Thousands of dollars completely gone … FTX’s founder might be charged … why Luke Lango believes we’re near a crypto buy-zone … wholesale prices cool off
Thousands of dollars…gone.I played golf last weekend with a foursome that included a young man who had liquidated some of his crypto holdings in recent months. It was a precautionary move as the sector experienced months of growing weakness.Unfortunately, he left that cash in his account on the exchange… FTX.Today, he’s looking at the potential for the complete destruction of that entire cash position. Multiple thousands of dollars, untouchable. He’ll likely never see a dime of it again.He’s hardly the only victim.From CNN Business:
As the dust settles from one of the most shocking financial implosions in history, one of the key unknowns is how much customers who can’t access their money expect to get back from FTX, the crypto exchange that filed for bankruptcy last week…The answer, according to legal experts, may be zero.…It looks increasingly likely that customers who handed their money over to FTX could be left holding the bag.“We just don’t know the extent of contagion,” said Howard Fischer, a partner at law firm Moses Singer and a former Securities and Exchange Commission lawyer.“The first ring of victims are the people who had assets held in FTX…They are probably not going to be made whole, or anywhere close to it.”
Our hearts go out to everyone in this situation.
More broadly, what should crypto investors do today in the wake of the FTX implosion?
On one hand, the potential for additional sector contagion suggests investors should move into maximum safety mode.On the other hand, are we witnessing a “buy when there’s blood in the streets” moment?We could be seeing prices for bitcoin, Ethereum, and Solana that we’ll dream about in the years to come.Over the weekend, our crypto expert Luke Lango of Ultimate Crypto provided his take. Here’s his top-line:
While much has been said about the FTX implosion and the bears are crawling out of the woodwork to call the event the “nail in the coffin” for the crypto markets, we actually think the event will ultimately prove to be much ado about nothing.That is, we still expect cryptos to soar in 2023.
Let’s dive into these details.
Bankruptcies don’t stop transformative technologies
If you need a refresher on what happened last week with the crypto exchange FTX, you can review our Digests here and here.The latest news is that FTX’s now-resigned CEO, Sam Bankman-Fried is potentially facing criminal charges.From The Wall Street Journal:
FTX’s implosion last week and reports that it used customer funds to back an affiliate’s risky venture investments have exposed the company and its founder to potential criminal liability, according to attorneys who specialize in white-collar criminal law.The Manhattan U.S. attorney’s office is investigating FTX’s collapse, according to people familiar with the matter. One focus for prosecutors, at least initially, is likely to be examining reports that FTX lent customer funds to Alameda Research, a crypto-trading firm that traded on FTX and other exchanges…Using customer funds for proprietary trading or lending them out—without an investor’s consent—is generally forbidden in the regulated securities and derivatives markets.
As we noted in the Digest last week, this is a massive black eye for the crypto sector. And the understandable, emotional reaction to this is “bail on the sector. Protect your assets in case there’s another shoe to drop.”But if Luke’s right, courageous investors should see it as a potential opportunity. After all, history shows that bankruptcies aren’t unusual in budding technology markets.From Saturday’s Ultimate Crypto update:
Big bankruptcies should be expected in cryptos at this stage of the game.Early-stage technological megatrends always have high-profile bankruptcies, like Commodore in the computer revolution, nearly Nokia in the smartphone revolution, and WorldCom in the internet revolution.Even further, the financial sector is full of its own high-profile bankruptcies, most notably Lehman Brothers…Importantly, these bankruptcies will not stop the crypto movement. Commodore’s bankruptcy didn’t stop the computer from becoming a consumer ubiquity. Nokia’s near-bankruptcy didn’t stop the smartphone from redefining communication globally. WorldCom’s bankruptcy didn’t stop the internet industry from eating the world. Nor did Lehman Brothers bankruptcy destroy the global financial system.Technological megatrends tend to take bankruptcies on the chin, and keep moving forward. Cryptos will prove no different.
The real driver of the crypto sector in 2023
The crypto sector is no stranger to crashes.Making this point, Luke highlights the Terra fiasco from earlier this year as one such crash that felt like it might take down the entire crypto sector. What happened was a brief sector crash, after which bitcoin and fellow cryptos went flat for about five months as investors mostly moved on from Terra debacle.Luke sees the same thing playing out with FTX’s collapse. Importantly, he sees increasingly-bullish macroeconomic factors driving cryptos prices next year rather than momentary events like FTX.Back to Luke:
[Last] week, we found that inflation is crashing – and that it is doing so without the help of unemployment spiking and the housing market rolling over.But we know that unemployment rates are going to start spiking soon (look at all the layoff announcements, from Meta to Disney to Lyft) and that home prices are going to start dropping (list prices have been cut dramatically).Therefore, inflation – which is already crashing – will crash even harder over the next several months as the labor market weakens and home prices drop.This rapid crash in inflation will force the Fed to pivot dovish in early 2023, which will lead to a drop in projected interest rates and a drop in bond market yields.
Put all this together, and Luke sees macro factors converging to drive a massive rally across risk assets.
News this morning suggests Luke’s macro forecast is playing out
The latest producer price index report showed that wholesale prices increased less than expected in October.Here’s CNBC:
The producer price index, a measure of the prices that companies get for finished goods in the marketplace, rose 0.2% for the month, against the Dow Jones estimates for a 0.4% increase…On a year-over-year basis, PPI rose 8% compared to an 8.4% increase in September and off the all-time peak of 11.7% hit in March. The monthly increase equaled September’s gain of 0.2%.Excluding food, energy and trade services, the index also rose 0.2% on the month and 5.4% on the year. Excluding just food and energy, the index was flat on the month and up 6.7% on the year.
This reading supports the idea that we’re beyond peak inflation, and the price growth is cooling.So, if this economic trajectory continues, what exactly does it mean for crypto?
The coming multi-decade bull market for crypto
Big picture, Luke is looking for macroeconomic conditions to continue strengthening. He expects cryptos are due for a massive rally in 2023 behind falling inflation, falling rates, and falling yields.But he doesn’t see this being a run-of-the-mill recovery rally. Instead, Luke says it will be “the start of a multi-decade trend.”Behind this belief is a comparison with the Dot Com Crash back in 2000.Let’s return to the Ultimate Crypto update:
There are two sides to the coin when it comes to the Dot Com Crash.The first side is that tech stocks got butchered by 80% in the early 2000s. The second side is that after getting butchered, those same tech stocks soared by thousands of percent over the next 20 years.Therefore, if this really is the Dot Com Crash 2.0, then at some point, the crypto crash will create amazing investment opportunities.
One quick addition to Luke’s point…QQQ, which is an ETF tracking the Nasdaq 100, fell 81% between March 2000 and August 2002.An 81% can feel irrecoverable. After all, just to claw back to break-even, an investor would have to make roughly 526%.But even including this disastrous 81% loss, had an investor held QQQ (which, granted, would have been very hard to do), the total return through the beginning of this year would have been more than 300%. That’s extraordinary.And as Luke pointed out, buying at, or near, those lows would have made investors nearly 2,000%. And that’s from a broad index. As you know, many specific stocks soared many thousands of percent.
So, does that mean Luke is urging his Ultimate Crypto subscribers to add new positions to their portfolios today?
Not yet.Back to Luke:
[We are not] rushing to buy the dip.The FTX and Terra fiascos do warrant caution. We should wait for confirmation signals from the market before we do actually buy the dip.However, it does mean we shouldn’t run for the hills, either, and instead, should wait on the sidelines, ready to pounce when the technicals start to improve.
We’re running long, so let’s wrap up with Luke’s final take on the impact of the FTX implosion and what it means for crypto going forward:
[Last] week was a setback, not a deal-breaker.Ultimately, the market will move on from the FTX fiasco. The lasting impacts will be minor.Macroeconomic factors will overwhelm the news flow and price action by December, and if those factors do pan out as bullishly as we expect, then cryptos should be off to the races by early 2023.
Have a good evening,Jeff Remsburg
