Macro Economy 101 and it's effect on our Imaginary Internet coins

Hey Fanos Fam! Hope you're having a beautiful Sunday. It’s been a while since we published a long format article in Fanos, and hopefully, this won’t be the last. **Fingers crossed**.

Well, as you all know, the world economy has been on life support since 2008. Central bank intervention into **the** open economy has been the norm for **decades** now. QE, or Quantitative Easing, has been the name of this deliberate intervention, which means putting more money into the system, aka the economy, whenever something breaks. This has been going on for almost half a century, but the intensity has grown over the last 2 decades since 2008.

I hear you say, Fanos! I am here to know if my dog-based meme coin that I received for free is going to pump or not! Why talk about MaCrO EcoNoMy???

Well, the first thing one has to realize is that everything in the economy is connected to some extent. The performance of your dog-based meme coin that you received for free depends on whether there are enough degens/buyers with extra cash to gamble on it. **No extra cash, less gambling**.

As most of you know, the price of crypto has been taking a tumble for over 6 months now, mostly led by Bitcoin's underperformance. Most tokens/coins are down 70-90% during this time, while BTC has only dropped 34% max and 29% when it was at $54K.

This is to say, this is a serious dip that might not be your average "buy the dip" situation.

But why have BTC and primarily alt prices taken such a big hit over the last 6 months? Why are alts generally weaker in this environment, and what should we expect moving forward?

Well, it’s a broad question, but to simplify, there isn't one clear answer as we're seeing a blend of idiosyncratic and systematic risks unfolding before our eyes. So, don’t expect a straightforward explanation.

Let’s start with systematic risk: AKA the macro.

The central bank of the US, the Federal Reserve, currently has the fund rate sitting at 5.5%, up from near zero percent in 2020. This has put a lot of pressure on consumer spending, taking money out of the market. It's very hard to see any significant market upside while interest rates are at decade highs. Unless the Fed lowers interest rates aggressively (which I doubt based on past experience), the market will continue to feel the impact in some way.

Crypto, in general, is a risk-on play, meaning it's one of the last things people buy during a bull market. Risk-on assets tend to perform well when the macroeconomic outlook is strong but suffer the most when there’s less liquidity in the system.

Crypto, primarily Bitcoin, is also a risk-on play. It’s the higher beta exposure for large players when they have a higher risk appetite. You could even say it’s a leveraged bet on the SPX (S&P 500). So, Bitcoin tends to outperform the SPX in both directions.

If the SPX performs poorly, BTC will usually drop by 2x that amount, and the reverse is also true.

Altcoins are a leveraged bet on Bitcoin, meaning if BTC goes up 2x, alts will generally go up 3-5x. Therefore, weakness in the broader market affects different asset classes differently.

Second Macro effect

Money supply, aka "Liquidity," specifically M2, affects the entire market.

Have you ever heard the phrase "Liquidity is king"?

Well, liquidity is what moves the market; it’s the fuel for asset prices in either direction.

The more M2 goes up, the higher asset prices will rise. If M2 starts decreasing, asset prices will drop much faster.

The above chart shows when M2 peaked in 2021. Ironically that’s where virtually almost all assets in existence peaked. BTC peaked earlier then the rest followed.

Conversely, Most asset prices bottomed in OCT 2023 in prices when M2 bottomed.

I think you get the gist now.

Crypto Idiosyncratic risks unfolding

As I said before, almost every altcoin has fallen 40-90% in the past 6 months. It’s easier to list what pumped than what didn’t, lol.

Only two things have really performed well since Q4 2023: Bitcoin and SOL.

Bitcoin’s performance can be attributed to the Bitcoin ETF, while SOL’s strength is mostly due to the Lindy effect and its inevitable repricing.

Nothing else, besides these two, had structural buyers—literally nothing.

That’s why everything was driven by quick narratives and speculative money. TIA pumped 10x and is now almost back to its 2023 price.

Every major Layer 1 pumped well, but all have now retraced their gains.

Even Ethereum is down close to 50% from its peak, which rarely happens.

So, what should we expect in the coming weeks or months?

It's hard to say with certainty, but unless the macro outlook starts to improve, I don’t think we’ll see a strong market in crypto, in my opinion. As I mentioned, crypto is a risk-on play. If the majority of market participants are risk-averse, who’s going to buy our overvalued alts?

I guess that’s a question for another day.

Hope you learned something from this! Like and subscribe to this account so it can reach a larger audience. See you in a few weeks!