7investing and CryptoEQ in May 2022: Volatility, Correlations, and the Terra Implosion - 7investing

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7investing and CryptoEQ in May 2022: Volatility, Correlations, and the Terra Implosion

May 24, 2022

– Advisor: 7investing Team

Industries: Financial Services  

7investing and CryptoEQ recently announced a partnership, to help investors get a better consolidated view of the opportunities in both equities and in cryptocurrencies. 7investing provides its top seven stock market recommendations every month, while CryptoEQ provides its top-rated cryptocurrencies.

The two companies are now joining forces and publishing a monthly Collision Course conversation, where they discuss important recent developments and the impact they’ll have on both equities and crypto.

This month, our teams discuss the recent market volatility. Equities have been significantly selling off — especially higher-beta tech stocks in the Nasdaq — and Simon and Spencer discuss whether this is also the case for cryptocurrencies. The two discuss how the volatility of crypto markets is impacting the fundamental developments of Web3, as well as how crypto is correlated to equities in a diversified portfolio. They also chat briefly about what caused the Terra ecosystem implosion and how this might impact other stablecoins in the future.

Several of the questions this month came directly from subscribers in our 7investing Community Forum. If you would like to join our Forum and talk about stocks and cryptocurrencies directly with our team, please sign up here. (It’s free)

These video conversations and the complete transcript are typically available for 7investing subscribers, and we publish them as monthly Advisor Updates. CryptoEQ also publishes a written recap of the conversation – including additional context on the events – in their monthly subscriber email newsletter. If you’d like to access that newsletter, please sign up for CryptoEQ using this link.

However, we’re making this Collision Course conversation available to everyone. If you’d like to learn more about becoming a 7investing member and getting access to all of our Premium content, please visit our Subscribe Page to learn more.

Publicly-traded companies mentioned in this conversation include Block, Coinbase, MicroStrategy and Tesla. Cryptocurrencies mentioned include Bitcoin and Terra. 7investing or CryptoEQ’s advisors may have positions in the stocks or cryptocurrencies of the companies that were mentioned.

Transcript

Simon Erickson  00:00

Okay, hello everyone and welcome to our May 2022 Collision Course conversation. This is where we talk about the collision between stock market publicly traded equities and cryptocurrencies and how they’re colliding as the markets are evolving out there.  I’m 7investing founder and CEO Simon Erickson joined by CryptoEQ’s Principal & Co-Founder Spence Randall. Spence it’s you and me today I was afforded these conversations because we’ve got a partnership with 7investing and CryptoEQ.

 

Spencer Randall  00:27

Absolutely, the same kind of deep market insights that 7investing brings to equities – we do that lockstep in crypto. So for folks out there that enjoy 7investing content, we do similar deep dives in the crypto market.

 

Simon Erickson  00:42

I really enjoy the conversations. We have a lot to chat about, because the markets are kind of in a freefall out there. And so maybe let’s start by talking about volatility. In our world in the equity world, we’ve seen that the S&P 500 is flirting right around official bear market levels, we’ve seen that the Dow is on an eight week losing streak. I mean, this is kind of a very, very negative market sentiment, probably some of the worst market sentiment we’ve seen in several decades.  And most of it is in response to the Fed raising interest rates. The Fed is raising the Fed funds rates by 50 basis points. Jerome Powell has promised there are more increases in the future as he’s trying to rein in the 8% inflation that America is going through. So this is roiled equity markets, Spence, you know, it’s a lot of people fleeing or very negative sentiment on the equity market.  So what are you seeing in cryptocurrency? Is it a similar sentiment there? Or are you a little bit more immune to actions from the Fed and inflation and everything else we’re seeing?

 

Spencer Randall  01:44

Great question. This has come up quite a bit in the community chats. You know, the 7investing community lives in Discord, and we live in Telegram. But this has been a hot topic. In terms of the Fed monetary policy and crypto. Yes, there’s a similar effect on crypto as there is in equities. There’s a strong correlation between the two. High growth tech stocks and crypto do have a strong correlation.  The part that I think is different to note to the 7investing audience is I’ve probably lived through half a dozen drawdowns this severe in the crypto markets. I entered the market early 2017. So about five years of history. So I will say that severe volatility and severe downside moves are a part of crypto and especially a part of emerging markets, which I would very much still call crypto an emerging industry.  So yes, Fed monetary policy. You know, I think it’s 75 basis points that we’ve seen rates increase already this year, and another 50 bips seems to be on the horizon. So that I would expect to affect crypto similarly to equities. The part that’s different is the resiliency of Bitcoin. And that this is something that we’ve seen almost on an annual basis. For different reasons. There’s been different catalysts that crypto and volatility go hand in hand and our community we encourage them to prepare for these types of downside moves well in advance.

 

Simon Erickson  03:22

How do investors think of cryptocurrencies as compared to equities? Are they similar assets where you might invest money in a high growth portfolio and put portions of that into cryptocurrencies? Sort of a think of it almost as a hedge, kind of like gold or other assets that aren’t as correlated to the returns of stocks? Do we know anything about correlations between crypto and equities?

 

Spencer Randall  03:45

I’d start with Bitcoin. You know, Bitcoin is the most successful and most well known cryptocurrency. It’s the largest by market cap, it is the most secure cryptocurrency in existence. Owning Bitcoin – some folks could look at it, depending on their use case, or their need, as an insurance policy similar to the way some bullion investors think of gold as a hedge. So that’s depending on why you’re looking at the crypto market.  Bitcoin exclusively, could be thought of as an insurance policy because of its history. Its success, its security. And then there’s lots of other things you could say about crypto and broader crypto markets. I think it’s really important to separate Bitcoin from everything else. Some of the, as we call deeper altcoins or more speculative cryptocurrencies could be thought of as smaller cap high growth equities.  Loosely, you could think of it as a mental model, as owning a piece of a platform, a piece of an infrastructure, a piece of an ecosystem, much like you would own shares in a technology company for example. One thing that’s different about owning equities, owning shares versus owning a cryptocurrency, especially some of the more nascent ones, is you can withdraw those tokens and own them in your own non custodial wallet.  That part is a bit different. And there’s less friction in owning your assets in your own, as we say, hardware wallets, so taking control of your assets and really owning them as an individual in the nature of the way you would do that – that’s another characteristic that’s different between crypto and, and equities.

 

Simon Erickson  05:44

Makes a lot of sense, Spence, good point that all cryptocurrencies are not all the same. Bitcoin is very different than Dogecoin than any other altcoin. that’s out there. It’s also interesting to see we’ve seen on the equity side of it, some serious sell off, especially of tech stocks, especially of higher beta, you know, more volatile companies that are out there. And it’s very interesting, because I think one of the things that we look at a lot is the yield curve inversion that just happened on April 1st. That is where the short term Treasury note that two year treasury note actually is paying at a higher interest rate than the 10 year Treasury is a very rare thing to happen. It’s only happened four times in the last 34 years. And when it when it happens, it typically indicates that there is a recession upcoming for the US economy, a US recession defined as two consecutive quarters of negative GDP growth, interest rates are rising too quickly, for the economy to keep up with it. Businesses are struggling from that. And there’s a recession that generally happens after that.  The other interesting piece of it is that because these indicators are out there, and Jerome Powell has been speaking about them for probably at least six months now, if not a little longer than that. Institutions have pulled money out of stocks and flight and this flight to safety, at least in to less risky assets or less risky stocks. And the interesting piece of it is is that we’ve seen some empirical research that showed that following the yield curve inversion of the previous four recessions from the period of the yield curve inversion to the point of the recession that happened, excuse me, 17 and a half months later on the stock market actually gained the s&p 500 was up an average of 28.8%. What that means is that the stock market is continually a forward looking indicator, stock sell off before the economy has its own struggles before we go into recession, you see sell offs and get getting out of these riskier assets. So it’s very interesting today, almost ironically, or counter intuitively that, at least empirically, by the evidence we’ve seen in the last three and a half decades, this could be a good return for the stock market over the next year and a half, even as the economy continues to struggle, has as the cryptocurrencies are a little bit a little bit lower than that, right? Bitcoin, the white paper was 2008, I believe. It didn’t have to go through the.com Bust didn’t have to go through a lot of inflation in the 80s. You know, it’s amazing we saw out there, but any expectations, I guess, with a struggling American economy, on cryptocurrencies, do you have any expectations? Or is this kind of still a wild west? Or we’re gonna see what happens out there? The cryptocurrencies are a little bit a little bit newer than that, right? Bitcoin, the white paper was 2008, I believe. It didn’t have to go through the .com Bust, didn’t have to go through a lot of inflation in the 80s..but any expectations, I guess, with a struggling American economy, on cryptocurrencies, do you have any expectations? Or is this kind of still a wild west? Or we’re gonna see what happens out there?  What that means is that the stock market is continually a forward looking indicator, stocks sell off before the economy has its own struggles before we go into recession, you see sell offs and getting out of these riskier assets. So it’s very interesting today, almost ironically, or counter intuitively that, at least empirically, by the evidence we’ve seen in the last three and a half decades, this could be a good return for the stock market over the next year and a half, even as the economy continues to struggle.

 

Spencer Randall  08:17

It’s a great question. I would say, I would go back to the correlation, right. So if we have a sustained downtrend in equity markets and leading indices, I would expect Bitcoin and crypto markets as I believe, I still believe that crypto markets follow Bitcoin. So Bitcoin continues to move in a downtrend, a sustained downtrend, I expect the rest of the crypto markets to follow.  But again, I’m going to point out the greater than 50% drawdowns that we’ve seen on average annually in Bitcoin, you know, I’ve lived through probably half a dozen drawdowns of 50% or more. And so, I would say, Bitcoin will find a bottom similar to the S&P 500 right? And those bottoms may not be identified exactly the same time. And within our community, some of our thought leaders around analyzing Bitcoin have already identified a bottom in this market cycle for Bitcoin.  So that that would, you know, support this idea of Bitcoin or equities markets being a leading indicator for where we could see the economy go. And then in crypto, if Bitcoin is king, everything else follows. So, if that is the base case, if the bottom is in then we would expect other cryptocurrencies to follow Bitcoin as it recovers. Another high probability situation is that the downtrend sustains and that we’re yet to find a bottom in Bitcoin. And so I would say that both of those are significant cases to look at. And we’re still evaluating within our community what the rest of the year looks like.

 

Simon Erickson  10:08

I do always love the research on your website. If anyone wants to find out more about CryptoEQ, it’s CryptoEQ.io is their website and our website is 7investing.com. If you want to learn more about either of our organizations, let’s chat about those drawdowns Spence. This was a question from our 7investing community forum that says, Does volatility in crypto markets affect the fundamental developments of Web3?  Certainly worth keeping in mind, you can transact with cryptocurrencies. Now, it’s hard to go out and buy coffee with Apple stock still, but you can’t have Bitcoin, or any other cryptocurrencies as a method of exchange. How is that impacting commercial transactions in this new future of the Internet out there?

 

Spencer Randall  10:51

Yeah, that’s a great question. And before I dive into that, if you’re enjoying this content, as Simon said, we both have premium memberships and subscriptions. So if you’d like video content like this, we have a monthly series that we do with 7investing, where we produce a newsletter to complement the video production that Simon’s team does. So subscribe if you’d like more content like this.  With Web3, sustained downtrends and the effect on fundamentals. The great projects, the great companies will have their head down, building through any sustained downtrend. That’s what we did in 2018. And that’s why our platform is what it is today, because we put our head down through the crypto winter of 2018 and 19. And continue building.  And there’s lots of companies like that in our industry that will continue to prove out the fundamentals of crypto to get more detailed on some examples of what’s happening in Web3. irrespective of the direction of the market and the direction of the economy. Instagram announced NFT integrations with some prominent cryptocurrencies, such as Ethereum, Polygon, Flow, and Solana.  So four prominent crypto projects, integrating with Instagram and Meta, and I think this you could view this as a response to what we saw with Open Sea. Open Sea through the past two years, it’s just exploded in growth around NFT collections and owning a piece of digital art or digital collectible. And having a platform for people to come make markets around these new NFT’s, these new Web3 elements.  So that proved out the need for Instagram and Meta to do something like this. We’ve also seen lots of integrations with crypto from prominent ecommerce platforms like Shopify, Shopify has been very active in partnerships around crypto.  We’ve also seen Strike partner with NCR. I think NCR processes something like one in six restaurant transactions in the United States. Don’t quote me on that, but ballpark, that’s about what it should be. And these are these are massive fundamental movements with an audience if you add in the social media elements, billions of people now with more convenient, usable, intuitive access to Web3 and crypto payments.  One of the things that I’ve said for years about mass adoption is I had always thought that it would look like people using crypto without knowing it, meaning that the front end that you love and know looks about the same or continues to improve with the companies that you – and apps that you know and love.  It’s the back end that changes and you don’t need to understand or know the back end, the important part is whether or not you trust it. And so, you know, a lot of the apps that we use today, I think what we’re seeing is some of the leaders in tech are adopting crypto on their back end in a big way. And I think that it’s a beginning of a new wave a new pattern of adoption.  The early days of crypto go back to 2008, 2009, 2010. If those are crypto punks, people that are extremely knowledgeable about cryptography, understand the deep science behind the asset class. Those are the earliest adopters. But then we had more speculative nascent industries adopt crypto. Online gambling was a good example. And then we had folks like myself coming in. Retail investors and traders.  And then we had companies come in and add crypto to their balance sheet. Then we had nation states come in and adopt crypto as legal tender. And now we’re getting to a point where big tech is integrating crypto into their platform for billions of people.  All of this is happening in a sustained downtrend in crypto and the US economy. All this is happening in the face of the Fed raising interest rates. Now, it’s, it’s a really interesting time to watch the fundamentals and keep your head down and not necessarily focus on the price.

 

Simon Erickson  15:28

It really is interesting to see how this has played out right, like we have seen years ago was Michael Saylor and MicroStrategy that was loading up Bitcoin on to the company’s balance sheet, right, you know, selling down cash buying Bitcoin. Elon Musk did the same thing with Tesla a couple, you know, months or years later. And it’s just going to be interesting to see if that kind of innovative or progressive way of thinking continues now, when cash is up against eight and a half percent inflation, you know, when you see the the bottoming like you were mentioning earlier of cryptocurrencies, like Bitcoin out there – are there going to be the other innovators that are out there that are taking advantage of this as an alternative to just holding cash on the balance sheet if they’ve got the opportunity.  And the other thing that I wanted to mention too while we were chatting about this was that you we now have publicly traded pure plays in the cryptocurrency markets. Coinbase is one that you can buy as a stock market investor, which is an exchange and you can do transactions as well with cryptocurrencies Coinbase, Brian Armstrong, CEO comes out.  And he was taking a heat a little bit of heat this last month, on saying they didn’t have the legal protections in place for some of their retail customers that were trading, buying and selling cryptocurrencies. And in the unlikely event of a bankruptcy for Coinbase, you know, would you still have those those tokens in those cryptocurrencies protected?  Certainly not that way. And for other financial institutions, right, a Bank of America goes under, you still get to withdraw your cash that’s protected for you. Same thing with Charles Schwab with stocks. Wouldn’t you want to have the same protections for a company like Coinbase with cryptocurrency, it just shows you that as this is innovating out there, regulations are catching up.  But the innovators are going to be a step ahead of that. And it’s really been interesting to see, not only innovative leaders figure out how to take advantage of cryptocurrencies for the equity value of their publicly traded stocks like MicroStrategy or Tesla have, but also innovators like the exchanges like Coinbase and Brian Armstrong have as well. Any other thoughts on that? One other question I wanted to chat about but any other thoughts about kind of Web3 and cryptocurrency out there?

 

Spencer Randall  17:29

Yeah, I have some comments to add on Coinbase. Coinbase is another example of a company integrating an NFT marketplace, right following the lead and success of Open Sea. Coinbase wants to compete on that front. FTX is another example. Coinbase and FTX are two of the biggest changes here in the United States for trading cryptocurrencies. They both added an NFT element and marketplace to their exchanges.  I’d say that because Coinbase is a publicly traded company, whereas a lot of its competitors are privately held. They get a different level of scrutiny, a different level of exposure. And yes, this disclosure that you mentioned about a theoretical bankruptcy and its impact on the consumer did make its its rounds in the news and the headlines. I’ll make a broad statement about cryptocurrency exchanges in general.  Unlike your traditional finance accounts, whether it’s a brokerage account or a bank account, you’re accustomed to all of your assets being covered by FDIC insurance. A really big difference between crypto exchanges and Trad Fi or traditional finance accounts is generally at best only the cash position in those accounts would be covered by FDIC insurance, it varies from company to company, but in general, most crypto assets so, assets held on a blockchain in some shape or form will not be covered by insurance for the end consumer as an individual. The best platforms carry lots of insurance to protect the company itself.  And so, something that we do as a best practice is we generally work with custodians and exchanges that have sufficient insurance for the company itself, because some of that will pass through in the unthinkable event to the end consumer. But the same level of consumer protections that you enjoy and traditional finance because this is an emerging industry, because regulation is still very much ongoing and developing.  You do not enjoy that as a crypto consumer today. Things will change things will evolve, regulation will form develop be adopted, but today just know that generally it’s only the cash position at best that would have FDIC insurance when you’re using a crypto exchange.

 

Simon Erickson  20:04

Makes a lot of sense Spence. We had two other questions that came in again, these are on our 7investing community forum, we’ll send the links along with this video so that anybody can join. It’s completely free. We can talk about stocks, and we chat about crypto with Spence and his crypto EQ team. But two others that came in, you know, feel free to take either or both of these if you’d like.  So it’s kind of a lightning round here at the end. But the other questions were what happened to the Terra ecosystem? And the other was what other stable coins will follow UST’s lead? Any thoughts on either of those?

 

Spencer Randall  20:36

These are great questions when the Terra debacle started to unfold, I said to the team, I can’t think of anything more catastrophic than what we’re seeing right now. Because we’ve had projects within crypto that were outright scams implode, or a lot of people call these in some way a rug pull where the rug is pulled out from underneath the community. In an open permissionless ecosystem, lots of things can happen.  You alluded to the wild wild west. And that’s why it’s so important to do your own research and lean on tools like CryptoEQ and send investing to do your research on equities and cryptos. But with Terra, that project and the leadership there had garnered so much support from prominent venture capital groups in crypto. And the community, it was widely regarded as one of the best projects in crypto, it was a top 10 by market cap.  So to see something like that completely go to zero is sensational. It’s incredible. It’s, you know, awful for folks that had exposure. And, you know, our evaluation of Terra is ongoing, so we will release content, it’s a post mortem of what exactly happened. But the really important part to double click on is that Terra and its design is different than other stable coins in crypto.  Not all stable coins are created equal, just like not all cryptocurrencies are created equal. You know, I said earlier, there’s Bitcoin and there’s everything else. In stable coins if you just analyze that bucket, in my opinion, there is USD coin and USDC, USDP in Paxos, and Dai or the Maker ecosystem. There’s those three stable coins and then there’s everything else. And so I think of those as the highest quality stable coins, where you can expect and anticipate that the peg will be maintained.  Terra is very much was in my mind and still is – I never allocated to Terra or UST in that other bucket of things that yet to prove themselves. What made Terra really unique is it was an algorithmic stable coin. So there were two assets. It was a twin token ecosystem, you had the LUNA collateral underpinning this ecosystem is really the infrastructure that was paired with the USD stable coin. And it worked until it didn’t.  And there was some smoke, there was a couple of near depeggings in the past. But ultimately, UST and LUNA in the Terra ecosystem, demonstrated the same thing that we’ve seen  historically with algorithmic stable coins where the peg is maintained by an algorithm and not necessarily underlying collateral – it’s a failed project, and a lot of people got hurt and it’s it’s terribly unfortunate and it shows why doing your own research is so important. And finding information providers that you can trust to provide unbiased research is critical. As a retail investor and trader.

 

Simon Erickson  23:57

Makes a lot of sense Spence. Like I said buyer beware do your own research and do your diligence. Certainly why we exist certainly why we have this partnership and certainly why we have these check ins on our Collision Course conversations every month. This was our May 2022 Collision Course. Always nice checking in with you Spence. Thanks for being part of this program again.

 

Spencer Randall  24:15

Thank you for having me. Enjoyed the conversation.

 

Simon Erickson  24:17

Thanks, everybody for tuning in. We are here to empower you to invest in your future. We are 7investing