The price of Ethereum (ETH) has not yet hit its lows and could eventually fall a further 40% over the next two months as investors adjust to the risk of an impending recession, Daniel Cheung, co-founder of Pangea Fund Management, has said.
Cheung, who runs the crypto hedge fund start-up he recently created with colleague Ryan Watkins after an $85 million first-round funding, also pointed to rising inflation and falling company earnings as factors that could derail stock markets, and Ethereum with it.
“We still have not seen real capitulation yet and July and Aug are lining up to be potentially the worst months,” Cheung outlined in a long thread on Twitter.
“Ethereum is likely going to just be a levered and liquid bet on Nasdaq for at least the next two months. A more aggressive way to express your views for macro/inflation/broad company earnings, etc.”
Increasing stock market correlation
His comments come after a more than 70% fall in the price of ETH so far this year. As at the time of writing, the second most valuable cryptocurrency was up 2% at $1,050 in 24 hours, according to CoinGecko, easing from gains of as much as 25% during the preceding five days.
Cheung said crypto markets have become increasingly correlated to equities, particularly tech stocks on the Nasdaq, and expects the status quo to remain between now and Aug due to a “lack of catalysts for crypto”.
He forecast company earnings to go lower during the recession and price/earnings ratio to fall, meaning stocks should drop another 20% from here.
Equities are already down 30% from their recent peak, as investors slowly adjust their earnings expectations following a few years of super-profits.
Discounting the impact of Ethereum’s much-awaited merge, now only likely sometime in the fourth quarter, Cheung stated:
“There will likely be more iterations of lower earnings revisions that follow over the coming months, especially given this is a market regime that very few investors have experienced. This will bring equities lower and crypto to follow with it. More downside to come… 40%+ downside for ETH.”
A decline of this magnitude will drag Ethereum down to around “$500 in the short-term” from the Jun 29 price of $1,200, when the U.S. Bureau of Economic Analysis reported that the economy shrank at an annual pace of 1.6% in the first quarter, stoking fears of a recession.
Cheung also said that stock prices did not look cheap at current values, despite a one-year forward price-earning ratio of eight times for Coinbase, the American publicly-traded crypto exchange, a bellwether of sorts within the industry.
“When earnings still need to get cut – there is no floor on the multiple. You cannot confidently say things are cheap until earnings have fully reset. Otherwise, you are most likely just walking yourself into a trap,” he explained.
Cheung’s company, Pangea Fund Management, adopted a “long-only strategy” when it was created a few months back following an $85 million funding round, but he believes that “there is a massive short opportunity for ETH” at current prices.
Pangea was not short, he refrained, but also said he expects inflation to worsen in July and Aug because of things like rising food prices and increased oil demand, all of which feed into a perfect storm for a “real capitulation in crypto markets.”