FTX fallout: “There is still an overhang” in the vast crypto space and bitcoin prices, strategist says

Lyn Alden Investment Strategy founder Lyn Alden speaks to Yahoo Finance Live about the impact of FTX’s collapse on the crypto industry.

Video transcript

Jared Blikre: Happy to see you again. Risk trading in January also took over cryptocurrencies. Bitcoin up over 30% – you can see 38.36% on your screen – so far in January despite ongoing investigations into FTX collapse and its clients still missing billions of dollars assets.

Lyn Alden, Founder of Lyn Alden Investment Strategy, Board Member of Swan Bitcoin, joins us now to discuss what is driving Bitcoin higher. Lyn, nice to see you here today.

I have to talk about the price action. I guess the crypto winter is over? That’s the question I asked myself. I kept thinking at the end of last year, is Binance going to leave? Didn’t happen. And then we see the prices of cryptos appreciate considerably since then. The worst is over, do you think?

LYN ALDEN: I think funds are going to be a process, right? It is therefore difficult to say for sure whether there is a bottom or not, but historically Bitcoin tracks liquidity indicators quite well. So when there’s more liquidity in the market, you know, in the financial system, Bitcoin tends to do pretty well. And when liquidity is removed from the system, Bitcoin tends to fare rather poorly.

And so since the fourth quarter of last year, we’ve seen kind of an upward stability in the liquidity condition after it’s been rather down for much of 2022. And so far, we see signs of a fairly solid low.

And I’m a little worried about the end of the year because based on current expectations the Fed is going to continue to pull liquidity out of the system, and part of the reason liquidity has been able to stabilize in recent months is that the Treasury is pulling…you know, they’re actually providing liquidity to the market, partly because of the debt ceiling impasse. They are essentially taking money out of their cash account, pushing it into the economy.

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And when we get to the second half of this year, assuming the debt ceiling impasse is resolved, we’re likely to see the Treasury filling up its cash account, which is taking liquidity out of the market, while the Fed is still presumably attractive. And so I think there are still some hurdles to overcome in the second half of this year, but so far the fundamentals represent a pretty firm bottom, in my opinion.

Jared Blikre: Lyn, I have to say that I love your liquidity model because that’s also how I see bitcoin. And I’ve noticed that on Fed days – that’s the big announcement day when Jay Powell takes the pulpit – we often see bitcoin lead stocks up or down, and so that’s what first indicator. I just wonder what some of those other headwinds might be for Bitcoin that you just talked about later in the year, though.

LYN ALDEN: Right. So, as I said, there are basically two main components of liquidity. There is the Fed. So by doing quantitative easing they are adding liquidity to the system. By doing quantitative tightening, they take liquidity out of the system.

But they are not the only variable. Another big variable is that the Treasury — the Treasury Department can suck money into its cash balance. And when they do that, they’re basically taking money out of the system. It’s sort of stepping into a void that doesn’t really affect anything. And when they withdraw their cash balance, they basically put that money back into the system.

And the TGA, the Treasury General Account, peaked in the middle of 2022. And since then it’s actually declined and offset a lot of the Fed’s quantitative tightening. And that should continue because one of the things Treasury does when it has a debt ceiling because it can’t issue more debt, it can dip into its cash balance, among other things that he can do. And so right now, it’s happening.

And until the debt ceiling is resolved, we are likely to see continued reduction in the general Treasury account, which in effect adds liquidity to the market and offsets the Fed’s quantitative tightening.

However, I fear that fundamentally when they — ironically, when they fix the debt ceiling, when they resolve it, when they can issue more bonds again, the Treasury will again have to increase its account cash and get back to its baseline, which means they’re basically going to suck cash out of the system. And so if the Fed is still doing quantitative tightening at that time, that’s kind of a double downside pressure on liquidity.

And so I think we’ve kind of been in the clear for a few months now. But if we look into the second half of this year, whenever the debt ceiling is resolved, I would again have quite significant concerns about market liquidity.

SEANA SMITH: Lyn, what about the collapse of FTX? Not so long ago we were talking about this overhang. Do you think this has clearly worked across the crypto space, or is there still some overhang?

LYN ALDEN: I think when we talk about the vast crypto space, there is still some overhang. Ironically, bitcoin – I mean, they were basically, towards the end there, they were net negative on bitcoin because customers thought they had bitcoin deposits at FTX, and it turns out FTX had, from the data we have, seems to have sold their bitcoin long before customers knew they did. So basically there was buying pressure on bitcoin that didn’t actually go into bitcoin. Basically, FTX was more or less shorting Bitcoin and even Ethereum to, you know, buy some more – supporting the values ​​of other tokens.

Going forward, I think we’re probably going to see some decoupling of bitcoin and the larger space, sort of a return to fundamentals, a return to what’s actually useful. So I’m pretty bearish on the wide space. I think a lot of these things that we’ve seen are indeed bad investments. There are still areas of concern like Binance and some of these other platforms, but I think the Bitcoin-specific ecosystem is pretty healthy.

Jared Blikre: Let me ask you about the mining situation. I noticed that when China officially shut down crypto mining – in fact all cryptocurrency activity a few years ago it almost acted like a halving where we saw a lot of miners suddenly cease their activity. I saw it as being bullish for Bitcoin. We have miners going bankrupt right now. Is it possible it’s also bullish for Bitcoin because you have fewer miners competing for their rewards?

LYN ALDEN: Well so basically when you see mining under pressure it can be bearish in the short term because some of those miners have to sell their coins because some of them hold coins on a balance sheet that they have extracted, and they must sell for liquidity or solvency reasons in order to continue to finance their operations. And so we saw that, for example, when China banned Bitcoin mining, and we see that during the halving. We saw it recently during the decline.

That seems largely behind us now. We don’t really see much more selling pressure from Bitcoin miners. And so if Bitcoin’s price stabilizes, that can create a self-reinforcing effect where Bitcoin miners are a little more comfortable now, and they don’t have to keep selling, you know, their remaining parts. They’ve kind of already sold a lot of the ones they owed. And so I think that’s kind of continued selling pressure that might be behind us now and that’s another indicator that, at least for now, a bottom is likely.