The crypto bear market ‘is looking like the stressors’ of ’80s-era equity markets: Expert

CoinDesk Indices Managing Director Jodie Gunzberg joins Yahoo Finance Live to discuss the state of the crypto markets and how it compares to previous bear markets.

Video transcript

- The wind coming out of Bitcoin sails once again has analysts wondering just how low can Bitcoin go. Well, joining us to explore what's happening with crypto and NFTs is Jodie Gunzberg, CoinDesk Indices managing director. Welcome, Jodie. So obviously, we're seeing again Bitcoin in that $20,000 range again. When you look at what's happening with equity markets and what you're seeing with crypto, what stands out to you?

JODIE GUNZBERG: What stands out to me is how much the crypto bear market is looking like the stressors that we saw in the equity markets back in the '80s. And as we just heard, the inflation and rising rates and possible stagflation. Again, this is the same story. And the demand really didn't kick up until the options and futures markets were developed to help the equity investors manage the risk.

And it was the same story for the fixed income as the rates skyrocketed. So now we're seeing incentives to motivate crypto trading in the downturn. But the real risk management tools and derivatives markets aren't developed enough. So there's a couple of things that we need to be aware of.

- I'm curious what you think of a co-founder of Absolute Strategy Research said that based on similar past cycles, Bitcoin could go as low as $13,000. How low do you think it can and will go?

JODIE GUNZBERG: I don't know whether I agree with that. I've been looking at the history. And unfortunately, in crypto markets and in Bitcoin, there's not as much history as we'd like to go off of in order to tell. Again, I'm looking at macroeconomic environment and derivatives markets that are echoing the '80s. And the data only goes back to 2014 on Bitcoin that we have in our index that was the first ever launched. So if you look at the historical data, we've got about a 73% drawdown now. And I think that there's more upside than there is downside.

- And I want to talk about the makeup of investors in this space, obviously, now versus when crypto was first picking up. Talk about the role of institutional investors and how they're looking at crypto right now.

JODIE GUNZBERG: The institutional investors need more regulatory clarity. They need deeper derivatives markets. I can't stress this point enough. We need that in order to manage the risk. And we need to have deep liquidity across the derivatives markets and across coins beyond Bitcoin. So right now, the market looks a lot like maybe the Dow did in the 1800s where you've got these huge concentrations in just a few assets.

And we need to see that. But the institutional adoption is moving forward. They're interested. And they're waiting on the sidelines to put money to work. And we're seeing some inflows as I think many institutions are viewing this as a buying opportunity.

- And the big news that Binance US has eliminated spot trading fees. What's the implication for the rest of the industry?

JODIE GUNZBERG: Yeah. I think that they want to increase the volume. But I think the trader should be aware of getting more active despite the lower trading costs, really, for three main reasons. One, it's easier to manipulate the market when there no fees. Actually, one of the most common criteria for exchange eligibility in crypto indexing is that the exchange must charge fees. And that's because it's harder to manipulate the market when you have to pay to trade.

Second is someone is still making money even when trading fees are waived. So the trading firm still sees the flows and data and trade around the book. The lower fees can lead to more flow, more room to cross orders and potentially trade against clients, which may undermine the trust in the market. And for crypto, that's a big deal.

And then last is that there's a ton of evidence that shows the more that retail investors trade, the worse their performance tends to be since they are relatively less informed and trade on the noise. But unfortunately, since most investors are overconfident, they think they will beat the average, which of course, is impossible for most to beat the average by the math of it.

- Yeah. That optimism not paying off for a lot of people, as we've seen. I just quickly want to ask you about FTX becoming a lender to BlockFi. They gave them a $250 million credit facility there. Talk about what's happening in that space, both the dangers of perhaps when you have already crypto platforms relying on other crypto platforms for finance, and what that means for consolidation in the space.

JODIE GUNZBERG: I think that this move basically says in the crypto community that we need to support each other to keep the business going. And this highlights the immature structure of crypto with the move to pay to keep trading partners. But for now, it seems that the industry does have Sam Bankman-Fried as the guaranteed fund, or in other words, he's acting as a credit backstop. But since there's no guarantee, we do have to evolve structurally. And there needs to be development to move forward the guarantee fund similar to how the exchanges have with banks where they can move positions between the banks until there is a need to dip into that guaranteed fund.

- Indeed Thank you for your insights. Jodie Gunzberg there, CoinDesk Indices managing director thank you so much.