This week’s inflation news was not good. Inflation, unsurprisingly, has risen faster than expected despite the Fed’s aggressive rate hikes. The Consumer Price Index (CPI) is up 0.4% from last month, and the core CPI (which excludes highly volatile food and energy costs) is up 0.6%. Predictably, the crypto markets tanked on the news.
I don’t expect inflation to disappear anytime soon. In fact, it might take some time before it even looks like inflation is under control. Thanks to cuts in oil production, energy costs are likely to rise. Shelter inflation, which takes time to work its way into the CPI data, will most likely continue to rise. That combination alone will drive inflation rates higher. And it doesn’t account for rising food or travel costs.
Another large Fed rate hike in November is likely. As are smaller ones after that. A global recession next year is a distinct possibility. This is objectively terrible news. But as a crypto investor, I’m weirdly okay with this.
Earlier this week, Allison Brickell and I spent some time talking to Brian Dixon, the founder and president of Off The Chain Capital (click here to watch our podcast with him). Off The Chain Capital is a hedge fund that takes a Warren Buffett-style approach to investing in crypto. The fund looks for value in its investments — assets that it’s clearly getting for less than they’re actually worth. That way, when the market moves up, the fund picks up outsized returns with significantly less risk than the usual crypto investment.
One way Off The Chain Capital finds value in the crypto markets is by focusing on distressed assets. An asset becomes “distressed” when its owner is forced to sell it (typically through bankruptcy proceedings). Because the owner is being forced to sell, the asset is usually sold for less than what it’s worth. And the person or entity that buys the asset can usually turn around and sell it for a profit (or wait until the markets go back up and sell it for a huge profit).
Off The Chain Capital did this with the Mt. Gox exchange bankruptcy proceedings. The fund bought claims on bitcoin for pennies on the dollar. And it was able to turn those claims into profits. The Celsius bankruptcy proceedings (which began earlier this year) will provide Off The Chain Capital with a similar opportunity.
I’m not suggesting that crypto investors follow this path. It takes incredible skill, expertise and relationships to succeed in doing this. But there are lessons crypto investors can take from a value investing approach.
Extended bear markets can create distressed assets. These assets aren’t distressed in the classical sense where someone is being forced to sell them. But a long bear market CAN drive the value of assets well below their true worth. Or at least what they would be priced at in a recovering or bull market.
So for investors, identifying coins that are significantly underpriced AND that have the resources and community to survive an extended downturn is critical. Those are the coins that are worth investing in.
And as always, we’ll keep an eye out for coins that meet that criteria and let you know what we think are the best opportunities moving forward.