🔎 Searching for Patterns in the Crypto Noise

We humans have an innate desire to know why.

Because our minds recoil at randomness, we can’t rest until every effect has been assigned a cause — even if it means resorting to ghost stories.

This is nowhere more evident than in financial markets, where an entire industry has been built around the business of explaining why things have happened and pretending to know what things will happen next.

Having played that game for 20+ years on the “sell-side” of the investment banking business, I can assure you that most of the stories told are mostly baloney — investment bankers are the Ghostbusters of finance. 

The financial Ghostbusters do occasionally get it right, however, mostly in cases where the causality is clear, like when a stock goes up because of a takeover bid or the market goes down because of a surprise rate hike or something.

Generally, though, prices move first and then bankers make up a narrative for why it’s moved after — the market is mostly noise, and the patterns we discern in that noise are mostly just narratives we tell each other.

This is even more so the case in crypto, because crypto itself is pure narrative.

There are, for example, few valuation metrics and no earnings reports to explain why crypto tokens do what they do, so we have to get more creative with our pattern matching.

Mostly, we will be fooling ourselves by randomness.

But we still have to try, because humans are so devoted to pattern matching that the perceived patterns often become reality, as Robert Shiller explained in his book Narrative Economics, How Stories Go Viral and Drive Major Economic Events.

“We can’t avoid using our human judgment about narratives for optimal understanding of economic events,” he concluded.

So let’s use our human judgment to try to understand what might be causing the current crypto crash.

Wrong answers only

Geopolitics: The crypto selloff on Saturday was correlated well enough with Iran launching its drone attack on Israel that the cause and effect there seemed unquestionable. 

But now it’s Tuesday and stocks are not down much, gold is not up much and oil is unchanged — so you have to wonder if that’s really what it was all about.

Unless you believe that the crypto market is better at parsing Middle East politics than the oil market, I think we have to look elsewhere to find a narrative that fits the current weakness.

Interest rates: If it really was geopolitics we were worried about, Treasurys would be up a lot — instead, they’re down a little.

That might mean that inflation is what the market is really worried about and, logically, you’d expect that to be good for hard-money bitcoin. 

But bitcoin has been bad — which must mean that the market is so worried about inflation that the Fed is going to get hawkish again.

Except that bitcoin made its most recent run to all-time highs amid the tightest monetary policy in decades.

You can choose your own adventure here — interest rates going in either direction can explain why crypto is going in either direction.

Flows: ETF flows have been a wash recently with $80 million of outflows last week following $480 million of inflows the week before.

That loss of momentum might be why bitcoin has stopped going up, but it might also be that the advent of bitcoin ETFs has given us a false sense of transparency — gold is making new all-time highs despite 10 straight months of ETF outflows.

Memecoins: The most entertaining sector of crypto may have reached a tipping point of absurdity, with things like SLERF and MOME making BONK and WIF look like Berkshire Hathaway by comparison — and sites like pump.fun have made it so easy to create new coins that the market is flooded with thousands of new ones every day. 

(7,203 over the last 24 hours, according to Dexscreener.)

Altcoin supply: The supply of coins coming from airdrops (W, ENA) and unlocks (ARB) may have hit a tipping point, too.

The flow of non-native fiat into crypto has not kept up with the flow of new tokens being airdropped to crypto natives.

Taxes: There’s a line of thought that crypto sold off this week because Monday was April 15 and crypto people needed fiat to pay their capital gains taxes for 2023.

But it was only tax day in the US and, even in the US, it’s only suckers like me that obediently report capital gains taxes on crypto, so I doubt that was much of a factor.

The tech: In equities, when it’s unclear why a stock is going down, the joking, last-resort explanation is “more sellers than buyers.” 

In crypto, the joking explanation is “the tech is getting worse.”

In this case, though, the tech (Solana in particular) really is getting worse!

Politics: Jeo Boden (also known in some circles as “Joe Biden”) has taken a slim lead over Trump in betting markets, which, in theory, might be negative for crypto.

Don’t cross the streams

None of these narratives seem convincing to me, however.

So, to feel like we know what’s going on, I think we have to get more creative.

Total protonic reversal: My last (and most favored) explanation is that we are perched precariously on the precipice of a Ghostbusters-esque “crossing of the streams” event where an unholy combination of things that don’t belong together is risking a total market reversal. 

A blockchain-SPAC deal agreed last week must feel like a sign of the end times to conservative investors; a project called ORE has put a proof-of-work bitcoin-clone on proof-of-stake Solana, possibly precipitating an existential crisis for BTC believers; the advent of Degen Chain, a layer-3 blockchain, may have introduced one layer of blockchain more than belief in the modular thesis can support; and Ethena, a Rube Goldberg-esque “synthetic dollar” may have crossed a rube-icon of complexity that threatens to bring the whole crypto ecosystem down with it.

The truth, of course, will be some unfathomable combination of all, some, or none of these things.

But, being human, it’s important we keep trying to fathom them — even if we are just chasing ghosts.

― Byron Gilliam

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