October Relief

In the last market commentary, we discussed the overall bearish market positioning. This proved to be true in October evidenced by the spike in short liquidations as the crypto market broke out to the upside. We still see evidence of defensive positioning in the short term, which could be the fuel needed for a continued rally.

The Nasdaq struggled throughout October as Facebook and Amazon led the way with missed earnings reports. Despite the rocky performance in technology stocks, the Dow Jones recorded its largest month (13.95%) since 1976 and crypto ended the month strong after a choppy start.

Trouble for Bitcoin Miners

Bitcoin miners are really struggling with profitability. Hashrate is at an all-time high, while Bitcoin’s price is at a two-year low meaning the competition is stronger than ever without commensurate rewards. As a result, some miners like Core Scientific and Argo Blockchain are running into cash flow issues. Miner profitability becomes a concern in each bear market and while short-term painful, the miner ecosystem becomes stronger for it.

Source: insights.braiins.com/en

NFTs are the Trojan Horse

One of the more fascinating stories of the past few months has been the adoption of Reddit NFTs by 3 million users. Reddit was seemingly able to capture a new cohort of users who had previously been against crypto and NFTs. They did this by addressing the benefits of the Reddit “Digital Collectibles” rather than focusing on the idea of NFTs which sometimes brings a negative connotation.

Source: Reddit

Reddit focused on making digital collectibles fun. In doing so, they were able to completely change users’ perspective.

Source: Reddit

It’s easy to think of each new iteration of NFTs as just a silly game, but that’s why they’re so powerful. People love collecting, trading, and being part of communities; NFTs enable those things. The number of people that will be interested in digital collectibles far outnumbers those that will be interested in decentralized financial products. Digital collectibles will drive the digital economy, while DeFi will support it in the background. This wealth and interest catalyzed by NFTs flow downstream to other applications and protocols; we can clearly see the effect Reddit had on Polygon in mid-October.

Source: Gokustats

To further drive the point, consider the enormous revenue Nike generated last year through NFT sales and royalties. Considering that this revenue was likely produced at extremely high margins, expect Nike and other brands to continue their exploration of digital collectibles.

CPI is Rolling Over

Shifting gears to macro, we continue to see signs that CPI has likely topped for the time being. Rent has been one of the stickiest measures and now has negative growth month over month. The .7% dip in the Rent Index in October is the largest on record. As we shared last month, CPI tops tend to correspond with local bottoms in the equity markets.

Searching for Value

Another bullish perspective given the carnage of this past year is the correction in P/E ratios. The graph below demonstrates the relationship between a low P/E and the subsequent 10-year annualized returns for the Russel 2000. Although it might not feel like it, the market is in a more attractive place than it was a year ago.

No Pain, No Pivot

We’ve been closely watching credit spreads as an indicator of the market “breaking” which would likely trigger some amount of monetary or fiscal intervention. We think it will continue to be important to monitor spreads even if we experience some relief in the short term. Despite the consistent drawdown in equities, rising yields, and US dollar strength, credit spreads are not yet signaling significant financial deterioration. We probably won’t see an aggressive pivot until there’s a clearer sign of things breaking.


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