ARK Invest founder and CEO Cathie Wood argues that 2023 could be a watershed year for crypto.
She recently posted a video on ARK Invest’s official website in which she explains her vision for financial markets in the new year.
The Fed’s turning point for the crypto market according to ARK Invest
She says that the main turning point for financial markets during 2023 could be a change of course in the monetary policy of the Fed, which is the US central bank.
With the outbreak of the pandemic in March 2020, the Fed kicked off its biggest expansionary campaign ever, going so far as to create and distribute $4.7 trillion to the markets in two years, more than doubling its balance sheet.
This much-expansionary policy came to a halt during the course of last year, due to the significant rise in inflation. In fact, the Fed at that point had to initiate a restrictive policy instead, so much so that it has since reduced its balance sheet by 500 billion, and raised interest rates to 4.5%.
The rate hike began in March, but from May it became harder, with monthly increases of up to 75 basis points.
During this phase, which has been ongoing for almost a year now, it has increased rates only once by 25 basis points, five times by 50 basis points, and twice by 75.
According to Cathie Wood, but also according to many other analysts, it would be time for a change of course by the Fed, which should ease the tightening measures.
In fact, the inflation rate has been falling for a few months now, and further large rate hikes could encourage the arrival of a recession.
In the US, the peak of the inflation rate at this time in history occurred in June last year, when it exceeded 9%. Already in July, however, it had fallen to 8.5%, and in October it also fell below 8%. Last month it was at 6.5%, denoting a significant decline over the past six months.
At this point. there may be no more reason for the Fed to raise rates by 50 or 75 basis points again, so much so that many expect it to raise them by only 25 points in February.
The evolution in 2023
But what is actually more interesting is how the situation might evolve over the next few months.
In fact, Cathie Wood of ARK Invest argues that in 2023 inflation could continue to fall so much that it could end up returning to or approaching the fateful 2% target.
In theory the trend over the past six months would seem to be this, with the target being reached in late 2023, or more plausibly in early 2024. It should be pointed out, however, that many disagree with this view.
For now, it seems that the Fed’s restrictive monetary policy in 2022 has been successful, so much so that one could imagine for all intents and purposes a further decline in inflation.
The key question is precisely this, namely when and if the Fed can stop raising rates, and reduce its balance sheet by withdrawing liquidity from the markets.
If, as Wood assumes, this will begin as early as during 2023, this could prove to be a watershed year for both traditional and crypto financial markets after the abyss of 2022.
In particular, the CEO and CIO of ARK Invest argues that risk-on assets, such as cryptocurrencies, could in particular benefit from this turning point.
For example, the price of gold, commonly considered risk-off, lost 22% during 2022, only to recover 19% during 2023. In contrast, the price of Bitcoin has lost 77%, recovering only 45% so far.
Thus, should the Fed reverse course, or even simply end its restrictive campaign, the assets that lost the most in 2022 may react with greater rises than those that held up better last year.
The two scenarios
Wood explicitly signals that the Fed is expected to change course soon, but adds that he expects that as early as the first half of 2023 the inflation rate could return toward normal.
There are therefore two scenarios.
The first is the one imagined by ARK Invest’s CIO that during 2023 the Fed may already even begin to cut rates, giving oxygen to financial markets, and in particular crypto markets.
The second is the one imagined by many other analysts, according to which the Fed during the course of 2023 could simply halt the rate hike, waiting to see whether inflation really falls toward 2% or not.
In particular, if the first scenario occurs, Ark Invest’s portfolio should perform well.
It is worth noting that Ark Invest recently sold its holdings in Grayscale Bitcoin Trust (GBTC) at a profit, and bought another 320,000 shares in the crypto exchange Coinbase.
Not only has Ark Invest been investing in Coinbase practically since it landed on the stock market, but Wood has always been bullish over the long term on this asset.
It is worth mentioning though that Coinbase stock currently loses 87% from the highs, and 86% from the initial placement price of April 2021. However, those prices were heavily influenced by the ongoing speculative bubble in the crypto markets, so it is not worth taking them as a reference point.
Far more interesting is the fact that their current price is in line with that of late May 2022, that is, after the implosion of the Terra/Luna ecosystem, but before the failure of Celsius and FTX.
In the past three weeks in particular, it has gained 68%, showing that it is capable of resolving itself should the crypto markets continue to perform as well as they have in this early 2023.
Ark Invest’s optimism for the crypto market
To be fair, Wood argues that during 2023 inflation in the US may even come in below 2%, which is completely counter to what almost all other analysts are arguing.
The fact that they have been pushing for years to promote crypto investments suggests that their words are not unbiased and objective, and that the heavy investment in Coinbase is forcing them to hope for a big rebound in crypto markets as soon as possible.
The fact remains that, as early as early February, we may have our first answer on the matter, when the Fed will have to say whether it intends to raise rates again, and by how much.