COMMA PARTNERS: FEBRUARY 2025

Market snapshot

Crypto:

• BTC (-17%)

• ETH (-32%)

• SOL (-38%)

Equities:

• S&P 500 (-0.5%)

• NASDAQ (-1%)

Let’s not bury the lead

I believe the most probable scenario is that we’ve seen the majority of this wash out as the market has reacted with fear to the bold change (and resulting uncertainty) that Trump and his team have brought into office.

Looking ahead, I think we chop around these levels for the next 1-3 months or so (1 if things move expeditiously, 3 if less so), until we get greater policy clarity and stability.

In December and January, I said that tightening global liquidity in Q4 suggested we could see a move upward in BTC’s price to ~$110K followed by a correction down to ~$70K.

Well, let’s look at what happened.

BTC followed this path almost to a number.

So, while this correction has no doubt been painful to watch, it hasn’t exactly been surprising.

In December, we had a couple short-term dives in price that washed out some leverage, which I thought decreased our chances of taking the full dive to the $70K-$75K levels suggested by the tightening liquidity levels as it removed some fragility and reflexivity in the market.

That may have been true, but as it turns out, Trump was determined to carry out bold change, which has been (and will continue to be) a more fundamental driver of things than investor positioning or leverage at the margin.

I think there is still a decent chance that we go that last bit lower (to $70K-$75K BTC) before things turn around.

And of course, there’s a chance I’m wrong and we continue to dive even further for longer.

But I’m still positioned for this scenario: 1-3 months of chop with a chance we go slightly lower, then a strong remainder of the year.

Why?

I’ll say more later, but for now, just take a look at the right hand side of that chart. Liquidity has been steadily rising.

The disconnect

If you were to look solely at the headlines of crypto-specific news, or shown it to any of us 6 or 12 months ago, what would you have thought?

Here’s just a taste of what we’ve seen in the last several weeks, not by any means comprehensive:

• Head of Policy at the world’s largest crypto fund confirmed as CFTC chair

• The SEC drops lawsuits against a spate of crypto companies (Coinbase, OpenSea, Robinhood, Uniswap, Consensys, Gemini, Tron, and Yuga Labs just to name a few)

• Citadel announces they’re moving into the crypto business

• Bank of America’s CEO says they’re likely to launch their own stablecoin

• BlackRock adds a 1%-2% BTC allocation to its model portfolio

• The US government officially establishes a Strategic Bitcoin Reserve and a Digital Asset Stockpile

I’ll tell you what I would have thought: higher.

Instead, we got lower.

What happened?

Macro happened.

By macro, I mean both traditional macroeconomy macro (liquidity, inflation, unemployment, GDP, etc.), and policy macro (Trump, geopolitics).

I’ve touched a bit on the policy macro so far, so let me wrap up on that before going to traditional macro.

Policy macro

Uncertainty is “bad” for markets. We know this.

But, at least for me, this idea is often vague. What specifically is bad about uncertainty? How bad is it?

So much of the world is uncertain - but not everything uncertain affects the market. How do we know which uncertain things are “bad,” which are not “bad,” and how severe these “bad” things are?

I may not be able to answer all these questions, but what I can say is that we are seeing a clear example of uncertainty being “bad.”

Sure, some of the possible outcomes of the change underfoot could be “bad” for certain things. As an example, tariffs could be inflationary. (But you can also argue that the outcome of the tariffs on re-shoring industry are positive in other ways. In fact, tariffs during Trump’s last term weren’t exactly inflationary.)

But I would argue that even if you were to take the most dramatically negative scenario of all that’s in flux, it wouldn’t account for the full degree of market pain we’re experiencing.

So, what makes up the rest?

The cost of uncertainty. Fear.

So, while we can argue about whether the specific outcomes of all this change are positive or negative, I think what we have to acknowledge is that the cost of uncertainty is real.

So, what does that mean?

It means that, regardless of the actual outcomes of this period of change that we’re in, to the extent that the uncertainty persists - or even increases - we will continue to bear the costs of it.

We are also seeing how newer, more volatile assets at the frontier bear an even steeper cost of uncertainty.

Just look at the February returns I included above. Even despite all the positive headlines for crypto, they haven’t stood a chance against the diffuse uncertainty levied on us all.

And yet the crypto fear & greed index sits at extreme fear - almost as low as it was after the FTX fraud amidst last crypto bear market...

...all while price sits consistently above last cycle’s highs.

Where I stand on uncertainty and fear?

I zoom out.

I see the foundations and fundamentals of crypto improving. I see the regulatory backdrop growing increasingly permissive and supportive. I see a deepening robustness and legitimization in the public zeitgeist and consciousness.

I say that the uncertainty and fear is overblown. The longer the time horizon, the more volatility works for you if it is superimposed against a backdrop of true progress.

Take these fundamentals, sprinkle on an improving traditional macroeconomy macro backdrop, and you can see why I’m positioned for a strong year (and beyond) for crypto.

Remember:

• In 2017, BTC had 5 pullbacks (ranging from (-28%) to (-39%)) in the midst of its journey ~23xing from trough to peak

• And in 2021, BTC had 5 pullbacks (ranging from (-20%) to (-50%)) on its journey ~2.5xing from trough to peak

Volatility is the price you pay for explosive asymmetry.

And volatility goes both ways - but crypto’s asymmetry means up > down over the long run.

I stand by what I said in January:

Traditional macroeconomy macro

Let’s get into it.

The USD

Over the last several months, I’ve highlighted the USD’s significance in our global macro puzzle.

A weaker USD drives global liquidity mechanically. (Since so much of the world economy is denominated in USD, as it weakens, it frees up additional liquidity for use elsewhere).

A weaker USD also allows other governments with struggling economies (namely China, but also much of Europe) to stimulate without nuking their currencies.

So, what’s been happening to the USD?

It’s weakened since Trump took office. Big time.

Liquidity & financial conditions

BTC has almost fully priced in the tightening of liquidity from Q4 2024.

And Solana has over-corrected.

This is against a backdrop where global liquidity is continuing to rise.

And look at China. They have a ways to go to support their economy.

What could disrupt this trend?

Inflation

There’s a lot of concern out there that inflation will run hot, which would, simply put, make things worse.

Inflation negatively impacts the economy (both companies and consumers), and it drives the Fed to keep financial conditions tight (rates high, QT going) to combat it.

People are worried in particular about the potentially inflationary impact of tariffs.

I’m not, and here’s why:

We’ve already talked about one of the outcomes of the tightening financial conditions from Q4 of last year - pain in asset prices.

But this is the bright side. Inflation should be coming down.

The old-school CPI metrics the Fed looks at have still been flashing above 3%, but I think they’ll increasingly reflect what many believe to be the more accurate picture captured by Truflation.

Latest CPI data is published tomorrow morning, so we’ll quickly see how right or wrong I am, at least in the short-term.

Growth

There’s also fear that the austerity-inducing actions of DOGE will impact growth.

There are even recent forecasts of a GDP contraction for Q1. This would be the first since Q1 2022. (Q4 2024 GDP growth was +2.3%.)

I think this concern is incredibly overblown, and fear-driven.

The manufacturing PMI (Purchasing Managers’ Index, a measure of the health of the manufacturing sector) has been improving.

So has the ISM (Institute for Supply Management, another measure of the health of the manufacturing sector).

I think recession fears are overblown.

We’re oversold

My takeaways are:

• Liquidity and financial conditions, tightened in Q4 2024

• These conditions lead asset prices

• Prices have already priced in this Q4 2024 tightening (BTC has almost closed the gap, Solana already has)

• Liquidity is rising again, and financial conditions are easing

• Growth scare fears are overblown (PMI and ISM are going higher)

• Inflation fears are overblown (Truflation is collapsing, tariffs in Trump’s last term weren’t inflationary)

• Sentiment for both equities and crypto is near all-time lows despite the above

• My time horizon is long-term, so I am willing to bear the brunt of this pain (which I believe is temporary) to reap the gains (which I believe are on their way)

This is all a reminder to myself of how easy it is to let the broad-based fear and doubt that’s in the proverbial water activate my own fear and doubt.

And of how challenging it is to combat it.

And how important it is to do so, and to zoom out.

And look at the fundamentals.

And remind myself that contrarian and right is the goal.

Over the long term.

I’ll reiterate what I said last month.

Some charts to take us out

(Last week marked the seventh largest spike in bearish sentiment on the AAII survey of all time, dating back to 1987.)

Until next month,
Devin