6th July 2024 > > Panic & SAB 121.

tl;dr

Some market participants are in a state of panic, so we should take advantage. SAB 121 is back on the agenda, and its glorious demise looks a real possibility.

Market Snap

Market Wrap

Liquidation of longs (see below) leaves the futures markets a little unbalanced. An entertaining short squeeze to offset yesterday's long squeeze would leave a lot of blood on the streets.

Curious Cryptos’ Commentary – Panic!

Crypto chatrooms and forums are full of speculators wondering how things could be “going so wrong” with a 20% drawdown over the last month from the low 70s, and with a near 10% drop in the last two days, which admittedly probably looks scary to the uninformed.

This latest dip was triggered by the news that Mt. Gox had transferred 47,229 BTC, worth nearly $3bn, ahead of the $9bn pay out to creditors. But the key thing here is that we already knew this was happening, and though markets are not perfect, this is not new news. A minor sell-off was exaggerated with much of the move being caused by liquidation of leveraged longs. Long and short squeezes are a constant feature of crypto markets, and we must just live with them.

For investors, as opposed to speculators, who know that the base-case for wholesale adoption of blockchain technology remains as compelling as ever, it can be useful to remind ourselves of our previous shared experience. This graph shows the drawdowns that we have seen before – bull markets have been punctuated with 40-50% price drops. What we are seeing this week is no more than the ordinary (h/t Wrong_again):

It is at times like this that DCA (dollar cost averaging) comes into its own, which probably explains why the spot BTC ETFs saw their largest inflows for a month yesterday. Smart investors buy the dips, the speculators panic and run for the hills. The former can make bank with a sensible in and out strategy, the latter will always lose.

Curious Cryptos’ Commentary – SAB 121

SAB 121 is the cornerstone of Choke Point 3.0. This accounting rule unilaterally created by the SEC prevents regulated banks from offering custodial crypto services to their clients by demanding that banks take a 100% capital charge against the market value of their clients’ crypto assets, even though the bank has no market risk exposure.

Cryptos are the only asset to suffer this perverse treatment, and contrasts starkly with the zero percent risk weighting of “risk-free” government bonds, some of which have suffered from 30% plus price drops in the last couple of years. This use of administrative power to prevent an activity which is legal, but which attracts the opprobrium of certain individuals who mistakenly confuse their personal desire for coercion and control with the moral high ground, is not worthy of any nation that lays claim to being a democracy.

Both houses voted to overturn SAB 121, with bi-partisan support, a rare occurrence in these divisive times. Joe Biden ill-advisedly used his presidential veto, no doubt to the pleasure of authoritarian regimes worldwide. But the story is not yet complete. The House of Representatives must vote on whether to overturn or uphold the veto, followed by the Senate.

A two-thirds majority in each house is required to overturn a presidential veto. During the first votes, 56% of the House and 61% of the Senate voted in favour. With cryptos becoming a political issue for the election in November (Trump has opportunistically claimed the crypto mantle for himself and many millions of votes as a result), and an issue of import for the younger generations, democrats who previously voted against may well reconsider their stance.

With Biden’s personal credibility already seemingly on the line, potentially putting some Democrats at risk in November, I am optimistic that at some point in the next week or so SAB 121 will be dumped, and rightly so.