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This is a free preview of MTC 33… In this note:
The macro outlook is getting better short term as I think the USD tops out around here.
Buy rumor / sell fact in ETH still makes sense but I’m less excited as I think risky assets are going to rally into CPI on September 13.
Can Crypto Cross the Chasm? To reach wide adoption, new technologies must transition out of the innovator and early adopter phase and find a mainstream audience. It’s still up for debate whether crypto can do that. Or will crypto forever remain a much-loved, but kinda niche product?
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Today’s note is 2500 words (14-minute read)
First: A Market update
My short-term view in macro world has changed a bit as I feel the dollar and yields are becoming a two-way trade after trending one-way for most of 2022. My reasoning is:
Global central banks are starting to push back on the strong USD
*BRAINARD NOTES POTENTIAL FOR STRONGER USD TO COOL INFLATION
*JAPAN MOF, BOJ, FSA TO HOLD MEETING ON YEN
PBoC has been fixing USDCNY very, very low in an effort to signal its displeasure with yuan weakness. USDCNH traded up to 7.00 and peaked there so far. 7.00 has been a key level for the market and with the China Party Congress set for October 16, stability is the official objective on USDCNH from here.
As central banks get to neutral, rate hikes will slow. If yields stop going up as quickly, the USD should calm down. Global rates and the USD have been tied at the hip because the US has been the leader on rate hikes.
Global energy prices are falling fast enough that the energy panic may move to the rearview mirror. The energy crisis theme has been a big driver of EUR and GBP weakness.
RBA pivoted to a more dovish stance, and they were one of the first movers in the big rates move that started in November 2021. They abandoned their yield cap, and that opened the door for global rates to rip. Now, if they are slowing down, there is probably a read-through to other central banks going forward. Here is the key excerpt from the head of the RBA (Lowe):
“We are conscious that there are lags in the operation of monetary policy and that interest rates have increased very quickly. And we recognize that, all else equal, the case for a slower pace of increase in interest rates becomes stronger as the level of the cash rate rises.”
The Fed is talking about overtightening risks now, not just inflation risks.
To give you a sense of how far the dollar has come, here’s USDJPY overlaid with oil prices (first chart) and US yields (second chart). USDJPY has been the leader on the USD move and it’s run rather far compared to what energy prices or yields would suggest. Note that energy prices moved before USDJPY, the whole way up. Now they are pointing lower. Hmmm.
USDJPY vs. oil, late 2020 to now
USDJPY vs. US 10-year rates, late 2020 to now
You can see that US 10-year rates have not made a new high while USDJPY has gone straight to the moon. Much less of a divergence on that second chart, obviously, but my view is that rates go lower from here, so the divergence is set to grow unless USDJPY heads south.
Since crypto is somewhat of an anti-dollar trade, and I’m thinking the USD is peaking… It’s hard to be overly bearish crypto, regardless of the buy rumor/sell fact set up in ETH. That said, the USD turn does not have to be an upside-down V. Very often these turns take a while and involve a lot of chopping around, so I’m sticking with the bearish ETH view ‘til we get a post-Merge wipeout down to 1100/1200.
To be clear: My macro view is becoming more constructive on risky assets, and I am no longer bullish USD … But crypto can still do its own thing for a while and keep going lower as the USD enters a topping process.
Can Crypto Cross the Chasm?
Here is something I have been thinking about a lot recently…
One impact of crypto winter is that interest from non-crypto people cools off. With very few useful mainstream applications ready for prime time, crypto remains a large, but still somewhat niche world populated by innovators and early adopters. My question is:
What if crypto never ends up as more than a niche product?
The small market cap of crypto relative to other asset classes is an argument that bulls use to justify massive further upside. At some point, that small market cap is an argument for crypto as a niche product.
In his 1991 book “Crossing the Chasm”, Geoffrey Moore explains that disruptive technologies must migrate through five discrete stages of adoption: Stage One is the innovators and tinkerers, Stage Two is when the early adopters and optimists come on board; Stage Three and Four are the two biggest groups: the “early majority” and the “late majority.” Stage Five is when the laggards and skeptics finally pile in.
In between Stage Two and Stage Three, there is “the chasm.”
Stylized technology lifecycle as described by Geoffrey Moore
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The chasm separates the early adopters from the early majority because the wants and needs of the two groups are different. Early adopters are optimists and visionaries that like shiny, fun, new things. They are willing to wade through some awkwardness. Early and late majority are more interested in functionality, ease of use, and clear problem/solution fit. Tech that cannot make the jump across the chasm remains niche, or dies.
For crypto, you could say the green part of the graph is 2017. The yellow part is 2021. My question (which is a genuine question because I don’t think anyone can possibly know the answer yet): Is the green part going to be 2025, or will crypto drop into the chasm like Segway, VR, The Clapper, and Juicero? With around 10-20% of the population involved in crypto, but overall crypto interest flatlining for now…
Crypto is in the chasm. Can it cross?
This has been a free preview of the latest MTC. The rest of the note outlines my thoughts on whether or not crypto can cross the chasm.
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Thanks.
bd