Crypto volatility ‘exposing the weaker corners’ in the industry: Strategist

Bitwise Asset Management CIO Matt Hougan joins Yahoo Finance Live to break down the volatility in crypto markets, bitcoin's current pricing, and how crypto ecosystems are pricing in the Fed's interest rate hike cycle.

Video transcript

RACHELLE AKUFFO: Well, crypto lender Babel Finance is halting withdrawals just days after Celsius did the same and sparked that crypto selloff. For more on crypto's wild week, we're joined by Matt Hougan, Bitwise's CIO. So Matt, obviously, a tough week here. But even though these are just the latest controversies, it didn't start here. How did we get to this point?

MATT HOUGAN: Oh, it's a great question. Thanks for having me on. There is a macro trade from risk-on to risk-off assets that drove crypto prices down, starting about November of last year. Crypto prices retraced down about 50%. And after that pullback, what we're seeing is sort of exposing the weaker corners of crypto, right? We saw Luna stablecoin fail. We saw Celsius run into issues. You mentioned Babel Finance.

Crypto is going through a classic deleveraging cycle. And it has to continue that cycle until it hits the bottom. So, again, a macro reset drove down prices, exposed some weaknesses, and now we're in the process of washing those weak corners out of the crypto market. We'll get to a bottom and rebuild from there, but we may not be at that bottom yet.

DAVE BRIGGS: Which implies another rough week ahead. Bitcoin down 22% the last five days. We talked a lot about the last five days. Where do you think we're going in the next week or even two?

MATT HOUGAN: Yeah, I think the next few weeks could see continued volatility. I wouldn't be surprised to see a short-term bounce if we can get through this weekend unscathed. Trading volumes thin out a little over the weekend. And so you can get some extra volatility. There is a lot of institutional capital that wants to move into the market. We speak to financial advisors and family offices all the time. They're thinking about where the right point is to buy this dip.

But my big picture view is there's still a lot of macro uncertainty in the market. There is still some questions about how much more deleveraging there is to go in crypto. So there's volatility for the next few weeks, next few months. I do think the long-term aspect's still bright. The fundamentals of crypto underneath these macro news items is still very strong. But there is continued volatility on the horizon, at least for the next few weeks and probably for the next couple of months.

SEANA SMITH: Yeah Matt, there's been lots of talk out there about what could potentially be the next shoe to drop. Is there anything in particular that you're watching or investors should be watching when it comes to the expected volatility that we could see in crypto?

MATT HOUGAN: Yeah, you know, I'll tell you something interesting, which is that the first start of this week, everyone felt there were multiple shoes to drop. And we did see some more drop. Also not mentioned, Three Arrows, the large hedge fund, is imploding, right, is winding down over the course of this week. Now there's a more diverse viewpoint. Many people think there is not a next shoe to drop. But others are looking at other lending platforms or other hedge funds and wondering if there is more.

It is a start of a sentiment shift, but I still think there is risk. There could be additional repercussions. You know, deleveraging processes always go on a little bit longer than you think. They have to get to a very solid foundation before you can build. And I think there is a worry that there may still be a few more items along the lines of Celsius and Babel and Three Arrows yet to come.

RACHELLE AKUFFO: And Matt, as you mentioned, some of these corners of crypto are now getting sort of thrashed out, as we see there. But are there some aspects of the crypto industry that are doing well? A lot of focus, obviously, on the individual tokens and the platforms themselves. What about the underlying technology and those sectors as well?

MATT HOUGAN: Yeah, I think that's really important. If you're a long-term investor, this is one of the most exciting times to enter the crypto market. You're getting to enter into world class, market leading protocols at prices that are down 70%, 80%, and 90%. When we look at what's going on in the Ethereum ecosystem or we look at some of the decentralized finance applications like Uniswap, those are amazing market leading technologies. They're making continued progress. They're onboarding users. Their trading volumes are significant. And their prices are down substantially.

So I do think there is a buying opportunity if your window is not the next three weeks, but the next three years. You're really having a sort of rare opportunity to enter these market leading protocols at prices that are down 80% or 90%. But you do have to have that long-term point of view if you're going to do that.

DAVE BRIGGS: So you're talking about the next three years, but the next three months are going to be interesting. And we heard Jerome Powell talk about at least another 50, if not 75, point hike in July. We're certainly going to have another hike in September. And what does that mean for the crypto space to continue to raise rates in the short-term? How will it--

MATT HOUGAN: Yeah.

DAVE BRIGGS: Yeah.

MATT HOUGAN: It's a great question. I think the market is comfortable with those rate hikes. I would say that those rate hikes are already priced in to the crypto ecosystem. The question is, does Powell have to go further than that, right? If we start seeing the market pricing in not 75 basis points, but 100 basis points at the next meeting, that could be difficult for risk assets. If we start to talk about Fed funds rate going into the 4s and 5s over the long-term, if it's harder to quash inflation than we're currently thinking, that could be hard.

I do think 75 basis points at the next meeting is already priced in. Probably 75 basis points the next meeting is priced in. The question is, is that enough? Or will there necessarily be more? And there are, obviously, diverse views on that.

RACHELLE AKUFFO: Indeed. Well, we do thank you for joining us today. Matt Hougan there, CIO of Bitwise.