BitMEX founder provides multifaceted analysis of future markets, predicting continued downturn for cryptocurrencies and US stocks.

BitMEX co-founder Arthur Hayes recently valued ETH as a bond at the beginning of this month, predicting its price to reach $10,000 by the end of the year. However, he also noted in the article that the current correlation between ETH and large U.S. tech stocks is too high, indicating that it is not the right time to enter the market. The article provides a multi-faceted analysis of the current market conditions, suggesting a less optimistic outlook for the future.

This summary highlights the key points of the article, for any uncertainties please refer to the original piece.

Correlation with Large Tech Stocks Increasing

Arthur Hayes believes that the current market has started to equate cryptocurrencies with large tech stocks. Analyzing the correlation between the Nasdaq 100 Index (NDX) and BTC and ETH, it is observed that the short-term 10-day correlation is quite high, with the mid-term 30-day and long-term 90-day correlations gradually increasing.

Only when the Nasdaq 100 Index retraces between 30% to 50% and the correlation significantly decreases will Arthur Hayes consider re-entering the market.

BTC and NDX 10-day correlation:

ETH and NDX 10-day correlation:

Note: The Nasdaq 100 Index is a stock market index of the 100 largest non-financial companies, both domestic and international, listed on the U.S. Nasdaq stock exchange, which includes many tech companies.

Rising Cost of Capital Impacting Tech Stock Performance

The emergence of computers and the internet has ushered humanity into the index age. In this era, valuation is no longer based on discounted future cash flows, but on Metcalfe's Law - when it comes to the internet, the more users, the higher the value.

Arthur Hayes believes that during periods of low interest rates, investors favor investing in high-tech ventures that may take years to materialize, such as the metaverse. Because the cost of borrowing is extremely low, these companies often receive overinflated valuations.

By observing the U.S. 2-Year Treasury Bond Yield and the ARK Innovation ETF by Ark Investment, it can be seen that as the cost of capital for investors rises, the actual returns from dividends suddenly become more important.

Companies invested in by Ark Investment's founder, Cathie Wood, have flourished in the current index era but are mostly unprofitable. Therefore, as the U.S. 2-Year Treasury Bond Yield gradually rises, these unprofitable tech stocks are heavily affected.

While the Nasdaq 100 Index's performance may not be as poor, this is mainly due to its composition being skewed towards a few profitable and dominant tech companies like Apple, Microsoft, Amazon, Tesla, and Google.

Monetary Conditions Less Favorable Than Before

Arthur Hayes believes that the Federal Reserve and most major central banks are tightening monetary conditions to combat inflation, raising real interest rates and reducing balance sheets.

The following chart illustrates the expected change in interest rate hikes, with market expectations for 2022 increasing from 3 hikes to around 9 hikes, indicating the Federal Reserve's accelerated pace.

China Can't Play the Hero This Time

After the 2008 financial crisis, China resorted to printing money and massive construction projects to steer the world back into an inflationary track, regardless of whether these actions created real economic value for its citizens.

However, Arthur Hayes believes that this time China cannot repeat the same actions. With the impact of Covid-19 leading to a global economic slowdown and rising energy costs, the Chinese economy is also severely affected.

By comparing the China Credit Index peaks in 2009 and 2020, it is clear that China is aware of its credit issues and is trying to address them. This time, Western countries will have to rely on themselves.

Japan's Monetary Policy Ineffective

Due to Japan's long-standing loose monetary policy, the 10-year government bond yield in Japan is around 0.24%, while the U.S. 10-year government bond yield is at 2.58%. Many large institutions engage in arbitrage by borrowing Japanese yen and purchasing U.S. dollars, thereby lowering their cost of capital. Despite offering cheap funds, Japan's money supply is insufficient to offset the liquidity drain caused by the Federal Reserve. Even with cheap funds available in Japan, it cannot save the current risk market.

Technical Analysis Showing a Downtrend

Arthur Hayes believes that if the chart aligns with the fundamentals, then technical analysis holds value. Otherwise, it is merely a convenient tool to confiscate funds from traders eager to find the holy grail of trading.

Looking at the NDX line chart through technical analysis, it failed to break above the 61.8% retracement level during the rebound. A few days later, it attempted to break this resistance level again but failed, subsequently moving lower. It is highly likely that it will fall below to test its local low around the 10,000-point level.

Ukraine-Russia War Adding Fuel to the Fire

With the ongoing war between Ukraine and Russia showing no signs of ending, and Europe cutting off Russian exports while it serves as a major exporter of commodities and food, global growth will decrease due to rising commodity prices. In such a scenario, central banks will be unable to provide ample liquidity to the market, leading to a decline in global stock markets.

Cryptocurrency Market Continues to Bottom Out

Arthur Hayes believes that the cryptocurrency capital market is the only truly free market globally. When the crypto market is in a slump, it will also lead traditional stock markets lower, and vice versa. Until the Federal Reserve takes action and shifts its policies from tightening to easing, BTC and ETH will continue to decline. By the end of the second quarter of this year, BTC and ETH are expected to touch levels of $30,000 and $2,500 respectively.

Furthermore, even though some altcoins may seem attractive in price, having dropped over 75% from their all-time highs, it does not guarantee they will escape the upcoming cryptocurrency massacre.

Note: Arthur Hayes' analysis does not constitute financial advice, and he acknowledges the possibility of being wrong. All outcomes are attributed to various possibilities and appropriate trades are made accordingly.