Fringe Assets Special Report / September 8
As Recession Fears Grow and Pockets Tighten, Fringe Assets are Put to the Test
Nearly a year into the pandemic and three stimulus checks later, those that hadn’t lost their jobs had some extra money to play with. Coincidence or not, Q2 2021 brought about some impressive runs for more unconventional financial assets.
Bitcoin, the most prominent cryptocurrency and a leader in the digital asset space rose to an all-time high of $63,729 on April 3, 2021. Throughout the summer, bitcoin dipped, but in early October, it began to rise again, hitting another all-time high of $68,990 on November 10, 2021, before it began freefalling later that month.
BTC chart now available on Signal Sigma via Technical Analysis Instrument
With the Federal Reserve announcing plans to get more aggressive on inflation at the end of 2021, the entire market took a tumble. People that had been raking in cash just a few months prior were in a panic, selling off cryptocurrency, NFTs, meme stocks, and anything that was high risk.
Now, as we round the corner to begin closing out 2022, we have a lot to look back on. One thing is for sure: people aren’t willing to take the same risks that they were when they had government-fattened pockets and seemed optimistic about economic recovery. IPOs, NFTs, SPACs, other digital assets, and even art and collectibles had a terrible year. Is their performance all due to lower levels of liquidity or is there more to the story?
Source: https://www.renaissancecapital.com/
The Choke”HODL” of Meme Stocks
Meme stocks weren’t around before the pandemic. Jamie Rogozinski, the founder of WallStreetBets, a popular subreddit that is dedicated to boosting the value of meme stocks, credits the group’s success largely to the perfect situation created by the pandemic. He said, “The government forced everyone home, sent them stimulus cheques, took away people’s entertainment, their sports, their everything. The natural progression was for people to turn to stocks and trading.”
The group shot Gamestop’s stock price from $3 to $300 in early 2021, shorting hedge fund traders, making money, and “hodling” the asset. However, in 2022, Gamestop has cooled and there is much less noise coming from the meme stock crowd. Edward Moya, a senior analyst at OANDA, attributes the change this year to the looming threat of recession, tighter pockets, and lessons learned from those that didn’t fare so well.
Portfolio performance of meme stock favorites: GME + BB + AMC + BBBY + SLV, equally weighted, via Technical Analysis, Multi-Instrument
Drawdown Analysis of meme-stock portfolio, via Technical Analysis, Multi-Instrument
Crypto’s Road to Recovery
Aside from bitcoin, the many other cryptocurrencies in circulation have all faced an uphill battle this year. Altcoins such as DogeCoin and Cardano experienced similar runs in 2021 as Bitcoin, but now, investor confidence seems to be lower. Cryptocurrencies as a whole are largely misunderstood and exploratory, and with so much uncertainty in the market, it’s clear that investors aren’t willing to take the same risks they were last year. Some analysts liken crypto to the internet, social media, and home gaming, which were all misunderstood until they finally took hold.
NFTs: Still Alive but Barely Breathing
In August 2021, NFT sales at a global level reached $4.9 billion, setting a record. However, in August 2022, just a year later, NFT sales didn’t even come close to breaking the $1 billion mark. Disappointingly, sales reached a measly $726 million, signaling to investors that NFTs have taken major steps backward. However, both Twitter and Meta have adopted NFTs on their platforms this year, and social influence often starts on social media platforms.
IPOs and SPACs Stoke Fears of Instability
In 2021, special purpose acquisition companies, SPACs, were a popular way for companies to go public. Throughout that year, there were 631 SPAC offerings. However, due to the fall of the market in late 2021, SPACs took a hit that was more severe than other companies not associated with these special purpose acquisition companies. This year, there have only been 74 of such offerings, showcasing a major decline in the once-hot trend.
In a broader perspective, IPOs have had one of their worst years since the 2009 financial crisis. Usually, by August, IPOs have raised $33 billion. This year, traditional IPOs have only brought in $5.1 billion. If you don’t trade in any of the other asset classes we discussed above, this metric should show you just how tight the market is right now. Companies going public have been flopping, taking investor enthusiasm down with them.
CONCLUSION
Are Fringe Assets Dependent on Liquidity? It Looks Like It
No corner of the market has given relief to investors this year, but as we ride the wave, it’s clear that investor liquidity is critical for fringe assets to succeed. During times of distress, people are going back to what they know. But we know that the market will recover eventually, and when confidence gets restored, fringe assets will be back in the game. One day, most likely, many of these assets will be so mainstream that we will look back and realize just how much money there was to be made during this dip. However, not all assets will survive. Winter is coming.
Dollar Transaction Volumes trend lower as the Fed ramps up QT operations, removing liquidity from financial markets.
Jerica Kingsbury