Crypto Sells Off As Hedge Funds Scramble To Protect Their Year

“Once upon a time, Gold was the most desirable store of value. Now Bitcoin is taking its place.” — Michael Saylor

5 min readDec 10, 2021

Michael actually had way, way harsher words for gold in a segment on Yahoo Finance following the crypto congressional hearings on Wednesday. However, we have some gold bugs on our mailing list who are still easing up to Bitcoin so I’ll leave it at that. Watch at your own discretion:

Enough with the Saylor praising and gold bashing — let’s address the fact that we’ve seen a pretty massive correction in crypto since last Friday. One can argue that the crypto dump that saw BTC and ETH lose over 20% of their value on December 4th was due in large part because investors had nothing else to sell over the weekend when signalling their feelings toward a severe reduction in risk asset prices. Look up the expression “a gift and a curse” and you will see the fact that the crypto market is open 24/7.

Gotta dig a bit deeper…

Most of our clients/readers are way smarter than I am so when I talk macro I always feel a bit hesitant because 1. I’m inherently biassed and 2. I’m relatively young (but like Gandalf in “bitcoin years”).

I was talking to a hedge fund manager today (what up Steve!) who was generous enough with his time to explain to me how he was looking at current market dynamics.

Hedge fund managers are paid on performance. Naturally, as we get closer to December 31st, HF managers will derisk to secure their end of year bonuses. Ex. in a typical structure, a HF manager will have a high-water mark or hurdle rate to achieve before they can lock in their performance and collect their end of year bonus. So naturally, as year end comes closer, HF managers are either scrambling to generate excess returns to capture a bonus or are in protection mode derisking their portfolio as much as possible to lock in their bonus.

Over the past year or so, Bitcoin (and to a lesser extent, Ether) became more of an institutionally investable asset class. This subsequently led to billions of capital pouring into this space in a short amount of time — at the height of the euphoria a monkey with a dartboard in this space would have drastically outperformed its peers in traditional money management.

However, here we are. Inflation is a thing and normies can feel it; which means that the Dem’s need to “nudge” the Fed to do something about it before they get shellacked in the 2022 midterm elections.

So, HF managers and the trickle down effect to other greedy bast—money managers are protecting their year end bonuses by selling off their riskiest assets.

At this point, of the 1000+ tokens — 3/4 are down 50% from all time highs, 1/2 are below 75% and 1/3 are down 90%!

Some math for perspective:

Total market cap of crypto ~2.4T
Bitcoin ~900B
Eth ~500B
5 largest stable coins ~150B

So, the remaining 1000+ coins are now only worth 850 Billion.

Back of napkin calculations show how a mass derisking event from the market — who is anticipating the Fed combating inflation by rapidly advancing their tapering efforts and eventually hiking interest rates — coupled with a literal sh** ton of new capital in the door to the crypto ecosystem over the past year or so which is managed by greedy (sorry, Steve) hedge fund managers looking to lock in their bonus cheques — can cause a domino effect on valuations.

As long as there are no more spooks from the Fed between now and the New Year, I suspect that we will see those same HFs buying back near December 31st to take advantage of the fire sale as they can afford another 360 or some odd more days of volatility which, if the trend suggest, should move up and to the right.

Actually, I think that HFs will think other HFs will beat them to the punch and might decide to go risk on earlier than the 31st — and this might trickle down unto the 26th (day after the Holiday).

Last Christmas was super fun. I was sending $20, $50, $100 worth of BTC to any friend that could come up with an address within 60 seconds (expensive gifts looking back on it now). I’d do it all over again if the crypto gods can bless us again :D

What we saw at the desk — Dan Wright

A three headed monster reared its ugly head at the end of last week.

New Covid fears, a hawkish Federal Reserve, and a bad employment report in the US made for a nervous, volatile market. The selling was fairly orderly Friday until early Saturday morning when we saw a flash crash on BTC and ETH with levels down to $41,800 on BTC/USD and $3,480 on ETH/USD.

Congrats to all those traders that had orders in the system and took advantage. We saw a lot of buyers on the desk all weekend and through the week. The recovery was fairly quick and both pairs are back above their longer term trend lines with BTC/USD nearing oversold levels on the RSI. See charts below.

Near term support levels:

BTC/USD 48000

ETH/USD 4000

Want to know the Grinch of Christmas 2021?

This guy ^

In case you missed it…

MicroStrategy buys some more BTC https://www.theblockcrypto.com/linked/126957/microstrategy-spends-82-4-million-in-cash-to-buy-even-more-bitcoin
“Faketoshi” loses $100m in court https://gizmodo.com/guy-who-claims-he-invented-bitcoin-loses-100-million-i-1848174450
Crypto CEOs ask Congress for clearer rules in monumentary hearing https://www.aljazeera.com/economy/2021/12/8/crypto-ceos-ask-us-congress-for-clearer-rules-for-3t-industry
Miners leaving Kazakhstan after relationship with government goes sour https://www.coindesk.com/business/2021/12/10/miners-look-away-from-kazakhstan-for-growth-opportunities/

(Any views expressed in the below are the personal views of the author and should not form the basis for making investment decisions, nor be construed as a recommendation or advice to engage in investment transactions.)

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