Crypto investors are surveying the meadow. And all they see are wolves…

Ecologists call it the “landscape of fear.”

John Laundré popularized the idea in the early 2000s. The basic premise is that animals have two maps in their heads.

The first map is the landscape itself: the hills, meadows, forests, rivers, etc. It’s a resource map.

The second map is based on risk. The animal develops a mental model for how dangerous an area is likely to be. For a deer, an open meadow may offer ample grazing, but it also exposes the animal to predators.

These competing maps of resources and the danger of acquiring them determine the animal’s behavior. A deer might enter that open meadow, but it will do so cautiously, stay vigilant, and not linger.

The best-known example of the landscape of fear unfolded in Yellowstone National Park.

The government’s eradication program killed the park’s last wolf pack in 1926. With no wolves, the park became a Disney film. Elk and bison roamed without concern.

During this time, researchers observed that elk spent only about 11.5% to 20.5% of their time watching for danger while grazing.

Then the wolves came back…

In 1995, 14 gray wolves from Canada were reintroduced to Yellowstone. Another 17 followed in 1996. The next year, 10 more wolves came from Montana.

Within five years, the time elk spent watching for predators climbed to 43%. The landscape of fear had changed.

Researchers also observed that elk moved to the most dangerous areas, open meadows, when the wolves went quiet. The wolves never left; the elk simply mapped out in their heads when they felt it was time to go “risk on.”

Markets have their own landscape of fear. In digital assets, it’s particularly pronounced. And right now, everybody in crypto is keeping their eyes peeled for the wolves…

What Scares This Market

I’ve worked in digital assets – as a developer, investor, and analyst – for 12 years. During that time, I’ve developed a good sense of what scares this market.

Government crackdowns scare this market. There were long stretches when it seemed the Chinese government might ban Bitcoin. Prices gyrated with each unconfirmed rumor out of Beijing.

A strengthening dollar also frightens this market. As the dollar strengthens, it makes Bitcoin – typically priced in dollars – more expensive for international investors. The same happens to gold.

A strengthening dollar often signals rising rates and monetary tightening. And that also scares this market. As a risk asset, crypto in general – and Bitcoin in particular – tends to struggle when rates rise and liquidity tightens. It’s why Bitcoin sold off hard as the Fed began hiking rates in 2022… and why the asset only started to rally when the Fed paused in 2023 and reversed course in 2024.

But if you want to understand what really scares crypto, look no further than a corporate debt market under strain.

There are different flavors of debt, but for our purposes today the two most important are U.S. government debt and non-investment-grade debt, also known as “junk.”

The former is your short-term government debt – your T-bills, which are heavily influenced by the rate set by the U.S. Federal Reserve. The latter is the speculative side, companies with higher risk profiles. For that reason, the yield on junk bonds is always higher than short-term Treasurys, a gap known as the spread. But how much higher is important.

When the spread widens, investors are dumping junk bonds. In turn, that implies a risk-off environment and falling liquidity. That really scares crypto.

And that matters right now because the spread has been widening.

The spread between junk bonds and Treasurys recently touched 3.48%, the highest level all year. It is not a coincidence that Bitcoin has struggled alongside it.

Now the question: Why is this happening?

There’s a growing belief that the AI buildout may have gotten a little over its skis. According to Barclays, about $37 billion of the roughly $80 billion in data center debt issued this year has been rated below BBB, or junk. All this debt is causing spreads to widen in turn.

Even Anthropic, the largest and most successful of the frontier labs, is expected to receive a junk rating after its upcoming IPO. Put simply, a lot of this AI-related debt is starting to overwhelm the bond market.

And that picture got a little more uncertain yesterday…

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About Jensen Huang

Jensen Huang was ousted as CEO of Nvidia (NVDA) yesterday after personal revelations involving an alleged Chinese intelligence operation. We won’t rehash the details. You likely already know them.

But here’s why it matters…

Nvidia is still the undisputed king of AI compute. The loss of Jensen Huang doesn’t change that. But it does add a dose of uncertainty. And if there’s one thing the market can’t stand, it’s uncertainty. Nvidia’s precarious situation will likely add anxiety to the bond market.

The bottom line is that crypto will not reignite until the spread trends down again. And once it does, we need to be ready to act.

It won’t happen overnight. Price will need to find a bottom.

Subscribers of Neural Net Profits might recall we took profits at the end of September as our system began to show rising stress in the market. It hasn’t changed its stance since.

But once it does, we’ll look to get back into the market ahead of a multiyear bull run.

But for now, crypto investors are surveying the meadow.

And all they see are wolves…

Your Pulse on Crypto,

Ben Lilly
Editor, Chain of Thought

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