Introduction

Since we published our “Searching for Market Bottoms” report, things have started to accelerate. We outlined a number of factors we were watching to give us the conviction that a market bottom is in. We argued several of these factors already checked their proverbial boxes to signal the worst is behind us. The only major one left standing – and the one that’s arguably most important – is the signal of a macro trend reversal.

Many are trying to speculate as to when the Fed – and other major central banks – will be forced to abandon their tighter policy regimes, but until something breaks – whether it be inflation or a crucial part of the financial system – we’re unlikely to see a material change in policy (yet).

We argued in our last report that, while we couldn’t say definitively that the bottom was in, today’s market was offering “flash sales for those looking to accumulate long term positions”. The market is up over 25% since, with outperformers like ETH pushing +50%, but we’d be remiss if we discarded our caution despite this. The unfortunate reality is there’s still a lot of uncertainty and potential risks that stand between us and a renewed bull run.

When it comes to recession risk, there are two primary camps: those that believe we’re headed for a prolonged, multi-year downturn, and those who foresee a steeper recession but a quicker recovery. The big determinant – which is still uncertain – is when policymakers will have enough “compelling evidence” to pause or pivot towards more accommodative conditions. The sooner that happens, the higher the likelihood that the worst really is behind us.

A pause in rate hikes may be the spear that pierces this bear market, but in order for us to see a recovery like that of 2020-2021, we likely need to see a reversal in the trend of global liquidity. That’s the big kicker in our view.

We’re still extremely bullish on this market if your time horizon is longer than 12-18 months. And even if we do get another leg lower, it’ll present a better opportunity for those with similar conviction to accumulate. The authors of this report have personally started wading back into the market, but we aren’t going all in until these uncertainties become a bit clearer. In our view, we don’t need to time the exact bottom; when the bear trend breaks and starts to look like a sustainable reversal, that’s when we’ll strike. Because the potential upside if and when that happens is worth waiting for.

Liquidity Drives Markets

We’ve likened the crypto market to one of the most levered bets on global liquidity expansion, and we cited the decline in global liquidity growth as one of the biggest risks to the crypto market at the start of the year.

Usually when people hear “liquidity”, they think of market liquidity, or the ability to buy and sell assets at stable prices with low transaction costs. When we refer to “global liquidity”, we’re talking about funding liquidity, which is private sector access to finance through savings and credit. CrossBorder Capital defines this as balance sheet capacity.

“Liquidity consists of all cash and credit available to financial markets, once the immediate transactions needs of the real economy have been fulfilled.” – CrossBorder Capital

This is an important distinction because it’s not just M2 money supply (which is a use, not a source, of liquidity) – it also includes credit, which is the more powerful driver.

Credit growth – and credit availability – is influenced by market conditions like changes in risk appetite and the availability, and stability, of collateral. As the aggregate amount of debt grows, more balance sheet capacity is required to finance new credit and, more critically, existing debt obligations. The latter of this – the ability to refinance and roll over existing debts – is where the real vulnerabilities lie in our view.

Global liquidity is very procyclical. When liquidity is abundant, it reduces systemic risks and the immediate need for liquid safe assets. Risk appetite improves and capital providers are willing to finance and in