Market Outlook #2 – From the Alpha to the Omega

2nd December

Last week I posited that the crypto market was well positioned to recover following the sustained bearishness that characterised the largest part of November. Although we find overall market cap at largely the same level today, the preceeding days have been volatile. This is as a result of the new Omicron variant of COVID-19 and statements from the Federal Reserve indicating a potential acceleration in the tapering of monetary stimulus. This macro context will continue to loom large until the market has a clearer understanding of one or both topics, and this is true for both crypto as well as trad-fi.

As we wade through the alphabet soup of COVID mutations, we would do well to remember that markets were similarly shaken by the Delta variant a few short months ago. On the 19^th July 2021 we hit max pain on Delta variant fears and on the day a Bitcoin could be had for the paltry sum of $29,302.  The Crypto fear and greed index* was hovering just above its low for the year and crypto bros everywhere were updating their LinkedIn profiles in preparation for needing to find a real job.

The 7-day rolling average of new COVID cases globally was 520,000 (vs 570,000 today) and US M2 money supply was roughly half a trillion dollars lower than today.

What happened after 19^th July 2021? We discovered Delta was not dissimilar to Alpha, Beta, and Gamma, and we continued rolling out vaccines.

And crypto gained 130%.

While my lack of medical training precludes me from commenting on the relative pathogenicity of Omicron, as opposed to any other strain, one could consider two potential scenarios:

1. Efficacy of the vaccines is substantially reduced, and we have another COVID-induced economic contraction. On a short-term basis, markets will take a beating particularly since leverage is high (see BTC estimated leverage) and we haven’t had a true flush out of leverage since September. On the medium-term this will preclude monetary tightening and the Fed will return to the “it’s transitory” narrative on inflation. As crypto fundamentals won’t be any weaker than they are today, many (both institutional and retail) will use this as a second chance to get in on projects they missed. This is likely to be jet fuel for prices.
2. Efficacy of the vaccines is not significantly reduced against Omicron. We breathe a sigh of relief and go back to analysing on-chain data, whitepapers, charts, and the Tweets of Elon Musk. Crypto fundamentals are strong, and the bull thesis will hold at least until monetary policy changes start becoming a reality (or we are somehow surprised by the emergence of the Rho/Theta/Epsilon-squared variants).

While any assignment of probability of occurrence to either scenario requires a Virology qualification, it’s not difficult to see that market participants may be overreacting. In the 3 hours after the announcement from the CDC that the first US case of Omicron had been identified, both the S&P and the BTC/USD pairs shed just over 3 %. Did we really get taken by surprise and think that somehow the USA would be immune?

Risk-on or Risk-off?

Last week I advised caution on gaming and metaverse projects and reiterated my bullish stance on Ethereum in the face of rising anti-ETH sentiment. ETH subsequently flirted with ATH but has retreated to largely flat, while the gaming/metaverse sector is down 7.5 % with tokens red across the board. This is most likely to be a healthy consolidation period rather than a major narrative change however.

From a sector perspective smart contract platforms have held their own (0.22% up in the last 7 days) and outperformed BTC by some 4.86 % in the last week. Alts remaining green while BTC and traditional markets retreat is an unusually risk-on signal given the context discussed previously. This leads me to remain in risk-on posture however we can expect volatility to continue until scientific consensus is reached on the severity of Omicron.