Ongoing inflation and rising interest rate concerns are just a few of the events affecting the cryptocurrency market in Q2, 2022. What can crypto traders and investors expect in the weeks and months to come?
On this episode, we’re once again joined by Edmund McCormack, Managing Partner at Dchained Capital, who offers his perspective on the latest crypto market trends.
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Dchained Capital: “Dchained Capital is a multi-strategy hedge fund that invests in businesses leveraging blockchain technology to gain a competitive advantage in high-growth sectors, such as Finance, Entertainment, Gaming, Transportation, Energy, and B2B services. Our investment framework maximizes risk-adjusted returns through a combination of long-term value investments, short-term systematic trading, and active hedging to minimize drawdowns and harvest market volatility.” (Website)
The Fed – Meeting Calendars and Information: “The FOMC holds eight regularly scheduled meetings during the year and other meetings as needed. Links to policy statements and minutes are in the calendars below. (Website)
Today’s Guest: Edmund McCormack
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Cryptogic is the show for crypto investors who are focused on long term results. Follow host Scott as he explores the investable world of blockchain technologies, Bitcoin, Ethereum, and other cryptocurrencies.
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Scott: Hello, and welcome to another episode of Cryptogic. Scott with you. Really looking forward to today’s show because we’re going to be really diving into crypto markets and what’s been happening as we’re here in Q2 2022. And joining me to offer his insights is Ed McCormack back with us once again. And he is the managing partner at Dchained Capital.
Ed, how are you doing today?
Ed: Good. It’s good to be back on the show. Thank you for having me.
Scott: Yeah. Thank you for being here. And I’m really excited to get your perspective because since the last time we talked, there’s been some movement, there’s been a lot of, you know, macro events. And we want to dive into all of that. So, I guess I’m curious to kind of kick it off at the time of this recording here, you know, a couple of weeks into April 2022.
What are you seeing from crypto markets? What’s the sentiment like? What’s your perspective there?
Ed: Yeah. And I mean, talk about a challenging market whether you’re looking at Ukraine-Russia, inflation numbers, potential interest rate hikes, all the way down to really where inflows of money are coming from especially as it relates to institutional. So, it’s certainly a challenging market to navigate.
What I’m seeing on my side, the general sort of participants in the market have changed, you know, especially over the last several months compared to a year ago, meaning the level of sophistication, or people that are right now trading in this market is a little bit more advanced, especially as it relates to having institutional-grade systems and data at their fingertips.
If you think about your average retail investor with the last several months even just going back to the start of 2022 having a number of market corrections, it’s constrained a lot of their ability to have liquidity to trade too frequently. Add on rising inflation and you’re seeing more of an obstacle for your retail investor who I think drove a lot of the pump that we had over last summer.
And you’re starting to see a lot more activity around different funds, different trading groups, and you’re seeing, you know, more cooperative type of groups sort of emerging. So, you’re certainly seeing a little bit more sophistication. On top of the fact that we’re seeing a bit of a drain on liquidity.
When you look at crypto, and whether you agree or not, it’s often bucketed with high-growth speculative assets, the tech sectors included there. Liquidity drives those types of investments. So, we’re sort of in this impasse right now where we know that inflation needs to be dealt with. We know interest rate hikes are coming.
We don’t know to what extent and really how much leverage or how much room the Federal Reserve really has to raise interest rates before it sort of breaks the financial system. And at the same time, there’s also a lot of underlying things that are happening from a global standpoint where it is actually making crypto a lot more sort of appealing, especially as you look at what other options you have available to you.
Scott: Right, right. There’s a lot of factors going on. And I really appreciate you kind of teasing that all out. There’s a couple of things I would love to point out. One, I really appreciate your point on the sophistication of a lot of the active traders right now in the market.
We had an episode a few weeks back where a really sophisticated trader was kind of pointing out that one of the big opportunities for crypto is for those who can be more sophisticated, but that over time just more and more sophistication is going to go into the market, which will make it harder for traders and high-frequency traders to, you know, see those benefits.
So, I think that’s a great point. And then you were touching on a lot of things. I want to dial in on maybe some of the uncertainty that we’re seeing from crypto traders and investors. It seems like there’s a lot of, I guess, fear out there. And when it comes to, you know, the market and I’m curious what you think might be driving that fear with crypto specifically.
Ed: Yeah. So, I think to start somewhere, you have to look at interest rates, you have to look at the impact that the overall market is having on this specific asset class. And we just saw that Jerome Powell, who leads the Federal Reserve, he did not lean back away from raising interest rates in March.
They just had a closed-door meeting last week with the larger meetings occurring in early May and mid-June where Lael Brainard who has been somewhat dovish in the last several months and years when it comes to monetary policy and really not going overboard in terms of raising rates to ultimately sort of put a flag in the ground from a Fed standpoint.
She’s even become hawkish and really saying, “We really need to do something here about this inflation. We need to start really leaning in on some quite uncomfortable interest rate hikes.” With that, there’s a question of, you know, is the market right now going to be surprised if we go up by 50 basis points in May and/or June?
Or is that already priced in? I think there’s a lot of uncertainty there. The other piece that I would say, you know, keep a very close eye on is what we’ve seen already in April is very…it’s eerily similar to what we saw in January where there’s a lot of focus in on interest rate hikes, a lot of focus in on sort of the macro more so I would say today than January, especially with prices of gas.
But going into the last week or two of the month, we’re starting to come up to sort of a pivotal moment where some of the big tech companies are about to announce their earnings. And because crypto is often lumped in with these large tech companies, the overall NASDAQ 100, if you sort of wanted to pull it all together, that could have a dramatic impact on really where crypto goes in this quarter.
End of January, you know, we were coming out of probably one of the worst starts to the year for overall growth assets in the last five years. And when Microsoft, Amazon, Apple, Google, when they all announced their numbers and they crushed, you know, analysts’ estimates, you saw crypto go on this massive relief rally. And I think that that’s something that, you know, it’s worth keeping a very close eye on.
Netflix is going to be announcing their earnings next week. The following week, so the week of April 25th, you’ll start to see Amazon, Apple, Google… Excuse me. Amazon is early May. You’ll see Microsoft, Apple, Facebook, Google, they’ll announce around that time too. So, just the last half of this month could be very interesting.
And really, you could see the sort of power dynamic sway from, you know, the short sellers to people going long and getting that, you know, resurgence and competence in the market again.
Scott: Absolutely. I’m interested specifically too in terms of Facebook’s earnings because, you know, they’ve made such a bet on the metaverse and that’s so closely tied to, you know, web3, and I could see a lot of the sentiment moving with that, right, which I think is interesting, full disclosure, as a shareholder myself.
Ed: And it’s going to be interesting because you’re seeing the overall space is becoming more tied into blockchain. I mean, the amount of sort of intersection that’s occurring is very similar to early 2000s where you would look at any company that had a website as really tech company and sort of siloed away from everything else.
And then it just sort of became ingrained in the fabric of just doing business of everyday life. You’re going to see more and more of that occurring. But I think we’ll see, you know, over the next several weeks companies that have really become very sort of forward-thinking as it relates to blockchain. Elon Musk, obviously, making a bid for Twitter is capturing headlines today.
Can’t probably get a more influx outside of maybe Vitalik Buterin when it comes to crypto than Elon. So, there are things that are happening that a lot of people probably don’t realize as it relates to, you know, Fortune 500 companies that are going to be making announcements either directly or indirectly that will be tied to adoption of blockchain.
Maybe not necessarily your favorite cryptocurrency, but the technology at the heart of it, certainly.
Scott: A hundred percent. I want to shift gears a little bit and kind of, I guess, speaking more to any uncertainty there. We discussed on our sister show, NFT Investor Nation, about the Axie Infinity hack. It was a huge story.
Obviously, the media took the ball and ran with it and, you know, anytime something like that happens, you’re going to get, you know, a deluge of think pieces of, “Yep. See. This is it. This is why, you know, crypto is not secure,” and all of this. Anytime there’s a story like that, and we know that there will be other hacks, there will be other heists, this is going to happen, it’s not going away, you know, would-be thieves are out there and there’s a lot of value to crypto so they’re going to target it.
I’m curious to your thought on how does this impact, or does it not, the market in the short term and in the long term in terms of maybe just those retail investors and folks that, you know, might be really worried to get in or might want to just get out completely because they’re scared after reading several of these articles.
I’m just curious to hear your perspective there.
Ed: Yeah. I think you have to look at the fact that if there’s some type of report on a hack related to blockchain, related to crypto, it’s going to gain headlines, it’s going to get readership. So, I’m not surprised that that got so much attention compared to other reports that have come out in the last several months.
Fact is, perfect example is Credit Suisse. The European Union threatened to basically blackball Credit Suisse from being able to trade in the overall financial infrastructure because of how poorly they’ve managed anti-money laundering. They even have reports that they’ve surfaced of their bankers telling Russian oligarchs how to hide their yachts going into the end of 2021.
So, that didn’t get as much attention even though that is a much bigger story, in hindsight, because we’re talking much bigger dollars. But, you know, I think that it’s also a good thing. While, you know, you never want to hear about, you know, hacks… And we’ve seen that happen from Wormhole where you had someone who was very sophisticated who knew the inner workings of how that transfer occurs, who exploited, all the way through what we just saw with Ronin and Axie Infinity, it’s going to be a catalyst for greater cybersecurity for better guardrails that are put in place both to provide greater transparency and accountability on the developer and the organization side, but also to give greater investor protections.
But with that being said, it goes without saying that as an investor, there are things that you could also do to safeguard yourself. And one of the things that I cannot recommend enough, and I know we don’t give financial advice on this show, this what I’m about to give you is advice, which is buy a cold wallet.
Please, please, I cannot stress how easy it is to try to find and try to phish someone’s MetaMask password. And if you’re not using a cold wallet, that’s all it takes to then drain that MetaMask. A cold wallet, 100 bucks can save you a lot of pain.
And you can even sync it with MetaMask Terra Station, whatever wallet you use, but that extra layer is invaluable when it comes to protection. And you don’t hear too many cases. I haven’t… I can’t recall one from recent memory of a Ledger or a Trezor getting hacked. So, do that and I think it will solve a lot of problems.
Also, don’t jump into things without doing a little bit of research at the same time. I can’t tell you how many people, one, don’t even know if the founders are even doxed, if they’re known, on top of the fact whether they know if that DeFi platform is audited. And even if it’s audited, it could pass the audit.
Just because it’s audited, it doesn’t mean necessarily it’s good. That audit could say, “Stay away from this at all costs.” So, there are things that as an investor, there are many ways that you can sort of increase that security for yourself.
Scott: And I think that’s such a great point, Ed. And as you were sort of laying that out and that very smart piece of advice, we recently just had a show where we talked all about crypto wallets and specifically, you know, cold storage, hard wallets there. So, I echo your sentiments there. I think it’s such a good point because there is all of this noise anytime there’s, you know, a security breach, a hack, what have you.
And as an investor, as a trader, you know, you want to not be subject to just that emotion and making moves because there was a scary hack. If you can take the steps you’re talking about, you know, just make sure you have a wallet, you know, make sure whatever security steps you can take, that’ll help you rest easier and maybe realize, well, it’s not like the whole market that’s the problem that everything is going to go away.
It’s just a matter of shoring up your assets, right?
Ed: And look no further than going back to big tech. They deal with hacks and exploits every single day. Just think of how many security patches that Apple has pushed out for their iOS operating system because researchers will find that there’s some backdoor in iOS.
They’re able to exploit, you know, some type of kernel or exploit some type of functionality that wasn’t intended to do. So, this happens with companies that, you know, have valuations in the trillions. So, it’s not surprising to see that blockchains, which is a fraction of that, are also experiencing challenges when it comes to security.
So, I think it’s something that we’re going to see for the foreseeable future until there’s no more people who are trying to play the cat and mouse game of trying to break into things.
Scott: Absolutely. Okay. Shifting back, I want to really drive home a little bit more on inflation because it’s just ongoing and there’s just this ongoing concern of, you know, one, “Okay. Will the interest rate hikes? What will the impact there be?” What’s your take from a market perspective on inflation’s impact on crypto?
Because I’ve always sort of had the thesis that, well, you know, Bitcoin can be an inflationary hedge, but then, you know, I have to admit, I haven’t seen markets quite respond in the way I thought they would. So, I’m curious to why that might be or maybe just your perspective on it.
Ed: So, there’s a few different explanations that you could look at here, one, is how serious is the Federal Reserve, really, to fighting inflation? Michael Burry, who was sort of the inspiration for “The Big Short,” made some headlines and he said, really, that this is just a theater that the Fed is putting on because in reality there’s only so much that they could do when it comes to raising interest rates before it really starts to become a detriment to the economy.
And what I mean by that is when you raise interest rates, it makes it a lot more expensive to borrow money, which means that’s now going to not only impact employers because they are going to have to tighten the belt, they can’t take as much money out from the bank. It’s going to make borrowing for the government a lot more expensive. And I think we touched on Ukraine, Russia earlier in the show.
All of that money that’s being sent over had to ultimately come from somewhere. And many times that’s vis-à-vis, you know, quantitative easing or some other type of lending. That’s going to become a lot more expensive. All the way down to when you raise interest rates, it’s also going to negatively impact the stock market. And the fact is, we are in a midterm election year, which in and of itself, historically, you generally see average to below-average returns in Q2, Q3 with higher volatility, and usually picks up, you know, towards the end of the year.
You’re going to see a lot of those donors who are going to start looking at their pockets and say, “Well, I don’t have as much now to donate because stock market is not doing well. I’m not able to scale my business as much as I would like to.” And you see that there is a direct impact between decisions that the Fed makes and really how the economy runs outside the fact that, you know, underneath the layers and layers of the financial infrastructure that we have, is we don’t even realize how much leverage is sort of being used at any one given time and really how those rate hikes can ultimately break some piece.
And we’ll see. It happened a couple of years ago with Mexico and the Federal Reserve had to step in there. So, I think that there’s really a limited runway that the Fed has, but right now I like what they’re doing. They’re ultimately creating an impact in the market just by talking.
They’ve only raised interest rates once. So, you know, for them to really take a stand here and try to minimize the overall sort of impact of this inflation that we have without having to raise it too much, I think that’s probably where we’re headed from an inflation standpoint.
Scott: Right, right. And many have said, “Yeah, and this was kind of overdue.” So, I think that really is a key piece there. Okay. Before I let you go, I always like to turn the attention to the future. So, when you’re looking past Q2, what would be worth keeping an eye on for folks looking at cryptocurrency market movements and where things might be headed?
Ed: Yeah. So, I would certainly in the short-term keep a very close eye on those earnings calls. The fact is crypto is lumped in with many of the big tech. So, with their earnings coming out in the next two, three weeks, see what the market response is to that, also keep a very close eye on what comes about in both the May and June Federal Reserve meetings, whether they announce a rate hike that catches the market off guard, and also, you know, keep a close eye on some of these altcoins out there that, you know, either are tied to the success and growth of Ethereum or are sort of building their own ecosystem such as Luna, for example.
And look at… And with Ethereum now with their announcement that they’re not going to be moving to their new proof of stake model in June. When that does occur, hopefully, in end of Q3, how is that going to impact other areas of the blockchain world whether it’s scaling solutions, other layer-one blockchains, all the way down to, you know, how is this going to impact now, you know, some of the projects that are positioned well for this other ecosystem out there that’s going to coexist alongside Ethereum?
Scott: Absolutely. All great things to keep an eye on. Ed, pleasure as always. Thank you for joining me. And if folks would like to connect, find out a bit more about Dchained Capital, where can they do that?
Ed: Yeah. Just go to dchainedcapital.com. dchainedcapital.com.
Scott: Fantastic. Thanks again.
Ed: Thank you.