FTX is insolvent: what future for the cryptocurrency?

Three weeks ago I posted an analysis noting that I feared bitcoin was one bad news story away from falling towards $15,000.

So, have we had that event?

However, I had not anticipated it. My article made no reference to anything about FTX. Not only that, but I have already elaborated in the past on Bankman-Fried’s insight. I misinterpreted his character, and I was wrong.

In a review of FTX’s solvency published Monday morning, I still believed it was highly unlikely that FTX was insolvent.

I also repeated the same adage over and over again: betting with Bitcoin in the short term is akin to spinning roulette.

But as we were hovering around $20,000 and heading into a winter plagued by worrisome variables such as an energy crisis, high inflation, a nasty geopolitical climate and political turmoil in the U.S., U.K. and many European countries, the risk was extremely high.

And then an extraneous variable: the FTX implosion. And in the words of the wonderful Black Eyed Peas, “it’s going down now and not a little later.”

Is it time to buy on the downside?

I don’t like this question for two reasons.

The first is that, being a random guy found on the internet, how would I know? As I said a few sentences ago, betting short term on Bitcoin is like spinning the roulette wheel. My opinion on whether I like red or black would be just as valid as what I think of Bitcoin’s short term action.

The second reason is that this question is almost a reaction to the cryptocurrency price crash story. Born out of the culture of the space, I guess. In the middle, people point to past cycles and reference how bitcoin has always come back. But they miss the point.

Bitcoin launched in January 2009, in one of the longest and most explosive bull runs in history. As of this year, that is no longer the case. Free money was turned off, and then the Federal Reserve raised interest rates at historically rapid rates, with inflation not seen since the 1970s.

This is the first time bitcoin has experienced a broader economic bear market. And for that reason, all bets are off. And it now trades at lower levels than it did five years ago, in December 2017.

There’s nothing like buying at the lows and laughing all the way down. A look at the chart above will show how many lows there have been this year. This stuff is tough. Trading is tough. Cryptocurrencies are a volatile game. For every screenshot you see on Twitter showing that person has multiplied their initial investment by 100, there are 100 more people who have lost it all.

Continue to follow news from the broader economy.

FTX’s implosion is wild. And it’s incredibly bearish for the cryptoeconomy as a whole. Some contagion is to be expected, as we don’t yet know who has been exposed to whom, but FTX, as such a major player in the sector, will undoubtedly take some entities with it.

But let’s not lose sight of the big trend. Cryptocurrencies follow the stock market. Blue chip assets like Bitcoin and Ethereum are the tail of the dog, the dog being the stock market. And that the stock market oscillates between inflation readings and the Fed’s approach to interest rates.

Last month I wrote about how this correlation between stocks and Bitcoin is as high as ever. It went way up in April 2022, just as we entered this high interest rate environment.

This FTX episode has to happen in the short term. Contagion will spread, news will come out, surprises will come out. And after that, we’ll go back to the stock market. In case it wasn’t already clear, cryptocurrency markets are ruthless. Don’t forget that and stay alert.