U.S. Markets closed

FTX fallout: ‘There’s still overhang’ in the broad crypto space and bitcoin prices, strategist says

Lyn Alden Investment Strategy Founder Lyn Alden speaks with Yahoo Finance Live about how the FTX collapse is still impacting the crypto industry.

Video Transcript

JARED BLIKRE: Welcome back. The risk-on trade in January has grabbed hold of cryptocurrencies as well. Bitcoin rising more than 30%-- you can see 38.36% on your screen-- thus far in the month of January despite ongoing investigations into the collapse of FTX and its customers still missing billions of dollars worth of assets.

Joining us now to discuss what's driving Bitcoin higher is Lyn Alden, the founder of Lyn Alden Investment Strategy, a member of Swan Bitcoin's board of directors. Lyn, great to see you here today.

Got to talk about the price action. I guess is the crypto winter over? That's the question I've been asking myself. I kept thinking late last year, is Binance going to go? Hasn't happened. And then we see the crypto prices appreciate considerably since then. Is the worst over, do you think?

LYN ALDEN: I think bottoms going to be a process, right? So it's hard to say for sure a bottom's in or not, but historically, Bitcoin follows liquidity indicators pretty 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 And when liquidity is being withdrawn from the system, Bitcoin tends to do pretty poorly.

And so ever since quarter four of last year, we've seen kind of a flat to up liquidity condition after it was rather down throughout much of 2022. And so so far we are seeing kind of signs of a pretty sound bottom place.

And I'm concerned somewhat about later this year because based on current expectations, the Fed's going to keep withdrawing liquidity from the system, and part of why liquidity has been able to stabilize in recent months is because the Treasury is drawing-- you know, they're actually providing liquidity to the market, in part because of the debt-ceiling impasse. They're basically drawing cash out of their cash account, pushing it into the economy.

And when we get to the second half this year, assuming that the debt-ceiling impasse is resolved, we're going to see the Treasury probably filling up its cash account, which takes out liquidity from the market, while the Fed is still presumably drawing down. And so I do think that there are still hurdles ahead in the second half of this year, but so far the fundamental indicators do represent a pretty firm bottom, in my opinion.

JARED BLIKRE: Lyn, I've got to say, I love your liquidity model because that's how I look at Bitcoin as well. And I've noticed that on Fed days-- that's the big announcement days when Jay Powell takes the lectern-- we often see Bitcoin either leading stocks up or down, and so it is that first indicator. Just wondering what some of those other headwinds might be for Bitcoin that you were just talking about later on in the year, though.

LYN ALDEN: Right. So as I said, basically there's kind of two major components of liquidity. There's the Fed. So by doing quantitative easing, they add liquidity to the system. By doing quantitative tightening, they pull liquidity out of the system.

But they're 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 pulling money out of the system. It's kind of going into a void that it's not really affecting anything. And when they draw down their cash balance, they're basically pushing that cash back out into the system.

And the TGA, the Treasury General Account, peaked in mid 2022. And since then, it's actually been drawing down and offsetting a lot of the Fed quantitative tightening. And that's set to continue because one of the things that the Treasury does when they have a debt-ceiling limitation because they can't issue more debt, they can draw down their cash balance, among other things that they can do. And so right now, that's happening.

And so as long as the debt ceiling is not resolved, we're probably going to see ongoing reduction in the Treasury general account, which actually adds liquidity to the market and offsets the Fed's quantitative tightening.

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

And so I do think we're kind of in the clear for a few months now. But as we look in the second half of this year, whenever the debt ceiling is resolved, I would have pretty significant concerns about market liquidity all over again.

SEANA SMITH: Lyn, what about the FTX collapse? It wasn't that long ago we were talking about that overhang. Do you think that's clearly worked its way throughout the crypto space, or is there still some overhang left from that?

LYN ALDEN: I think when we talk about the broad crypto space, there's still overhang. Ironically, Bitcoin-- I mean, they essentially, towards the end there, they were a net negative on Bitcoin because customers thought they had Bitcoin deposits at FTX, and it turns out FTX had, from the data we have available, seems to have sold their Bitcoin well ahead of the customers knowing that they did. So essentially 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 other-- prop up the values of other tokens.

Going forward, I think we're probably going to see some degree of decoupling from Bitcoin and the broader space, kind of a return to fundamentals, a return to what's actually being useful. So I am pretty bearish on the broad space. A lot of those things we've seen I think are effectively malinvestments. There's still areas of concern like Binance and some of these other platforms, but I think that the Bitcoin-specific ecosystem is rather healthy looking.

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

LYN ALDEN: Well, so basically when you see mining under pressure, that can be bearish in the near term because some of those miners have to sell their coins because some of them hold coins on a balance sheet that they've mined, and they have to sell them for liquidity or for solvency reasons in order to keep financing their operations. And so we saw that, for example, when China banned Bitcoin mining, and we see that during halving. We saw that recently during the downward move.

That mostly seems to be behind us now. We don't really see a lot 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 bit more comfortable now, and they don't have to keep selling, you know, their remaining coins. They've already kind of sold a lot of the ones that they had to. And so I think that's one kind of ongoing selling pressure that might be behind us now and is another indicator that, at least for now, a bottom is likely in.