- In March of last year, hedge fund chief Mark Yusko predicted crypto would likely face a tougher year in 2022.
- With bitcoin down 17% year-to-date, Yusko shares his tips for surviving a bear cycle.
- And he highlights 4 projects he expects to thrive in the next bull cycle.
Over the past few years, more and more institutional investors have entered the cryptocurrency market in search of uncorrelated returns, particularly drawn to bitcoin’s gold-like qualities.
Yet, bitcoin still continues to disappoint in periods of stock market distress.
The drop isn’t so bad.
Crypto market investors are familiar with dramatic double-digit swings and this is nothing in comparison.
Yet the correlation between bitcoin and other risk assets still rocks the core investment thesis for many.
In March 2020, another period of distress, the S&P 500 dropped 15%, while bitcoin fell 25%.
Insider spoke to Mark Yusko, a major bitcoin bull as well as chief investment and chief executive officer of the $1.7 billion hedge fund Morgan Creek Capital, to get his perspective on whether the recent correlation challenges the thesis for bitcoin and his outlook for the crypto market going forward.
A correlated asset?
“You can’t calculate correlation over the short-term,” Yusko said. “Just the math doesn’t work. And so yes, it is true that in times of stress, ‘all correlations go to one.'”
This correlation phenomena comes down to too much leverage in the system, particularly in periods when the stock market is overvalued, he said.
When stocks fall under these conditions, it creates margin calls where players not only have to liquidate stocks to cover their positions in equities, but also those in other assets like bitcoin and bonds, which leads to tighter correlations across markets.
“So yes in liquidations, March of 2020, December of last year, right now, people are forced to sell what they can sell, not what they want to sell to fund margin calls.”
In recent years, Yusko has been outspoken on the US stock market’s overvaluation, making multiple calls for a correction. In September of last year, he called the market “wildly overvalued” and despite a correction in US stocks since the start of the year, he still expects another leg down to occur in March.
The Federal Reserve’s monetary stimulus policy ignited this overvaluation by driving up asset values and devaluing the dollar because of the country’s high debt levels, according to Yusko.
This is one of the reasons he’s become so bullish on bitcoin.
“Bitcoin rising isn’t so much about bitcoin getting better, it’s about the dollar getting worse,” Yusko said last March.
Predicting crypto cycles
But he’s not always ultra-bullish. Back in March, he predicted a bear cycle in crypto would take place this year.
Now it appears to be underway.
“What you’re seeing is crypto is definitely in a bear cycle,” Yusko said.”It’s gonna struggle for the next 12-ish months then we’ll go back to the next bull cycle triggered by the next halving event”
The bitcoin halving is an event when the pace at which new bitcoins entering circulation is cut in half. The last halving took place in May last year and the next is expected to occur in 2024.
“It’s a basic mechanism for increasing the price because if the price didn’t increase … [miners] would have to shut down and lose money,” Yusko said. “The price adjusts upward, and that upward adjustment in price attracts new entrants. It’s a beautiful structural way to grow the network, “
This creates a natural four-year cycle that almost follows how the Federal Reserve approaches its own
cycle, he said.
Others think the bull cycle could come sooner, however.
Bloomberg Intelligence commodity strategist Mike McGlone expects the Federal Reserve’s tightening of monetary policy may result in outperformance for bitcoin and ether, according to a recent research report.
Ruffer investment director Duncan MacInnes, who invested in bitcoin in November 2020 and closed the position five months later at a profit of $1.1 billion, is staying clear for now.
MacInnes invested in bitcoin because of its gold-like qualities, but sold out last April because “it was behaving more like a NASDAQ-leveraged ETF.”
“The withdrawal of liquidity definitely made us concerned and that’s why we exited when we did,” said MacInnes in a webinar. “But also there’s just so much froth in the sector and I love all the examples. It does feel to me like I’m living through 1999, even though I wasn’t there – this feels like the new one.”
Surviving the winter
A crypto winter could be vital in removing some of this froth.
“Winter is the time when the weak things get killed off and allows the strong to really thrive when the spring comes,” Yusko said.
Many of these protocols are currently trading at extreme discounts relative to their all-time highs in 2021.
One of the hottest investments of last year, solana (SOL) has been in freefall due to a number of technical issues on the blockchain. At $104.11, it’s lost 40% so far this year and is down 60% from its November record high. But it’s still up by more than 1,000% from this point last year.
“There’s probably still some potential
in the price ahead,” Yusko said. “But long term, I think it’s a great protocol.”
provides time for the teams of these protocols to iron out technical issues and make the value proposition for their blockchains clearer, Yusko said.
“Just own lots of things in small sizes, and buy more of what you believe in and have conviction in as it becomes cheaper,” Yusko said. “And do a deep-dive on the fundamentals, and the things that you think are broken fundamentally just leave, because they’re going to die.”