Why September is Crypto’s Cruelest Month

unforgiving this year. So what's the outlook for crypto asset prices as we leave September behind? Joining me now from Sydney, we have Jamie Kots, crypto market analyst for Bloomberg Intelligence. I was of the view that really we would bottom out in the second half of this year, and I still think that is entirely possible. Jamie. What a pleasure to have you on the show. Thank you so much

for joining us. Thank you very much for having me. Stacy, tell me a little bit more about you know, what the part of Bloomberg that you work in does and how you got here. Yeah. Sure, So. Bloomberg Intelligence is the research arm of Bloomberg. So in terms of there's just the number of analysts and strategists. If you think of it in the context of like an investment bank or a sell side broker, it's a pretty large operation. It would sort of be in the top five or

six in terms of research. Yeah, so I mean with spans across all the all the global offices. And you know, the way I came into the Bloomberg intelligence role was really I was that Bloomberg for seven years prior, I was working as a senior equity market specialist based in Singapore, and that really speaks to my background in history as a sort of an equity sell side idequities trader. For the past of the twenty years or so, it's been a long week. The highlight which has been the FED.

Digital assets essentially did not escape the volatility that we saw across financial markets, not at all. So you actually saw bitcoin outperform traditional socks a little bit. But if you zoom out, it's just been a brutal stretch for bitcoin, down fifty eight percent almost here today we are obviously not just in a kind of a normal down draft.

We are at you know, as I'm looking at prices right now, we're sort of hovering below, well below nineteen thousand dollars, which is of course for for one bitcoin, which is significantly below the highs that we've reached this time last year. One of the things that you, you know, have kind of covered a lot for both bitcoin and ether or what you see as some of the fundamental drivers of that relative underperformance. Like you've talked about liquidity

risk a lot. Can you share your perspective on how you're seeing bitcoin and ether do both relative to your projections but also to kind of the broader markets that you're so familiar with. Yeah, so, I mean I started this role in January, and really from the outset, we sort of we put out the outlook, which was that crypto is going to underperform at least for the next six months, because we was clear that we were entering at that stage even though started to rise, but we're

entering at a tightening environment. And if you just look at the FED balance sheet and overlay that onto the bitcoin price, it's a chart that I've been using since two thousand and sixteen, and it's very clear that the

big kind of crypto cycles follow monetary conditions. You know, what's evolved is something, you know, vastly different to the previous cycles, with the rate of change that we've seen in the price of money, the interest rates, and also the degree of tightening or in the withdrawal of liquidity from financial markets by the FED. So this is not

like previous cycles, although it still has similar hallmarks. I was of the view that really would bottom out in the second half of this year, and I still think that is entirely possible. I think what we saw in June had all the hallmarks again of a capitulation style bottom that we've seen in previous cycles. All the markets that I look at and I had on my sort of board of of things to take off for a

low encrypto. So that came to fruition in June because of the things that I mentioned that that changed in liquidity, the tightening of interest rates. The cycle is I think going to be a little bit more extended, and it's possible that we are going to take out the loads

that we saw in June. But I think a lot of that damage in the cycle had been done because of the force selling, the liquidations that happened on the back of Lunar and the back of the centralized financial players that kind of did a redux of two thousand and eight GFC and gave crypto a bit of a black eye. So I don't think Bitcoin is not going to zero. Clearly, the number of people holding bitcoin continues to rise a certain new all time high, so the

utility factor is still quite strong. And these are the kinds of things that I look at. So all in all, I think of rates continue to go high. If the d x Y continues to explode higher, obviously that puts or risk assets on notice. But what's very interesting is that in the last couple of weeks has been the our performance of crypto versus other risk assets such as equities,

and we've seen that actually from the June lows. You know, Bitcoin is up slightly from the June lows, whereas the SMP and NASTAC are sort of taking out those lows. So I'm not saying that this is a decoupling in a long term basis, but these are the sort of things you look for to see if the market structure

is starting to change. We've spoken to people on this podcast where like crypto has no fundamentals, you have a whole presentation in which you go through what you think the fundamentals of crypto war Can you share a couple of those kind of underlying elements that you look at when you're coming up with how you see what the next six twelve easy months may hold fundamentals At the end of the day, this is what really drives the value of these assets, for the price of these assets,

and you know, for many people it's it's a challenge to sort of adopt or think about these assets with a framework, which makes sense because it's very conceptual or it's intangible. But in the same way as you know social networks like Facebook and Amazon you came to fall with massive valuations, these block chains, of these crypto networks the same. They are driven by adoption, and there are fundamental metrics that you can use to gauge whether adoption

is taking place. So I have a dashboard that I've created for both the Bitcoin and ethereum, and it will be rolled out to more assets over time. But this looks at anywhere between sort of thirty five to sort of forty five different fundamental metrics which measure things like adoption on both of these chains. And if you really if I just distill it down into the you know, the first principles, core tenets of what fundamentals are for

crypto networks. It's simply the number of addresses holding the asset, the number of active users on the network, and the value in US dollars or whatever currency that's actually transacting on the network. These are the indicators or these are the markers of utility. And if these things are going higher and the price is going lower, then you have a positive divergence which ultimately at some point will self correct. Do you have a sense of what that point might be?

I mean, you did mention and we've been writing on the newsroom side about the kind of the breakdown of the correlation story, right like the bitcoin and ether and so's another tookens I've started to diverge from the dismal overall performance of the stock market. Where do you see that kind of trajectory in this as you've mentioned, challenging

liquidity environment that we still that we're still in. Yeah, so I'm not in the case amp that cryptos decoupling, because I mean, there's so much volatility in the market at the moment that it's very hard to read into a one week one month trend. But if we see this continuing where we see a significant divergence, it is telling us something and it's probably a signal that we

should pay attention to. But I think if things get worse, then I can't see how crypto will not break down alongside equities, which has just been it's been resilient in the last couple of weeks and not doing so well. It's testing those those today. So it's interesting in that when you look at the Bitcoin network, you know, the number of long term holders on the network is now at an all time high. You know, you're not seeing the long term holders of the Hoddlers get shaken out

by this. So at some point that's going to matter. It's a question of how long it can sort of diverge. But yeah, I think it's it's something to keep an eye on. I want to just push on that point a little bit more because what you said there is

a very interesting way to think about the market. You know, the o G Hoddlers, as it were, These are folks who didn't get in, and these are folks have been in for a kind of several years, brought in at much lower prices than where we are even right now, So kind of by definition, you can't be a long

term holder if you've recently bought into the markets. That would suggest from what you're saying that what we're seeing is the market the newer entrance get either forcibly liquidated or just like opting out entirely, so that the balance is returning to the folks who have been players for a longer time. Am I understanding that analogy correctly? Well, the definition for a long term holder, based on the data that I'm using, which is a mixture of different

data providers, is actually six months or longer. So it's just a kind of a moving goalpost. It doesn't just include those earlier adopters, but it includes you know, six months or or later. And the people within that cohort they're changing all the time. But if you just look at that as a group of addresses, then that's saying that that is actually increasing in the The The entities that have been more active in the last couple of months

have basically left the network right there. There's still a lot of short term trading on the margins, and that is really what's influencing the price. It's really that trading activity what's happening in the derivatives market. The drivers market is several times larger than the spot and that tends to be faster money. Short term traders sort of involved in a lot of the perpetuals and the and the futures trading, futures and optimist trading, so it's not quite

the cohort that you're thinking of. But typically what you see in you know, the bear markets is the short term holders they exit, you know, they're buying, they're already underwater within a couple of days and a couple of weeks or just a couple of months, and they exit system. And then the people who are actually you know, have been accumulating over a long period of time either hold

or continue to accumulate. At least that's what you definitely want to see as a bottoming indicator for something like bitcoin. If you start to see that change dramatically, then you know there's something to be a little bit more weary of. But ultimately what will drive bitcoin higher will be more short term buyers coming in owning bitcoin and then obviously converting into long term holders over time. Up next, you'll hear more from Jamie Kots of Bloomberg intelligence on bitcoin's

financial health. We'll be right back. We've talked a lot about Bitcoin, but you also write extensively and expensively about Ether. So and obviously, you know, like one of the biggest stories in crypto for a while had been the merge. Is the merger going to happen? Okay, the emergen is happening. What's going to happen after the merge? We're now kind of couple of weeks? Is it a couple of weeks?

What is time? We're past the merge? And you had a note in or around September twenty two in sort of in which you talked about like the lack of a bid for Ether and what your kind of reflections on that ar Can you just share a little bit what the premise of that note was. Yes, so it goes back to fundamentals again, things like active users and the sort of value transacted on these change. These are

markets of adoption. And whilst I have a very positive outlook on Ethereum versus other l ones within the space, because of that supply reduction, because of that massive drop in inflation, you know, which removes you know, Billy, is the dollars in selling pressure every year from the network. Ultimately, in order for a recovery in the in the prices of these assets, we need to see adoption. We need to see an increase in some of these fundamental metrics,

at least the ones that I'm that I'm tracking. And what was highlighting too to my readers back in September is that whilst yes, it's it's great to be positive about the outlook, and I mean there's structurally some very positive things that's going to come out of it, ultimately it's all for not if there is an adoption on chain and that's been you know, something that's been lacking, you know, across the ecosystem for past six to twelve months.

The Ether and the ethereum bulls, you know, they will they will say no, no, the flippening is upon us. Ether is going to replace Bitcoin as as the number

one layer one. Just as a kind of a broad question for you, is there anything that you're observing post merge and in the as you say, it's still volatile, has only been a couple of weeks that would suggest, you know, this is having an effect on bitcoin, bitcoin prices, bitcoin sentiment at all, or are these two markets kind of continuing to operate relatively different trajectories based on their

own underlying fundamentals. There's almost diametically opposing forces play in both of these assets at the same time, on the positive and the negative side. So I mean on the positive side. Some one thing I'd point out for the Bitcoin balls is that what is surfacing is a lot better data and more visibility around how bitcoin is actually using renewable energy sources and has the potential for greening

the you know, the grid. And that is a slight change in narrative that you know, we've heard and seen for the entirety of bitcoins existence. On the foot, it was like electricity uses, fine, don't even worry about greening

the grid. Just a change of perspective as it were. Yeah, but I mean through the innovation of participants on the network and just the bare basic economics of bitcoin, which is a you know, which is a technology in search of the cheapest forms of energy, it is actually rapidly approaching or it's already over renewable, at least from the minors surveyed in the Bitcoin Mining Council documents, which represents I think around sixties seventy of all miners I mean,

the bitcoin was a country would be the greenest country in the world. I mean, that's just the reality. But through that innovation and seeking of the lowest energy cost, what it could potentially do for marginal renewable energy projects as well as carbon offsetting is you know, a surprising externality that no one really anticipated early on, but is is certainly now becoming far more visible. Um. We've seen you know, this being acknowledged by politicians in Texas and

in other states of the United States. To jump on the other side of this. On the negative side, I mean, you've still got a lot of uncertainty around regulations UM. Although Bitcoin has been along with ethereum, depending on which day Gainsla are speaking, singled out or petitioned as being um not a security, which I think is you know obviously policive for those two assets. But there's a lot of jockey and going on, and a lot of politics

and going on. So you know, we until that gets cleared up, hopefully in the next twelve months, that could be a you know, a massive negative headwind. Well, Jamie, thank you very much, and good luck with the rest of the year. I hope we'll be able to have you back in the show sometime soon. Thanks very much, Tasty. You can find more of Jamie Coot's analyses on the Bloomberg terminal or follow him on Twitter. He's at Jamie one Coots. That's j A M I E one, as in the number one c O U T T s

on the next episode of Bloomberg Crypto. If you don't think that Web three is going so great, If you're not sure that this crypto thing is everything some folks are making it out to be, it might be because you've seen the viral threads posted on Twitter by an account called Yes, Web three is going great. We'll talk to Molly White, the software engineer and crypto skeptic behind that Twitter handle. This is Bloomberg Crypto, a dearly podcast

from Bloomberg and I Heart Radio. For more shows from I Heart Radio, visit the I Heart Radio app, Apple Podcasts, or wherever you get your podcasts. Send us your comments, questions, or suggestions for the show to Crypto at Bloomberg dot net or find us on Twitter. We're at Crypto. The supervising producer of Bloomberg Crypto is Vicky Vergalina. Our senior producer is Janet Babin. Our producers are Mohammed Farouk and Sharon Barriro. Our associate producers are Ty Butler and Moses

on Them. Desta wonder At is our engineer. Original music by Leo Sidrn. I'm Stacy, Marie Ishmael. Have a great weekend. Before we wrap this episode, I want to mention some exciting news from friends of the show, Katie Greifeld and Tim Stanovic. They've launched a brand new video series called Crypto I r L. For more information about how to watch Crypto I r L, the new series from Bloomberg Quicktake, go to Bloomberg dot com slash q T. The first episode just dropped to day and we'll feature it as

a bonus podcast episode in our stream tomorrow. That's right, You're getting a special Saturday episode to celebrate the launch of Crypto I r L. Congratulations to Casey and to Tim