Market Musings #2: Conflict & Crypto
Geopolitical instability and tightening liquidity = more downside risks
This weekend could have marked the beginning of World War 3.
As a geopolitical non-expert, I’ve been closely monitoring the situation in the Middle East. In an unprecedented show of force, Iran fired hundreds of ballistic missiles directly at Israel, lighting up the night sky. This was in retaliation to Israel’s earlier attack on the Iranian Embassy in Syria.
Crypto markets reacted sharply to this conflict, experiencing their largest drop this cycle over the weekend.
Being open 24/7, crypto bore the brunt of market uncertainty. Weekend traders used Bitcoin as a proxy to front-run what might happen in the stock market on Monday. BTC fell 15% and briefly dipped below the $60,000 mark. Altcoins suffered heavily, with many dropping 30 - 50%. Yet, many coins have now recovered strongly from the dip, with Bitcoin stabilizing around $66,000 today.
We’re at an inflection point. Crypto markets feel fragile and could easily go either way in the short term.
On one hand, there were massive liquidations, with over $1.6 billion in long positions liquidated in just two days. Funding rates have returned to their lowest levels, sometimes even turning negative, indicating that much of the long leverage has been flushed out. This acts as a good reset and forms a solid foundation for market recovery, back to all-time highs and beyond through 2024-2025
On the other hand, I wonder who is left to buy the coins right now? Many investors have lost money or given back a substantial portion of their unrealized profits. I saw prominent perp traders publicly sharing that they lost 40% of their book.
Most of Crypto Twitter is already positioned long—somehow, it appears that everyone bought the dip. Since everyone’s primarily long, whether we can go up further from here depends on how much sidelined capital is waiting to buy a big dip like this. We will find out soon, particularly as we watch BTC ETF flows this week. Remember: BTC is reflexive both on the upside and downside.
And given how global liquidity conditions are tightening these few weeks, as Arthur Hayes eloquently explained, I’m leaning towards greater downside risks in the near term.
One thing is certain: geopolitical uncertainty will persist. The situation in the Middle East remains unresolved, and Israel's unpredictable stance could precipitate sudden risk-averse movements in global markets. One narrative that could rise up, though, is the potential for Bitcoin to be viewed as an economic hedge against war, especially when people realise it is not easily seized by governments and can be transported easily.
GCR remarkably came out from a long Twitter hibernation to tweet this, garnering 8M views within a day:
My views align with his. It’s a great time to go shopping cautiously. Find your highest-conviction coins, scale in slowly, and be patient. Plus, the Bitcoin halving is occurring in just five days—to think my mum actually asked me to explain it to her during our regular family weekend lunch.
Have a wonderful week.
Cheers,
Teng Yan
It will be interesting to see how BTC acts long-term if WW3 does break out