Q2 Report Part 1: Macro Review: Crypto Faces Macro Headwinds
In Q2, crypto faced a challenging global macro environment for the first time since Satoshi’s seminal Bitcoin paper was published on October 31, 2008. US policy reversed course from generally dovish and accommodating to a concentrated effort to fight rising inflation. The Fed’s tightening is a (somewhat belated) response to the highest inflation in 40 years, following near-zero interest rates for ten of the last 14 years and unprecedented fiscal and monetary expansion.
Macro drove BTC and the entire crypto market lower. Though daily return correlation between BTC and the NASDAQ has flipped from mildly negative during the last bull run to only mildly positive, BTC has mirrored the general NASDAQ direction of late.
Most risk-on assets suffered, but digital assets had their own idiosyncratic narrative violations that revealed who was swimming naked when token price tide receded. Q2 witnessed a destruction of over $1 trillion in digital asset market cap.
Price retreats revealed the problem with death spiral tokenomics in chains and protocols such as Terra and Bancor. Investors in shadow banks such as Voyager were victims of bank runs. Token incentives became less meaningful as they became less valuable. Protocol treasuries struggled to fund themselves as the value of their native tokens collapsed.
