The Most Important Question in Crypto

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Welcome to another issue of Passionate Income.

Today we’ll be discussing the #1 most important question you must answer if you’re considering investing (or already invested) in the crypto markets.

Let’s dive in.

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Since the Bitcoin ETF was approved a couple weeks ago, the crypto space has been a roller coaster ride.

First, the Securities Exchange Commission tweeted that the Bitcoin ETF would be approved, sending the price of Bitcoin skyrocketing. Less than two minutes later, a tweet from the Chairman of the SEC - Gary Gensler - announced the account had been hacked and that the ETF had not been approved.

This, in turn, sent the market crashing, with Bitcoin falling thousands of points in a matter of minutes.

24 hours later, the SEC officially approved the ETF.

Given the market’s reaction to the fake announcement from the previous day, the official announcement was a non-event, with virtually zero price reaction.

Since then Bitcoin crashed a full 20%, before recovering approximately 9% to its current level of $41,750.

Why do we mention this?

Because ever since the ETF approval, crypto gurus (aka Moon Bois) on social media have been shouting how the influx of institutional money would send Bitcoin to new all-time highs.

On the surface, it’s a convincing argument. Until you dig a little deeper…

See, if you know anything about crypto, you know markets trade based on Narratives and Liquidity.

Narratives are stories (explanations) for why the market should go up or down. Liquidity refers to new money brought into the system from outside.

Combine these two factors, and without some kind of narrative, there’s no reason for outside liquidity to come into the crypto ecosystem.

The reason this matters is because approval of the ETF killed the #1 narrative responsible for bringing in hundreds of billions of dollars over the last 14 months.

Which raises a critically important question for crypto investors:

What’s the new narrative? And more important, where is the liquidity going to come from?

If you plan to invest in crypto, you must have an answer to these questions.

For the time being, the new narrative is that the SEC will approve an Ethereum ETF now that the Bitcoin one has been approved (resulting in even more institutional money coming into the space).

In our opinion, this theory is flawed for multiple reasons.

First and foremost, Ethereum’s market cap is about 1/3 the size of Bitcoin’s, coming in at just $230 billion relative to BTC’s $870 billion.

Meaning, even if there was an equal amount of interest in an Ethereum ETF, odds are it would only bring in 1/3 the amount of liquidity we’ve seen come in over the past 14 months (since Bitcoin’s low in Nov. of 2022).

And because of that, it wouldn’t push the market up in a significant kind of way. Especially if approval of the Ethereum ETF stretches into 2025.

The second and larger problem is that anticipation of the Bitcoin ETF approval already brought in hundreds of billions of dollars in new liquidity.

Which raises the question: Is interest in - and demand for - an Ethereum ETF high enough that it could bring in another $200 billion?

If you believe the answer is “Yes,” you can invest based on that thesis.

In our opinion, we not only see this as being unlikely, but have much larger concerns about the crypto market’s ability to continue going up in general.

Mainly because it’s not clear where the liquidity would come from in general.

During the bull run of 2021, it was extremely clear a) what the driving narratives were, and b) where the money was coming from.

While investors were 2.5 years too early, the big narrative back then was the same: That the SEC would eventually approve a Bitcoin ETF. Which, in turn, would open up the floodgates for crypto to go mainstream.

In addition, and exponentially more important, we knew where the liquidity was coming from.

In 2021, the US government pumped trillions of dollars into the economy via stimulus checks and various COVID relief programs. On top of that, we were in a 0% interest rate environment.

And because of that, both banks and venture capitalists were throwing money around like the Wolf of Wall Street at a cocaine-fueled yacht party.

Fast-forward to today and the economic situation is night and day different.

Between November 2021 and October 2022, the tech-heavy NASDAQ (which is the most growth-oriented stock market index) lost a whopping 33%.

In addition, interest rates have climbed from 0% to anywhere from 4-5%, with everything from mortgage rates to consumer credit card rates skyrocketing.

Not to mention, large companies are facing the reality of having to renew their debts at higher interest rates. Which, in turn, will force them to spend more money on interest payments (resulting in them having less money for R&D, expenses, payroll, etc.).

While we have no intention of turning this into a macroeconomic newsletter (given these issues are much more complex than we could ever cover here), we do know a lot of our readers are interested in crypto.

And because of that, we wanted to draw your attention to this question:

If the market is going to go up, where’s the liquidity going to come from?

While it’s easy to get caught up in YouTube videos and Twitter threads about how Bitcoin is going to explode and make everybody rich, remember: Social media influencers get paid based on engagement.

The more views, likes, and shares they get, the more money they make.

And ya know what kind of content gets the most engagement?

The kind that makes everyone think they’re about to get rich.

So if you’re investing, or thinking about investing, slow down. Ask yourself:

Where’s the liquidity gonna come from?

Without an answer, investing in crypto right now is no better than gambling at a Las Vegas casino.

💡 Takeaway: While it’s easy to get caught up in social media hype, success in crypto requires understanding what’s noise, and which factors actually move the markets.

I'll leave you with this quote…

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