Is crypto winter the canary in the coal mine for a broader market downturn? My worst case scenario for what's around the corner... a thread. 👇 
The sell off that's occurred over the last quarter has not been isolated to crypto. The S&P 500 erased a 9% YTD gain to be flat on the year. The Nasdaq index retraced 18% over the course of 3 months (before bouncing off the low).
But of course no market has hurt more than the crypto market. January's market cap of $830 bn has crumbled to roughly an eighth of that. Much of this unwind has happened over the last few weeks, with the crypto market as a whole getting marked down 40% in the last month alone.
Don't get me wrong - the crypto market is minuscule in the scheme of things & is not about to have any impact on the global market. Nor has it demonstrated any real correlation with macro market asset classes, but it may act as an important indicator - a canary in the coal mine.
Remember: 2 years ago the crypto market stood at $15 bn in total value with trade vols in the double-digit millions. What led to the asymptotic rise in interest (and prices)? The search for yield...
The search for yield has played out across asset classes over the last 8 years. As central banks around the world have pumped liquidity into the global economy, traditionally risky assets have had their premiums sucked out driving investors further out along the risk spectrum...
Emerging markets stocks & bonds have benefited from this trend as have high beta equities (like the FAANGs). Even alternative asset classes like art, cars, and venture capital have felt the benefit of these tailwinds.
The cryptocurrency boom of 2017 may just have been the illogical conclusion of the search for yield trade. If you are addicted to easy money and you can't get your kicks from traditional assets anymore, where better to turn than magic internet money?
Capital started by pouring into the relatively lower beta cryptocurrencies like Bitcoin and Ethereum and then found its way to the ICO market... dumping close to $30 billion into assets that provided them little in the way of investor protection. Talk about "risk on."
But the story has obviously reversed since the start of 2017 with many cryptocurrencies and tokens getting marked down 80-90% on the year and funding for ICOs drying up substantially.
Maybe crypto, the last mover on the way up in the global search for yield, is the first mover on the way down in a macro market sell off.
If the crypto boom of 2017 was the result of the longest expansionary period the economy has seen in 100 years, perhaps the bust of 2018 is the canary in the coal mine that the big unwind is well on its way...
