economy. Over the next two years, almost 6 trillion in new money was printed, increasing the broad supply of USD nearly 40%. Awash with cash, financial institutions compete to lend this fresh capital out, forcing them to lower interest rates to remain competitive. Again, availability of cheap credit encourages borrowing, which ultimately supports the economy.<\/p>\n<figure class=\"mm mn mo mp gz kj gn go paragraph-image\">\n<div role=\"button\" tabindex=\"0\" class=\"kk kl dq km cf kn\">\n<div class=\"gn go ml\"><img alt=\"\" class=\"cf ko kp\" src=\"https:\/\/miro.medium.com\/max\/1400\/0*B7JJ9dv72L-_oVsr\" width=\"700\" height=\"475\" loading=\"lazy\" role=\"presentation\"\/><\/div>\n<\/div>\n<\/figure>\n<p id=\"3a0d\" class=\"pw-post-body-paragraph kq kr ji ks b kt ku kv kw kx ky kz la lb lc ld le lf lg lh li lj lk ll lm ln jb gc\">The US wasn\u2019t alone, as the European Central Bank, Bank of Japan, and Bank of England all lowered interest rates to near (or even below zero) and printed money at historic levels. All told, the world\u2019s four major central banks printed $11.3 trillion, which is a <a class=\"au lo\" href=\"https:\/\/www.atlanticcouncil.org\/global-qe-tracker\/\" rel=\"noopener ugc nofollow\" target=\"_blank\">73% expansion since the beginning of 2020<\/a>.<\/p>\n<p id=\"8355\" class=\"pw-post-body-paragraph kq kr ji ks b kt ku kv kw kx ky kz la lb lc ld le lf lg lh li lj lk ll lm ln jb gc\">On top of all that, the US Government injected over <a class=\"au lo\" href=\"https:\/\/www.nytimes.com\/interactive\/2022\/03\/11\/us\/how-covid-stimulus-money-was-spent.html\" rel=\"noopener ugc nofollow\" target=\"_blank\">$5 trillion<\/a> of \u201cstimulus\u201d into the economy by taking on debt from public, private, and foreign entities. Similarly, China pumped another <a class=\"au lo\" href=\"https:\/\/www.bloomberg.com\/news\/articles\/2022-05-19\/china-s-stimulus-tops-5-trillion-as-covid-zero-batters-economy?sref=NpFHg3Ue\" rel=\"noopener ugc nofollow\" target=\"_blank\">$5 trillion<\/a> into its economy through the same methods. Basically, the world became awash with fresh cash.<\/p>\n<h2 id=\"835b\" class=\"mq mr ji bn ms mt mu mv mw mx my mz na lb nb nc nd lf ne nf ng lj nh ni nj nk gc\"><strong class=\"ba\">Don\u2019t fight the Fed<\/strong><\/h2>\n<p id=\"7324\" class=\"pw-post-body-paragraph kq kr ji ks b kt nl kv kw kx nm kz la lb nn ld le lf no lh li lj np ll lm ln jb gc\">\u201cDon\u2019t Fight the Fed\u201d is an old investor mantra which implies that given the Fed\u2019s outsized influence, one should invest in lockstep with whatever direction the Fed is moving financial markets. This mantra rang true after COVID struck in 2020.<\/p>\n<p id=\"0e19\" class=\"pw-post-body-paragraph kq kr ji ks b kt ku kv kw kx ky kz la lb lc ld le lf lg lh li lj lk ll lm ln jb gc\">When new money is being printed at record levels, and interest rates are near zero, all of this money and credit needs a place to go. On top of that, when rates are low, conservative instruments like bonds are less profitable, pushing money into higher yield assets. In the aftermath of COVID, these forces caused massive inflows into stocks, crypto, and even NFTs, helping push asset prices to new heights.<\/p>\n<p id=\"9f57\" class=\"pw-post-body-paragraph kq kr ji ks b kt ku kv kw kx ky kz la lb lc ld le lf lg lh li lj lk ll lm ln jb gc\">From their COVID panic induced bottoms, the S&amp;P500, NASDAQ, BTC, and ETH would soar 107%, 133%, 1,600%, and 4,200% respectively.<\/p>\n<figure class=\"mm mn mo mp gz kj gn go paragraph-image\">\n<div role=\"button\" tabindex=\"0\" class=\"kk kl dq km cf kn\">\n<div class=\"gn go nq\"><img alt=\"\" class=\"cf ko kp\" src=\"https:\/\/miro.medium.com\/max\/1400\/0*Qjbb7A_aexOxbqcZ\" width=\"700\" height=\"475\" loading=\"lazy\" role=\"presentation\"\/><\/div>\n<\/div>\n<\/figure>\n<h2 id=\"d61a\" class=\"mq mr ji bn ms mt mu mv mw mx my mz na lb nb nc nd lf ne nf ng lj nh ni nj nk gc\"><strong class=\"ba\">Enter inflation<\/strong><\/h2>\n<p id=\"73e8\" class=\"pw-post-body-paragraph kq kr ji ks b kt nl kv kw kx nm kz la lb nn ld le lf no lh li lj np ll lm ln jb gc\">When the system is awash with money, and assets are going up, everyone <em class=\"lp\">feels<\/em> richer. People can spend more and companies can pay their employees more. When spending and incomes increase faster than the production of goods, you have \u201ctoo much money chasing too few goods,\u201d and the price of goods rise, or <em class=\"lp\">inflate.<\/em><\/p>\n<p id=\"8f6f\" class=\"pw-post-body-paragraph kq kr ji ks b kt ku kv kw kx ky kz la lb lc ld le lf lg lh li lj lk ll lm ln jb gc\">With supply chain shocks stemming from COVID lockdowns, there were even fewer goods in the economy. More money chasing even fewer goods led to even more inflation. This started to become apparent in May 2021.<\/p>\n<p id=\"f8b5\" class=\"pw-post-body-paragraph kq kr ji ks b kt ku kv kw kx ky kz la lb lc ld le lf lg lh li lj lk ll lm ln jb gc\">The consumer price index (CPI) measures the change in prices paid by consumers for goods like gas, utilities, and food. From March to May 2021, it shot up from a healthy 2.6% to 5%. By March 2022 it hit 8% <strong class=\"ks jj\">\u2014 levels of inflation not seen in over 40 years<\/strong>.<\/p>\n<figure class=\"mm mn mo mp gz kj gn go paragraph-image\">\n<div role=\"button\" tabindex=\"0\" class=\"kk kl dq km cf kn\">\n<div class=\"gn go ml\"><img alt=\"\" class=\"cf ko kp\" src=\"https:\/\/miro.medium.com\/max\/1400\/0*BHejt5x2cYv6fkgU\" width=\"700\" height=\"475\" loading=\"lazy\" role=\"presentation\"\/><\/div>\n<\/div>\n<\/figure>\n<p id=\"b3ea\" class=\"pw-post-body-paragraph kq kr ji ks b kt ku kv kw kx ky kz la lb lc ld le lf lg lh li lj lk ll lm ln jb gc\">Inflation makes everyone poorer, because people\u2019s money no longer buys as much as it once did, so the Fed had to step in once again. To combat rising inflation, they turn to the same tools they used to support financial assets in the first place.<\/p>\n<h2 id=\"c1ec\" class=\"mq mr ji bn ms mt mu mv mw mx my mz na lb nb nc nd lf ne nf ng lj nh ni nj nk gc\"><strong class=\"ba\">Reversing course<\/strong><\/h2>\n<p id=\"7000\" class=\"pw-post-body-paragraph kq kr ji ks b kt nl kv kw kx nm kz la lb nn ld le lf no lh li lj np ll lm ln jb gc\">As we explained, low interest rates and newly printed money support both the economy and asset prices. When overdone, they can also lead to inflation. When that happens, the Fed flips the switch, raises rates and removes money from the market, setting the process in reverse.<\/p>\n<p id=\"74fd\" class=\"pw-post-body-paragraph kq kr ji ks b kt ku kv kw kx ky kz la lb lc ld le lf lg lh li lj lk ll lm ln jb gc\">Raising interest rates ripples throughout the economy. Since it makes it more expensive for banks to borrow from the Central Bank, they in turn charge customers more to borrow money. On top of it becoming more expensive for everyone to borrow money, the price to pay for money already borrowed also goes up (think if your credit card rate jumped from 5 to 10%).<\/p>\n<p id=\"870e\" class=\"pw-post-body-paragraph kq kr ji ks b kt ku kv kw kx ky kz la lb lc ld le lf lg lh li lj lk ll lm ln jb gc\">Where quantitative easing involves injecting money into the economy by buying securities from financial institutions, <a class=\"au lo\" href=\"https:\/\/www.investopedia.com\/quantitative-tightening-is-here-5270749\" rel=\"noopener ugc nofollow\" target=\"_blank\">quantitative tightening<\/a> is the opposite. First, the Fed stops buying securities while letting existing securities expire, and eventually, begins selling them on the open market. This ultimately leads to less money in the economy. Less money to lend out causes interest rates to rise due to simple supply and demand.<\/p>\n<p id=\"5707\" class=\"pw-post-body-paragraph kq kr ji ks b kt ku kv kw kx ky kz la lb lc ld le lf lg lh li lj lk ll lm ln jb gc\">With the cost of borrowing and paying existing debts more expensive, everyone slows down on the spending that caused inflation in the first place. With less money being pumped into the economy via asset purchases, there\u2019s less money chasing inflated goods, and prices in theory should normalize. There\u2019s also less money chasing investments, which brings the price of assets down along with it \u2014 something sophisticated market participants know all too well.<\/p>\n<h2 id=\"76f7\" class=\"mq mr ji bn ms mt mu mv mw mx my mz na lb nb nc nd lf ne nf ng lj nh ni nj nk gc\"><strong class=\"ba\">The machine reacts<\/strong><\/h2>\n<p id=\"7d96\" class=\"pw-post-body-paragraph kq kr ji ks b kt nl kv kw kx nm kz la lb nn ld le lf no lh li lj np ll lm ln jb gc\">When inflation was hanging around 5% over the summer, the line out of the Fed was that it was \u201ctransitory,\u201d or non-permanent. On <a class=\"au lo\" href=\"https:\/\/www.bloomberg.com\/news\/articles\/2021-11-03\/fed-to-start-tapering-asset-buys-by-15-billion-later-this-month?sref=NpFHg3Ue\" rel=\"noopener ugc nofollow\" target=\"_blank\">November 3rd, 2021<\/a>, the Fed said that it would start to slow asset purchases, but would be patient with any interest rate hikes as it continued to monitor inflation.<\/p>\n<p id=\"84e6\" class=\"pw-post-body-paragraph kq kr ji ks b kt ku kv kw kx ky kz la lb lc ld le lf lg lh li lj lk ll lm ln jb gc\">When October\u2019s CPI of 6.2% was <a class=\"au lo\" href=\"https:\/\/www.bls.gov\/news.release\/archives\/cpi_11102021.htm\" rel=\"noopener ugc nofollow\" target=\"_blank\">announced<\/a> on November 10th, it became clear that inflation was not under control and that the Fed would have to intervene. While the first interest rate hike wouldn\u2019t come until March, the great information processing machine that is the market, seemed to react at first sign that they\u2019d <em class=\"lp\">likely <\/em>be coming.<\/p>\n<p id=\"f435\" class=\"pw-post-body-paragraph kq kr ji ks b kt ku kv kw kx ky kz la lb lc ld le lf lg lh li lj lk ll lm ln jb gc\">Don\u2019t fight the Fed rang true once again, as BTC and ETH each peaked on November 8th, the NASDAQ on November 19th, and the S&amp;P at the end of December.<\/p>\n<figure class=\"mm mn mo mp gz kj gn go paragraph-image\">\n<div role=\"button\" tabindex=\"0\" class=\"kk kl dq km cf kn\">\n<div class=\"gn go nq\"><img alt=\"\" class=\"cf ko kp\" src=\"https:\/\/miro.medium.com\/max\/1400\/0*s2qltHtkIfJODWSs\" width=\"700\" height=\"475\" loading=\"lazy\" role=\"presentation\"\/><\/div>\n<\/div>\n<\/figure>\n<p id=\"d16f\" class=\"pw-post-body-paragraph kq kr ji ks b kt ku kv kw kx ky kz la lb lc ld le lf lg lh li lj lk ll lm ln jb gc\">Even the <a class=\"au lo\" href=\"https:\/\/nftpricefloor.com\/cryptopunks\" rel=\"noopener ugc nofollow\" target=\"_blank\">CryptoPunks floor price<\/a> (a proxy for NFT sentiment) and <a class=\"au lo\" href=\"https:\/\/defillama.com\/\" rel=\"noopener ugc nofollow\" target=\"_blank\">DeFi TVL<\/a> peaked during this same period.<\/p>\n<h2 id=\"cdc9\" class=\"mq mr ji bn ms mt mu mv mw mx my mz na lb nb nc nd lf ne nf ng lj nh ni nj nk gc\"><strong class=\"ba\">In a nutshell<\/strong><\/h2>\n<p id=\"339c\" class=\"pw-post-body-paragraph kq kr ji ks b kt nl kv kw kx nm kz la lb nn ld le lf no lh li lj np ll lm ln jb gc\">Basically, in response to COVID, Central Bank and government intervention helped keep markets afloat with record low interest rates, money printing and stimulus. These easy money policies ultimately helped propel stocks and crypto to all-time highs before leading to inflation \u2014 inflation that was exacerbated by supply chain stocks stemming from COVID lock downs in China (and later on in 2022, Russia\u2019s invasion of Ukraine).<\/p>\n<p id=\"6051\" class=\"pw-post-body-paragraph kq kr ji ks b kt ku kv kw kx ky kz la lb lc ld le lf lg lh li lj lk ll lm ln jb gc\">When it became clear that inflation was persistent and that Central Banks would have to reverse course and bring an end to the policies that propelled many assets to new heights, the macro downturn began.<\/p>\n<h2 id=\"657b\" class=\"mq mr ji bn ms mt mu mv mw mx my mz na lb nb nc nd lf ne nf ng lj nh ni nj nk gc\"><strong class=\"ba\">The great re-rating<\/strong><\/h2>\n<p id=\"6432\" class=\"pw-post-body-paragraph kq kr ji ks b kt nl kv kw kx nm kz la lb nn ld le lf no lh li lj np ll lm ln jb gc\">While we started our story at the beginning of 2020, the era of easy Central Bank monetary policies started in the wake of the 2008 Great Financial Crisis. An era that saw the birth of crypto as well as a historic run in equities.<\/p>\n<p id=\"0dac\" class=\"pw-post-body-paragraph kq kr ji ks b kt ku kv kw kx ky kz la lb lc ld le lf lg lh li lj lk ll lm ln jb gc\">In the face of inflation not seen in 40 years, Central Banks have signaled that the easy money era has come to an end. Previous frameworks for valuing companies and assets are no longer relevant in lieu of this shift. The value of everything has been \u201cre-rated\u201d, which is the downturn we\u2019ve all experienced over the course of the last six months.<\/p>\n<p id=\"7b05\" class=\"pw-post-body-paragraph kq kr ji ks b kt ku kv kw kx ky kz la lb lc ld le lf lg lh li lj lk ll lm ln jb gc\">When interest rates rise, bonds become more attractive investments. Meanwhile, \u201cgrowth\u201d stocks, or companies that aren\u2019t expected to produce dividends until many years in the future get hit the hardest. With money tighter, investors preferences shift to investments that produce cash flows today, rather than far out in the future. Thus the tech sell-off.<\/p>\n<h2 id=\"93d0\" class=\"mq mr ji bn ms mt mu mv mw mx my mz na lb nb nc nd lf ne nf ng lj nh ni nj nk gc\"><strong class=\"ba\">Crypto selloff<\/strong><\/h2>\n<p id=\"6899\" class=\"pw-post-body-paragraph kq kr ji ks b kt nl kv kw kx nm kz la lb nn ld le lf no lh li lj np ll lm ln jb gc\">But wasn\u2019t crypto supposed to be an inflation hedge? It depends. If you bought Bitcoin in May 2020 after macro investor Paul Tudor Jones famously dubbed it \u201c<a class=\"au lo\" href=\"https:\/\/www.cnbc.com\/video\/2020\/05\/07\/paul-tudor-jones-calls-bitcoin-fastest-horse-in-this-environment.html\" rel=\"noopener ugc nofollow\" target=\"_blank\">the fastest horse<\/a>\u201d in a post COVID environment, you\u2019re still up over 200% and well ahead of inflation. If you bought after inflation started to rear its head, much less so.<\/p>\n<p id=\"b808\" class=\"pw-post-body-paragraph kq kr ji ks b kt ku kv kw kx ky kz la lb lc ld le lf lg lh li lj lk ll lm ln jb gc\">Even with the correction, Bitcoin and ETH are each still up 500% and 1,000% respectively from their pandemic lows. Longer tail assets have not fared as well, however, and it\u2019s hard to deny that this time around crypto more broadly has been highly correlated with stocks \u2014 particularly tech.<\/p>\n<p id=\"b2fa\" class=\"pw-post-body-paragraph kq kr ji ks b kt ku kv kw kx ky kz la lb lc ld le lf lg lh li lj lk ll lm ln jb gc\">Tech stocks are considered <em class=\"lp\">risk assets<\/em>. Given the correlation, it\u2019s fair to say that most individuals are still treating crypto similarly. Risk assets carry high upside, as well as high downside risk. When money gets tight, which is what happens when Central Banks tighten up, risk assets are often the first to get sold. That, in a nutshell, explains the recent crypto market downturn.<\/p>\n<h2 id=\"9dfb\" class=\"mq mr ji bn ms mt mu mv mw mx my mz na lb nb nc nd lf ne nf ng lj nh ni nj nk gc\"><strong class=\"ba\">The Fed giveth<\/strong><\/h2>\n<p id=\"c0b7\" class=\"pw-post-body-paragraph kq kr ji ks b kt nl kv kw kx nm kz la lb nn ld le lf no lh li lj np ll lm ln jb gc\">Have you ever wondered why market participants hang on every word of the Fed Chair? It\u2019s because they know that the direction in which the Fed turns its dials can significantly influence markets and the economy. It can make businesses succeed or fail, and home values rise or fall.<\/p>\n<p id=\"e6bf\" class=\"pw-post-body-paragraph kq kr ji ks b kt ku kv kw kx ky kz la lb lc ld le lf lg lh li lj lk ll lm ln jb gc\">It\u2019s not done with malice, but with the noble aim of keeping prices stable and people employed. However, the Fed\u2019s tools are somewhat crude, and in the hands of well meaning, but inherently fallible groups of people. It isn\u2019t unreasonable to think it strange that the unilateral decisions of a very small group of people remain so consequential for the average person.<\/p>\n<p id=\"b764\" class=\"pw-post-body-paragraph kq kr ji ks b kt ku kv kw kx ky kz la lb lc ld le lf lg lh li lj lk ll lm ln jb gc\">While crypto prices are clearly not immune to Fed policy, it should also come as no surprise that it was among the best performing asset classes over this last market cycle. Easy money policies encourage speculation, and speculation has always accompanied paradigm shifting technologies: personal computers, the internet, smartphones, and even the <a class=\"au lo\" href=\"https:\/\/en.wikipedia.org\/wiki\/Railway_Mania\" rel=\"noopener ugc nofollow\" target=\"_blank\">railroads of the 1800\u2019s<\/a>.<\/p>\n<p id=\"98f6\" class=\"pw-post-body-paragraph kq kr ji ks b kt ku kv kw kx ky kz la lb lc ld le lf lg lh li lj lk ll lm ln jb gc\">Additionally, Bitcoin and its hard supply of 21 million that can\u2019t be debased by a central authority continue to stand in stark contrast to Central Bank money printers. <a class=\"au lo\" href=\"https:\/\/www.youtube.com\/watch?v=xguam0TKMw8\" rel=\"noopener ugc nofollow\" target=\"_blank\">History tells us<\/a> that all centrally managed currencies fail eventually, typically from mass inflation via economic mismanagement. While this cycle has also shown that crypto is still far from without its risks and shortcomings, it also further validated the need for decentralized systems free from the risks of single-party control to co-exist with centralized counterparts. While crypto prices will remain influenced by Fed policy in the short run, in the long run, crypto and Web3 remain more alluring than ever.<\/p>\n<h2 id=\"6c30\" class=\"mq mr ji bn ms mt mu mv mw mx my mz na lb nb nc nd lf ne nf ng lj nh ni nj nk gc\"><strong class=\"ba\">Looking ahead<\/strong><\/h2>\n<p id=\"97a9\" class=\"pw-post-body-paragraph kq kr ji ks b kt nl kv kw kx nm kz la lb nn ld le lf no lh li lj np ll lm ln jb gc\">If this is your first crypto market downturn, it can certainly be scary. It is however, not without precedent. This market has been pronounced dead in 2018, 2015, and 2013, only to come back stronger each time.<\/p>\n<p id=\"434b\" class=\"pw-post-body-paragraph kq kr ji ks b kt ku kv kw kx ky kz la lb lc ld le lf lg lh li lj lk ll lm ln jb gc\">Like the internet before it, crypto innovation marches on regardless of market cycles.<\/p>\n<figure class=\"mm mn mo mp gz kj gn go paragraph-image\">\n<div role=\"button\" tabindex=\"0\" class=\"kk kl dq km cf kn\">\n<div class=\"gn go nr\"><img alt=\"\" class=\"cf ko kp\" src=\"https:\/\/miro.medium.com\/max\/1400\/0*6ALgHoiCAF0re4Ep\" width=\"700\" height=\"397\" loading=\"lazy\" role=\"presentation\"\/><\/div>\n<\/div><figcaption class=\"ns bm gp gn go nt nu bn b bo bp co\">h\/t <a class=\"au lo\" href=\"https:\/\/twitter.com\/cdixon\/status\/1529291066045870081?s=21&amp;t=xyBuJt1rk1pa7GnWd7ylYQ\" rel=\"noopener ugc nofollow\" target=\"_blank\">Chris Dixon<\/a><\/figcaption><\/figure>\n<p id=\"449c\" class=\"pw-post-body-paragraph kq kr ji ks b kt ku kv kw kx ky kz la lb lc ld le lf lg lh li lj lk ll lm ln jb gc\">From our seat, crypto feels more inevitable than it\u2019s ever been. Bitcoin has global adoption, now held by institutions, corporations, countries, and millions of individuals alike. DeFi has created the underpinnings of an internet based financial system with no single party in control. The <a class=\"au lo\" rel=\"noopener ugc nofollow\" target=\"_blank\" href=\"https:\/\/blog.coinbase.com\/a-simple-guide-to-the-web3-stack-785240e557f0\">foundations for Web3<\/a> and a user-owned internet have been laid. <a class=\"au lo\" rel=\"noopener ugc nofollow\" target=\"_blank\" href=\"https:\/\/blog.coinbase.com\/the-coinbase-ventures-guide-to-nfts-db1ad58b4e0d\">NFTs<\/a> have birthed billion dollar industries across art and gaming with a diverse array of use cases on the way. <a class=\"au lo\" rel=\"noopener ugc nofollow\" target=\"_blank\" href=\"https:\/\/blog.coinbase.com\/daos-social-networks-that-can-rewire-the-world-128b73732547\">DAO<\/a> treasuries manage <a class=\"au lo\" href=\"https:\/\/deepdao.io\/organizations\" rel=\"noopener ugc nofollow\" target=\"_blank\">nearly $10B+<\/a> and are just getting started. Crypto\u2019s real world utility has been showcased on the world stage, <a class=\"au lo\" rel=\"noopener ugc nofollow\" target=\"_blank\" href=\"https:\/\/blog.coinbase.com\/cryptos-emergence-as-a-geopolitical-force-30f29d62e562\">raising millions in aid<\/a> for Ukraine following a Russian invasion.<\/p>\n<p id=\"405e\" class=\"pw-post-body-paragraph kq kr ji ks b kt ku kv kw kx ky kz la lb lc ld le lf lg lh li lj lk ll lm ln jb gc\">Even the biggest detractors have come around. <a class=\"au lo\" href=\"https:\/\/www.coindesk.com\/policy\/2022\/05\/06\/nine-out-of-ten-central-banks-exploring-digital-currency-bis-says\/\" rel=\"noopener ugc nofollow\" target=\"_blank\">9 out of 10<\/a> Central Banks are exploring digital currencies and analysts at JP Morgan have dubbed crypto a \u201c<a class=\"au lo\" href=\"https:\/\/www.forbes.com\/sites\/ninabambysheva\/2022\/05\/25\/jpmorgan-says-bitcoin-is-undervalued-by-28-says-cryptocurrencies-are-now-its-preferred-alternative-asset\/?sh=3cd191151d70\" rel=\"noopener ugc nofollow\" target=\"_blank\">preferred alternative asset class<\/a>.\u201d Facebook rebranded to Meta, Twitter, Spotify, TikTok and Instagram are integrating NFTs, while Google and Microsoft are each dipping their toes into Web3.<\/p>\n<p id=\"d08e\" class=\"pw-post-body-paragraph kq kr ji ks b kt ku kv kw kx ky kz la lb lc ld le lf lg lh li lj lk ll lm ln jb gc\">In the long run, it appears that the proliferation of the financial internet is a function of time, rather than Central Bank policy.<\/p>\n<h2 id=\"dcd9\" class=\"mq mr ji bn ms mt mu mv mw mx my mz na lb nb nc nd lf ne nf ng lj nh ni nj nk gc\"><strong class=\"ba\">The weighing machine<\/strong><\/h2>\n<p id=\"ccc3\" class=\"pw-post-body-paragraph kq kr ji ks b kt nl kv kw kx nm kz la lb nn ld le lf no lh li lj np ll lm ln jb gc\">As we mentioned, Benjamin Graham said that in <strong class=\"ks jj\"><em class=\"lp\">the short run, the market is a voting machine. <\/em><\/strong>But he also said that<strong class=\"ks jj\"> in the long run it is a weighing machine. <\/strong>In the short run it\u2019s a giant information processing machine subject to emotional swings when presented with distressing information. In the long run, it has a knack for weighing assets based on their true value.<\/p>\n<p id=\"7a4d\" class=\"pw-post-body-paragraph kq kr ji ks b kt ku kv kw kx ky kz la lb lc ld le lf lg lh li lj lk ll lm ln jb gc\">Bitcoin and Ethereum have maintained their weight over past downturns. Many other crypto assets will be weighed accordingly over the current downturn. The job of the individual is to vote in the short run for whatever they think the market will weigh as valuable in the long run.<\/p>\n<p id=\"ed1f\" class=\"pw-post-body-paragraph kq kr ji ks b kt ku kv kw kx ky kz la lb lc ld le lf lg lh li lj lk ll lm ln jb gc\">At Coinbase, our votes are cast on crypto, Web3, and the financial internet eventually being weighed as one of the most valuable innovations of our time.<\/p>\n<\/div>\n<p><script async src=\"\/\/platform.twitter.com\/widgets.js\" charset=\"utf-8\"><\/script><br \/>\n<br \/><a href=\"https:\/\/blog.coinbase.com\/the-crypto-market-downturn-explained-a-macro-outlook-bfbeddf69d44?source=rss----c114225aeaf7--bitcoin\">Source link <\/a><br \/>\n<br \/><\/p>\n","protected":false},"excerpt":{"rendered":"<p>(Originally posted on : Bitcoin in The Coinbase Blog on Medium ) Around the Block from Coinbase Ventures sheds light on key trends in crypto. Written by Connor Dempsey. Data by Mike Cohen. TLDR: Central Banks and governments responded to the March 2020 COVID market shock with unprecedented interest rate cuts, money printing, and stimulus [&hellip;]<\/p>\n","protected":false},"author":20,"featured_media":12769,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"om_disable_all_campaigns":false,"_monsterinsights_skip_tracking":false,"_monsterinsights_sitenote_active":false,"_monsterinsights_sitenote_note":"","_monsterinsights_sitenote_category":0},"categories":[32],"tags":[],"_links":{"self":[{"href":"https:\/\/crowdfundjunction.com\/blog\/wp-json\/wp\/v2\/posts\/12768"}],"collection":[{"href":"https:\/\/crowdfundjunction.com\/blog\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/crowdfundjunction.com\/blog\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/crowdfundjunction.com\/blog\/wp-json\/wp\/v2\/users\/20"}],"replies":[{"embeddable":true,"href":"https:\/\/crowdfundjunction.com\/blog\/wp-json\/wp\/v2\/comments?post=12768"}],"version-history":[{"count":0,"href":"https:\/\/crowdfundjunction.com\/blog\/wp-json\/wp\/v2\/posts\/12768\/revisions"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/crowdfundjunction.com\/blog\/wp-json\/wp\/v2\/media\/12769"}],"wp:attachment":[{"href":"https:\/\/crowdfundjunction.com\/blog\/wp-json\/wp\/v2\/media?parent=12768"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/crowdfundjunction.com\/blog\/wp-json\/wp\/v2\/categories?post=12768"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/crowdfundjunction.com\/blog\/wp-json\/wp\/v2\/tags?post=12768"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}