The Crypto Crash and the Bear Market in Stocks

When historians look back at the post-pandemic performance of stock prices and crypto currencies, they will wonder what we were thinking. After all the excesses were there for all to see as we thought the free money policies of the Federal Reserve would last forever. Along the wild ride we witnessed a more than doubling of stock prices from their March 2020 pandemic low to early January 2022, a flurry of speculation in so-called meme stocks, the Wall Street underwriting machine spitting out blank check SPACs on a daily basis, and the beatification of Cathy Wood in her investing in money losing 50X-100X sales companies. Most of which have crashed and burned.

 

As I wrote last week the stock market entered the “anger” stage of a bear market, now down around 24% as measured by the S&P 500. ( Shulmaven: The Bear Market Enters the Anger Phase ) Nevertheless, the real poster child for the bear market is Bitcoin, the standard bearer of the cryptocurrency market. As I write this Bitcoin is trading at $18,300 73% below its November 2021 high of $67,800. All cryptocurrencies combined have declined by over $2 trillion since November and with the failure of such so-called stable coins TerraUSD and Luna along with the suspension of withdrawals at faux crypto banks Celsius and Babel, the decline continues to accelerate. While it took an almost 20% decline for stocks to enter the anger stage of its bear markets, it took more than a 50% decline in cryptocurrency to enter its anger stage and my guess it is still far from the acceptance stage as margin calls accelerate. Further, it is my guess that we are about to witness a flood of litigation and a big-time Federal investigation similar to what happened after the Dot.com bust of 2000.

 

Why is Bitcoin relevant to the stock market? The answer is that it is first a symbol of the recent mania and second many aggressive stock investors held positions in Bitcoin. With the collapse of Bitcoin those investors effectively faced margin calls on their entire portfolio and in order to meet the margin call they were forced to sell what they could sell thereby selling equities to fund margin requirements on their collapsing Bitcoin positions. I did mention in my yearend review that “Sometime during the year a leveraged player in the Bitcoin market will fail triggering a mini-financial crisis” (Shulmaven: Some Non-Consensus Thoughts about 2022 ) Little did I realize then how leveraged the Bitcoin market was. I guess we are here.

 

What this means to me is that until the Bitcoin unwind is largely complete, stocks will have a difficult time rallying and the bear market will continue.