Jeff Dorman dives into the factors behind the crash, the macroeconomic impacts, and why he remains optimistic amid the market decline.
Compiled & edited by TechFlow
Guest: Jeff Dorman, Chief Investment Officer of Arca
Moderator: Laura Shin, Writer and Host of Unchained
Podcast source: Unchained
原标题：Crypto Prices Are Way Down. Is It Time to Buy the Dip?
Air Date: August 7, 2024
Summary of key points
The recent cryptocurrency crash has left many investors confused. In this episode, Arca's Chief Investment Officer Jeff Dorman dives into the factors behind the crash, the macroeconomic impact, and why he remains optimistic amid the market downturn. He is surprised that Ethereum has performed so poorly this year and believes that the Democratic Party's handling of cryptocurrencies is a misstep, while also discussing the differences between traditional finance (TradFi) and decentralized finance (DeFi) during market turmoil.
Two main reasons for last weekend's market crash
Jeff pointed out that when he sees a big price move, he first analyzes the difference between the new information and the previously known information. He believes that there are six main theories for the reasons for the market weakness, two of which have had the greatest impact on the market in the past 72 hours.
Global macroeconomic issues: First, the Bank of Japan (BOJ) unexpectedly raised interest rates, causing the Nikkei index to fall nearly 8% over the weekend and another 12% the following day. This wiped out all gains for the year in a week. At the same time, the VIX index rose sharply, affecting the digital asset market. Despite this, the crypto market's reaction far exceeded that of other markets, showing its characteristics as an abnormal reaction.
Jump Trading's massive sell-off: Jeff believes that Jump Trading's sale of nearly $600 million in Ethereum on Sunday may be related to the liquidity issues they face. Jeff proposed three possibilities: one is forced liquidation due to collateral issues, the second is to avoid the expected market crash in advance, and the third is to use the less liquid market for "stop loss hunting". These factors have led to the violent market fluctuations.
How the macro environment has impacted crypto lately, and why the market is moving too fast
The relationship between macroeconomics and cryptocurrencies
Jeff explained that the relationship between macroeconomics and cryptocurrencies has been interesting over the past six or seven years because the relationship has been on and off. He recalled his experience working in traditional debt and equity markets, noting that in his early days in the crypto space, the market did not pay attention to these macroeconomic data, but after 2022, as the crypto market became more correlated with other markets, the importance of these data began to rise.
Impact of the employment report
Jeff pointed out that the recently released employment report showed that the unemployment rate rose to a three-year high, and the number of unemployed people in June was significantly revised, which panicked the market. He emphasized that the market reaction was not just because of the employment data itself, but because Fed Chairman Powell was vague about interest rate cuts in his speech on Wednesday and failed to give a clear timetable for rate cuts. The market is therefore worried that the Fed will be slow to respond to the economic slowdown.
He further explained that the history of interest rate cuts over the past 25 to 30 years shows that the market's reaction to the Fed's interest rate cuts depends on the reasons for the cuts. If the Fed starts to cut interest rates when the economy has already shown obvious weakness, the market will usually fall sharply; if the interest rate cut is a preventive measure before the economy slows down, the market may rise. Therefore, Jeff believes that the challenge facing the Fed now is to take action before the economy needs to cut interest rates to avoid further market declines.
Why the market overreacted
When talking about why the market overreacted, Jeff pointed out that despite some negative data, the overall economy is still performing well and corporate earnings are strong. He believes that the market reacts too sharply to a single data point, especially when other economic indicators are relatively stable. He mentioned that although the market experienced violent fluctuations on Friday, the decline in the stock market after the actual opening was not as large as expected.
Why Ethereum (ETH) is Falling More Than Other Cryptocurrencies
The Impact of Jump Trading
Laura mentioned that Ethereum's price had dropped sharply in the past week and asked if it was simply due to Jump Trading's selling.
Jeff responded that market fluctuations are usually not caused by a single factor, but the result of the combined effect of multiple factors.
Jeff explained that Jump Trading’s wallet activity triggered panic in the market, especially before the Ethereum sell-off began, and the news of Jump Trading’s large Ethereum transfer to the exchange was undoubtedly “the last straw that broke the camel’s back.” Although Ethereum was already affected by other market factors before Jump Trading’s sell-off, Jump’s selling exacerbated the downward pressure on the market.
He stressed that while Jump Trading’s trading behavior may have had an impact on the market, overall market sentiment and other macroeconomic factors were also at play.
Jeff believes that the market's reaction is often based on emotions and expectations rather than actual economic data. He pointed out that although the crypto market may be subject to sharp fluctuations in the short term, fundamentals remain the key factor in determining prices in the long run.
Market forward-looking response
Jeff also mentioned that the market often reacts in advance when it is known that supply is about to enter the market. He used the high-yield bond market as an example to illustrate that when the market hears that a large fund is about to sell a large amount of assets, other investors will sell in advance to prevent the price from falling, resulting in actual sales far exceeding expectations. This phenomenon is particularly evident in the crypto market with low liquidity, so price fluctuations will be amplified.
Macroeconomic factors
In addition, Jeff pointed out that the market was already weak before the Jump Trading sell-off, mainly due to macroeconomic factors such as the Bank of Japan's interest rate hike, the rise in the VIX index, and the rise in US Treasury yields. These factors worked together to cause the market to react particularly strongly to Ethereum.
The unexpected performance of the Ethereum ETF
Laura mentioned that while the recent launch of an Ethereum ETF was seen as positive news, Ethereum’s performance was still surprising.
Jeff said that if someone had told him at the beginning of the year that the Ethereum ETF would be approved and that the U.S. political environment would undergo major changes, people might have predicted that Ethereum would perform very well. However, in reality, Ethereum's performance is not as good as other assets such as Bitcoin, Solana, BNB, and even underperforms in many cases.
The “most important” shift in crypto policy that happened this year
A critical moment for policy change
Jeff mentioned that May this year was a critical period for a major change in cryptocurrency policy. He believes that this is one of the most important weeks in the history of crypto, marking a significant change in the attitude towards cryptocurrencies in the United States.
Jeff cited a series of events, including Trump's statement on May 8 that "a vote for Trump is a vote for cryptocurrency" and the Senate's vote on May 16 to repeal SAB 121, an accounting rule that negatively affects digital assets.
Expectations for Ethereum ETF
In addition, Jeff also mentioned that on May 20, the research team raised the approval expectations of the Ethereum ETF from 0% to 75%. These events together constitute a major shift in the US regulatory environment, showing that policy support for cryptocurrencies has significantly increased.
The Democratic Party’s Miscalculation with Cryptocurrency
Jeff pointed out that it was a major misjudgment for the Democratic Party to take an anti-cryptocurrency stance in an election year. He believes that a large number of voters in the United States support cryptocurrencies, while there are very few opponents.
Jeff emphasized that if the Democratic Party continues to oppose cryptocurrencies, it may alienate a large number of voters, and this strategy will be extremely unwise in the election.
Market reactions and political dynamics
As Trump and the Republican Party were viewed as more crypto-friendly, Jeff observed that market expectations for future elections also shifted. When Biden dropped out of the race and Kamala Harris was nominated, market expectations for a Trump win dropped from 76% to 52%. This shift in political dynamics had a negative impact on cryptocurrency prices, further exacerbating market weakness.
The yen carry trade was one of the key factors leading to the market crash
The concept of yen carry trade
Jeff explained the basic concept of the yen carry trade (Kerry Trade), pointing out that this is a common carry trade in multiple markets. Simply put, this trade is to borrow a low-interest currency (such as the yen) and convert it into a high-interest currency (such as the US dollar) for investment to obtain the interest rate differential. Japan's interest rates have been negative or close to zero for a long time, allowing investors to borrow yen at a relatively low cost and obtain higher returns in other markets.
Market reaction and risks
However, recently the Bank of Japan (BOJ) raised interest rates from negative to zero, and subsequently raised them further to 0.25%. Although seemingly a minor adjustment, for highly leveraged traders, this means that the cost of borrowing yen has increased, causing them to have to quickly close their positions to avoid losses. Jeff pointed out that when the yen appreciates, traders who borrow yen and invest in dollars face a huge risk of loss because they need to repay their loans at a higher interest rate.
Technical and fundamental factors
Jeff emphasized that market fluctuations can be divided into technical selling and fundamental selling. Technical selling is usually caused by short-term market fluctuations caused by leverage effects, while fundamental selling is closely related to economic indicators (such as unemployment rate, consumer spending, etc.). He believes that the current market decline is mainly caused by technical factors rather than deterioration of fundamentals.
Historical background of the market
He also mentioned that similar situations have occurred many times in history, such as the Long-Term Capital Management incident in 1998, which was caused by excessive leverage leading to a market collapse. Although the yen carry trade may cause a shock to the market in the short term, it usually does not cause systemic risks unless the scale of the transaction is so large that it requires rescue.
Overall market situation
When discussing the overall market situation, Jeff said that although the Japanese stock market (Nikkei) has fallen sharply, the declines in other markets are relatively small, which shows that this incident has not had a widespread impact on the global market. He pointed out that the fundamental data of the US economy currently does not show signs of recession, and there is a mismatch between market reaction and actual economic information.
Will Genesis's distribution of $4 billion have any impact on the market?
Background on Genesis Asset Distribution
Laura mentioned that Genesis began distributing approximately $4 billion in cryptocurrency and cash to customers after bankruptcy, and asked whether this had an impact on the decline in crypto market prices.
Jeff responded that individually, this asset distribution may not be enough to have a significant impact, but combined with other factors, it did exacerbate the market's weakness.
Potential impact of asset distribution on the market
Jeff explained that Genesis’s asset distribution is mainly due to the end of its bankruptcy proceedings, which means that creditors will receive cash and Bitcoin returns. Although some customers may choose to hold these assets for a long time, there is also the possibility of selling them. When market participants expect asset distribution, they may sell in advance to prevent price declines. This “front-running” behavior will increase the selling pressure in the market.
Comparison of historical cases
He mentioned that similar to the Mt. Gox situation, the market has discussed the return of Bitcoin for ten years, but the actual market impact has not been that significant. Although most of Mt. Gox's $900 million in bitcoins have been distributed, it has not had a huge impact on the market. This suggests that market responses to supply issues are often excessive, and short-term traders may take advantage of these expectations for arbitrage purposes.
Recent market supply pressure
Jeff further analyzed the recent supply pressure in the market, including Bitcoin from Mt. Gox, Bitcoin seized in Germany, and the sale of locked assets after FTX went bankrupt. All these factors together have led to an increase in the supply of assets in the market. He emphasized that market participants tend to react to these supply changes in advance, leading to price fluctuations.
Future market outlook
Speaking of the future, Jeff pointed out that FTX will distribute cash at the end of the year or early next year, with an estimated amount of between $12 billion and $14 billion. This may have an impact on the market, especially if these funds are reinvested in the crypto market. He said that the benefits of real-time on-chain analysis coexist with challenges. Although instant information can be obtained, market participants may also act in advance, thereby amplifying the magnitude of price fluctuations.
Why Jeff believes current data does not point to a US recession
Views on the recession
When talking about the possibility of a recession, Jeff said that he does not have a strong view that the economy will enter a recession, but he firmly believes that the current data does not show any signs of approaching a recession. He pointed out that a recession is usually defined as two consecutive quarters of negative GDP growth, and the GDP growth in the second quarter is expected to be between 1.5% and 2%, which shows that the economy is still growing.
Corporate Profits and Economic Activity
He mentioned that recent second-quarter corporate earnings data showed earnings growth of 12%, beating expectations of 9%, further supporting the view that the economy is healthy. Despite some mixed data, such as rising unemployment and lower revenue expectations for some large technology companies, the overall economic performance remains relatively strong.
Current state of life and consumption
Jeff also mentioned that personal life experience also reflects the vitality of the economy. He mentioned that crowded airports, difficulty renting cars, and full hotels indicate that people's travel and consumption activities are still strong. He recalled the scene during the 2008 economic crisis, when airports were almost empty and many people were unemployed and unable to find jobs, but the situation is completely different now.
Market reaction and data dependence
He further analyzed the market's reaction to economic data, pointing out that the market reacted extremely violently in the early days of the COVID-19 outbreak, while the recent market volatility has not shown the same degree. He believes that although there are some unemployment data that may hint at an economic slowdown, it is not enough to cause a strong negative reaction in the market. He emphasized that the current market is still a good buying opportunity.
Future Outlook
Finally, Jeff said that although there may be signs of economic slowdown in the future, based on current data, he does not think the economy is heading for a recession. He reiterated that the market is highly sensitive to data, and if there is more data in the future that shows that the economy is really slowing down, then the Fed may take faster action. But at present, he believes that there is no evidence to support the view of a recession.
Why Jeff Says He's "Buying the Dip"
Market reaction and the Fed's interest rate decision
When talking about the scenario of the Fed's possible rate cut, Jeff pointed out that the market's reaction to the rate cut depends on the reason for the rate cut. If the market generally believes that the Fed is forced to cut interest rates because of the economic collapse, in this case, the stock market and the crypto market may fall. On the contrary, if the rate cut is because inflation has been controlled within a reasonable range and the economy is in good condition, then the stock market and the crypto market may rise sharply.
Confidence in a soft landing
He said he tends to think the economy will achieve a soft landing, and the data supports this view. He believes that if the Fed overreacts to the stock market decline and cuts interest rates urgently, it may cause more panic, so he hopes that the Fed can remain calm and give the market confidence.
Continued “buy on dips” strategy
Jeff made it clear that he is optimistic about the market and is “buying the dips.” He believes the current market sell-off is one of the dumbest in recent years, so he has no hesitation in continuing to buy. The three factors he mentioned that confirm his bullish stance include:
Stabilization of Japanese stocks: He observed that Nikkei 225 futures rose, indicating that the market is warming up.
ETF inflows: He hopes to see retail and institutional investors in Bitcoin and Ethereum willing to buy into ETFs during market downturns.
Reassuring remarks from the Fed: He expects the Fed to make some reassuring remarks to the market, demonstrating its monitoring and confidence in the economy, without taking emergency rate cuts.
Concerns about potential risks
Despite his optimistic outlook on the market, he also mentioned some risk factors that could cause him to reconsider his bullish stance, such as volatility in the Japanese economy, drastic changes in the crypto market, or continued negative economic data. If these situations occur, they could cause market panic and force the Fed to act quickly.
Cryptocurrency as a political issue: Harris’ win won’t be as bad for crypto as many think
The connection between elections and cryptocurrencies
Jeff pointed out that the election has become one of the important narratives in the cryptocurrency field. He mentioned that although the market has experienced some volatility recently, this will not necessarily have a significant impact on the election results. While many believe a Trump victory could be better for the market, he sees no statistical evidence that stock market performance would be significantly different under Republican or Democratic leadership.
Market reaction and uncertainty
Jeff mentioned that historically, the market tends to fluctuate before elections, and after the election results come out, the market usually resumes its rise. This is because the market hates uncertainty more than bad results. He cited the example of the 2020 election, where even though Biden won the election, the market still rebounded after the election, and both the stock market and Bitcoin rose sharply.
Democratic Party’s Changing Attitudes on Cryptocurrency
He mentioned that the Democratic Party has realized the political influence of the cryptocurrency industry, especially in Congress, where more and more members have begun to pay attention to voter support for cryptocurrency. Although Trump may use cryptocurrency as a political tool to win voters, the Democratic Party can no longer oppose cryptocurrency as it did in the past. He believes that this change in attitude will reduce the influence of some forces against cryptocurrency, such as Warren and Gensler.
The Future of Cryptocurrency
Jeff believes that while a Trump victory may be more favorable for the cryptocurrency market, a Harris win would not be as bad as some fear. He mentioned that Nancy Pelosi and Chuck Schumer recently supported some bills to promote cryptocurrencies, which shows that the attitude towards cryptocurrencies within the Democratic Party is changing.
On the future of Gary Gensler
It was also mentioned in the discussion that Gensler's position may be affected. If Harris wins, there may be a new committee chairman, which may change the regulatory environment for cryptocurrencies. Jeff believes that no matter who is elected, Gensler may face the risk of being replaced because some of his policies on cryptocurrency regulation have caused widespread controversy.
Why Jeff believes Bitcoin isn’t always a hedge against equity-related or geopolitical risks
Bitcoin’s Correlation and Market Performance
Jeff mentioned that Bitcoin is generally considered a non-correlated asset, but this does not mean that it will not be correlated with other assets in all cases. He pointed out that Bitcoin's correlation may change with changes in market conditions, sometimes showing negative correlation and sometimes showing positive correlation. For example, when certain specific events (such as geopolitical crises) occur, Bitcoin may be regarded as a safe-haven asset, while in other cases, it may perform similarly to the stock market.
Government and banking crisis performance
Jeff believes that Bitcoin tends to act as a defensive hedge asset when investors lose confidence in governments or banks. For example, during the March 2023 banking crisis, many investors had doubts about the safety of local banks, and demand for Bitcoin rose. However, he noted that Bitcoin does not always perform consistently when the stock market falls or geopolitical risks increase.
Comparison of Bitcoin and Gold
Jeff further stated that Bitcoin does not necessarily have to be considered "digital gold" because there is no substantial basis for such a comparison. He believes that many investors are not interested in gold, and only a few macro investors and central banks pay attention to gold. Therefore, it is unnecessary to think that Bitcoin should assume the role of "digital gold".
The influence of institutional investors
As Bitcoin gradually becomes more accepted by more institutional investors, its correlation may also increase. Jeff explained that if an institutional investor needs to sell its holdings, they may sell all assets at the same time, including Bitcoin, which will cause the correlation between Bitcoin and other assets to increase.
The True Value of Bitcoin
Jeff stressed that the real value of Bitcoin lies in its ability to serve as a tool to defend against untrustworthy governments and banking systems. After the banking crisis, many small businesses were concerned about being able to withdraw funds from banks, and in this case, the importance of Bitcoin as a store of value was reflected. He believes that in countries with unstable economies and depreciating currencies (such as Argentina or Turkey), Bitcoin is particularly important as a tool to protect assets.
What does Jeff think of the US government's proposal to buy Bitcoin as a strategic reserve?
Trump's proposals and the debt problem
Jeff mentioned that Trump proposed at the Bitcoin conference that perhaps Bitcoin could be a way to solve the trillion-dollar debt problem in the United States, and this view aroused his interest. He believes that while Bitcoin may be an option, there are other ways to invest that can also achieve "transcendence" of debt, such as investing in high-quality companies in the US stock market (such as Apple or Nvidia). Therefore, he was confused by Trump's proposal and was not sure whether Trump wanted to emphasize the excess returns of Bitcoin or regard it as an asset that central banks should hold.
The possibility of central banks buying Bitcoin
Jeff said he does not think central banks will buy Bitcoin like they buy gold. He believes that if Bitcoin is confiscated, it may not be sold or auctioned, but directly become part of the government's balance sheet. In this case, the role of Bitcoin will be different.
Views on Bitcoin as a reserve asset
Although Jeff does not have a strong opinion on the idea of central banks buying Bitcoin, he admits that if governments become new buyers of Bitcoin, it will have a positive impact on the price of Bitcoin. He admits that he does not have a deep understanding of the internal mechanisms of central banks making such decisions, but if it really happens, he would support it.
The stark contrast between the suspension of trading by traditional financial giants and the permissionless nature of decentralized finance (DeFi)
Reflections on the financial crisis
Jeff pointed out that during the financial crisis, people will re-recognize the limitations of the current financial system: you can only trade when the financial institution allows you to, not when you want to. He emphasized that an important lesson from the past decade is that assets deposited in banks or brokerage firms do not really belong to you, but are the liabilities of these institutions. The return of assets depends on these institutions, which is not common in the United States, but more common in other countries, especially where there is a lack of trust in local governments and financial systems.
The issue of mobility and accessibility
In a crisis, liquidity is often missing when you need it most, and not being able to access your assets to buy and sell is a frustrating experience. This happens mainly because the assets do not really belong to you, but are stored in a centralized third-party system. Jeff believes that decentralized finance (DeFi) provides a way to trade without a third party, and users can trade at any time.
Advantages of DeFi
Jeff emphasized that DeFi and self-custodial layer 1 protocols provide a better system when actually needed. He believes that the main problem at present is that due to regulatory restrictions, users can only trade cryptocurrencies on these crypto trading platforms, and most people are not interested in cryptocurrencies. He envisions a scenario: if platforms like Charles Schwab, Fidelity, Vanguard, and Ameritrade go down at the same time during high volatility, users will be able to trade Apple or Nvidia stocks on decentralized platforms such as Uniswap, which will be a major shift.
Future Possibilities
Jeff believes that the advantages of decentralized financial systems in owning and transferring assets are obvious, but the assets that can currently be traded on these systems are not attractive enough for most people. He believes that being able to trade real stocks, bonds and other assets on crypto trading platforms will completely change people's experience, and many people will be surprised by this new way.
