Why Did Bitcoin Collapse and What Could Happen Next?

It's very hard for prices to rise. Fundamentals look strong, but liquidity has been soft. Everything that drives prices is really around macro and liquidity.

Bitcoin took A nosedive below $54,000 on July 5, hitting a four month low and sparking a ton of crypto liquidations. Ether also suffered, dropping below $3,000 for the first time since mid May. Market sentiment has sunk to its lowest levels since January 2023. The recent dip was driven by a potential sell off as Mount Gox prepares to repay a significant amount to creditors and the German government has been selling BTC since June. However, these factors are exacerbating an already bearish trend. To uncover what's driving this downturn and what lies ahead, my colleague Giovanni spoke with Jamie Kutz, Real Vision's chief crypto analyst. Stay tuned to find out whether this is the end of the bull market or an opportunity to buy the dip. Before we begin, remember that this video represents just a single point of view meant for educational purposes and you should do your own research and not take it as financial advice.

What I wanted to discuss with you is the current state of the crypto markets. Where we stand now in the crypto.

Cycle, really everything that drives prices is really around macro and liquidity. So if we don't have those things in place, it's very hard for prices to rise. And so really at the start of April, at least in the macro indicators that I use, liquidity indicators as part of my framework, they all started to decline and started to, I guess, point to a very bearish regime. My view is that this is really just an intermediate pullback in some of those liquidity indicators. Things like the dollar being a little bit stronger over the last three, four months is, speaks to that. And also the fact that you've still got QT going on in the United States, which as part of the global central bank balance sheet composition is very, very high. But that pace of the QT is actually, is starting to slow. So the Federal Reserve has actually cut QT the, the amount of QT each month. So we're starting to see this sort of deceleration of the liquidity contraction. And I think that actually points to sort of a liquidity upswing and that should come really in the second half of the year as part, at least in the framework that I'm using and the framework that's used by, you know, Ralph here at Real Vision. So at the moment, you know, the fundamentals look strong, but liquidity has been soft. But liquidity should actually improve as we start going into the second half of the year, we're already starting to see some of the central banks, some of the peripheral central banks start to cut.

In a recent tweet, you pointed out that according to certain metrics, we are in one of the most bearish moments in the recent history of crypto. Maybe you could expand on that and explain what metrics you used to come to this conclusion.

Yeah, so I mean, what I was referring to in that tweet was the, the difference or the divergence between altcoins and large cap coins or small caps versus large caps. And so you get these moments in time through the cycles where large caps are outperforming and then vice versa, where smaller caps are outperforming. And typically what you see is small caps outperforming in the sort of, the most bullish part of the bullish cycle. So when liquidity is really starting to expands and you start to see increased risk taking and people moving out the risk curves into some of the more speculative assets within the asset class. And that usually occurs within the sort of second half of the cycle. Now, what I was referring to in that tweet was if you look at it on a normalized basis, you get these extremes where small caps underperform large caps. And the important distinction here is to understand whether it's occurring in a bear cycle or in a bull cycle. And so you get signals in both of those instances. But there's really only one time to take the signal as being bullish for altcoins or bullish for small caps. And that's if you believe that we're in a bullish cycle. We saw the cycle low at the end of 2022 when all the liquidity measures started to turn, and that was enough to put a bottom in prices. And we've rallied into 2023 really without a great deal of liquidity support. Interest rates are still relatively high, central banks are still relatively tight. But the shit, you know, the math doesn't stack up for central banks to maintain that level or that degree of tightness in monetary policy and liquidity conditions through all the different mechanisms. So I think this bull market still has more to go. And the pullback that we've seen as registered, you know, one of those extremes in that, in that ratio between large caps and small caps. So I'm sort of of the view that's actually a pretty good signal that the sentiment has got sufficiently bearish in altcoins and that there's definitely going to be some opportunities to really outperform in altcoins over the next sort of 12 to 18 months. That doesn't mean necessarily that you just buy any old altcoin. You have to really do your research and base it on some sort of fundamental basis rather than just the narrative.

We didn't see a cut in interest rates in the US this year. Even though many analysts have been expecting it for four months. We didn't see that. And some politicians in the US apparently are even saying that we might not see a cut, even, even a single cut these years. How much of the performance of crypto depends on that factor?

Yeah, look, I mean I've given up trying to forecast what central banks are going to do in the short term. Longer term there has to be easing. As I said, like the math just doesn't stack up. The level of interest payments on the US debt is getting to such a, you know, such a level that it's becoming very, very problematic. So I think, you know, in the next couple of months, who knows, it is a little bit tricky for the Fed right now to aggressively cut because you know, we're leading into election. They want to be seeing seen as being non political and not favoring one politician. I don't think we will see the same kinds of liquidity provisions going forward as we've seen in the past. I think the Fed is going to get creative. You know, it's going to be QE by some different name. And I also think that, you know, it's not just the Federal reserve, it's the PBoC. These are really the two major central banks that really determine at the margins what happens in risk assets ultimately. You know, we've seen a rally in risk assets with just really only a slowdown in tightening. So you know, it's not, it's not completely dependent like prices are not dependent on interest rate cuts.

You said that. Now it's a very low point. So it's a good opportunity for people to select a few quality altcoin projects. In a recent tweet you said that based on, on chain metrics, you are particularly bullish on Sol Ton and Near. So could you give us the reason behind your bullishness for these specific altcoins?

Yeah, so I mean near and Solana have been two projects we've written about quite a bit at Real Vision. And the reason why we're bullish on these are simply because of the momentum behind the acquisition of new users and also their ability to convert those new users into fee revenue. When you look at also how they Rank relative to other blockchains based on the sort of the user to network value or the market cap divided by the number of users, the market cap divided by fees. They rank sort of in the top quartile of all the projects based on that. So they're growing at, they're growing at a relatively fast rate, yet they're not overly expensive relative to some of the other projects which are essentially not growing, but have, they command very large market caps. So, you know, there's ways to play this theme if you're a little bit more risk averse. You can look at actually putting on a pair versus some of those, you know, some of those other projects that are simply just not experiencing network growth. And you know, blockchains, like any network, they, they either expand or they die. So really it's, it's, you know, it's a matter of continually trying to create network effects. So, you know, it's much better to be in those assets that are growing and growing the fastest as long as you're not overpaying for those assets. And the whole concept of, you know, blockchain fundamentals or blockchain valuation techniques and metrics is a really, it's a new art form. It's, you could say it's a bit of a science, but really it's an art form because we don't have a lot of history to sort of backtest and test these things. But there is, you know, some logic in valuing these networks based on the number of users and based on the revenue that they generate.

Right, and what about Ton?

Yeah, Ton's interesting. It's definitely got the aspects of a fast growing network. It's not necessarily cheap though in terms of the, you know what, it's valued in terms of its fully diluted market cap. But the interesting angle with Ton is that it's tapping into an existing captured audience of Telegram users as one of the largest social media platforms globally. And you know, they're seeing really explosive growth now that they've sort of come to market and started to really, you know, tap into that network. And we, we can also see how useful Telegram is to growing other blockchains. Near has successfully grown its daily active use account by offering a wallet integration into Telegram. So Telegram itself is going to fuel Web3, it's going to fuel blockchain adoption. Ton is the best position because it's sort of like the native blockchain to that ecosystem. But Telegram users will be able to, you know, tap across the entire Web3 space. So it's you know, pretty exciting.

If you had to sum up the criteria, the main criteria that our listeners, that our viewers should look at when they are evaluating quality altcoins for the next altcoin season, you would say that the main metric to look at is the pace of growth in terms of network effect.

Yeah, sort of. I, I think about it in a couple of ways. Number one, activity momentum. Right. Or user momentum, fee momentum. So that rate of change is quite useful. Then I look at how expensive it is based on those metrics relative to other, to other blockchains. And then thirdly, we didn't mention this and it's really important, especially this year, because of what's been happening with some of the token launches. You have to really look at a token's market value, circulating market cap versus its fully diluted market cap. Because where you've got projects that have got 70, 80% of their supply still to be vested over the next three to five years, that constant pressure, that constant investing process puts pressure on the token price. So it's very hard for these projects to outgrow that, sell that supply pressure, but they can do it. It's not to say that they can't. It's just harder. So that's the other, I would say, the third pillar of evaluation strategy.

Thanks a lot for coming on our show.

Thanks, Giovanni. Sam.