"Crypto-AI-U.S. stocks" are tightly linked, the era of "free money" has ended, and everyone is watching to see "when the crypto market will stabilize."

"Crypto-AI-U.S. stocks" are tightly linked, the era of "free money" has ended, and everyone is watching to see "when the crypto market will stabilize."

As the saying goes on social media: "We are all long Bitcoin, only some people don't know it yet."

On November 24th, renowned Academy Securities strategist Peter Tchir warned in his latest report that with the end of the "Free Money" era, this hidden leverage is now biting back at the market. The logic by which companies could boost their stock price several times merely by announcing massive spending plans over the last two years has now collapsed, and this reversal has become the key driver behind the recent decline in the Nasdaq Index.

Recently, the market has been highly volatile, with the Nasdaq 100 Index leading the decline at over 3%, while broader indices like the S&P 500 equal-weight index fell by only 0.9%. This divergence highlights that the pain is mainly concentrated in tech and high-growth sectors.

Particularly on October 10, Bitcoin saw a violent sell-off during the US stock market trading hours, dropping sharply from $122,000 to $105,000. This "inexplicable" crash not only hit crypto assets hard but, through ETFs and the transmission chain of related listed companies, created direct liquidity pressure on a wide range of stock portfolios.

This phenomenon reveals a dangerous signal in the current market structure: cryptocurrency, AI infrastructure investment, and passive investment in US stocks have formed a highly intertwined, "iron chain across the river" situation. As passive investment assets surpass those of active management, through ETFs like QQQ, billions of pension and hedging funds are now deeply bound to "digital asset reserve companies" like MicroStrategy and the capital expenditure cycles of AI giants.

Currently, investors have collectively turned their attention to the stability of the crypto market. Goldman Sachs trader Brian Garrett bluntly stated that many clients now regard Bitcoin performance as a weather vane for future risk appetite, "If Bitcoin improves, the year-end stock market rebound may return to track."

The Collapse of the "Free Money" Mechanism

In his report, Peter Tchir attributes the past market boom to the "Free Money" effect. "Free money" here does not refer to central bank liquidity injection, but rather a specific phenomenon in corporate capital operations: when a company announces spending of X amount, if its market value increases by more than X, it is essentially creating "free" shareholder wealth. This logic was mainly present in two sectors:

First, AI and data center construction. Previously, tech giants could simply promise to build more data centers ("if you build it, they will come" logic) and receive an enthusiastic stock market reward. Now, simply announcing more spending can no longer translate into stock gains, and the market has begun to question the returns of these massive investments. Once stock prices stop responding, the next step for companies may be to cut spending, threatening overall economic momentum.

Second, cryptocurrency and "Digital Asset Treasury Companies" (DATs). Companies represented by MSTR enjoyed significant valuation premiums, financing crypto purchases that led to stock price gains far beyond their cost to acquire coins. This positive feedback loop was a key driver of both stock and underlying crypto prices. But now, this chain is becoming increasingly strained, and many DATs' share prices are gradually returning and no longer tightly tracking their Net Asset Value (NAV), meaning the way to "create wealth out of thin air" is closing.

The "Amplifier" Effect of Passive Investment

The prevalence of passive investment has intensified the complexity of this situation. Peter Tchir notes that when a large amount of money "blindly" flows into the Nasdaq 100 Index (QQQ), 55 cents out of every dollar ends up in just a handful of companies, including MSTR.

According to Bloomberg, Vanguard, Blackrock, and State Street, as passive investing giants, are among the top five holders of MSTR. QQQ alone holds nearly $1 billion of MSTR shares. This means that if major index compilers (such as MSCI) adjust their rules, it could trigger massive capital flows.

This indexing has caused crypto asset volatility to spill out of the coin space. The market is currently focused on whether MSCI will include DATs in its stock indices (decision expected to be announced on January 15). If MSCI decides to keep or include these companies, it will prevent forced selling and boost expectations of such companies being added to subsequent S&P 500 indices; conversely, it could trigger mechanical selling by passive funds.

Surging Asset Correlation and Wealth Effect Reversal

Bitcoin's market cap recently slid from a high of about $2.5 trillion to $1.85 trillion, and with $650 billion in evaporated wealth, the market's "wealth effect" is facing headwinds.

Peter Tchir observes that with spot ETFs becoming popular, investors can no longer mentally separate crypto assets from their stock holdings. When investors see their crypto ETFs shrink sharply within their stock accounts, panic is more easily transmitted to the entire portfolio—a very different psychology from the past when assets were checked in standalone cold wallets.

Moreover, prominent investors are surprised to find that some of their non-crypto assets show an extremely high correlation with Bitcoin. This typically means the same investor group is facing liquidity pressure—when crypto assets plunge, they have to sell other liquid assets (such as US tech stocks) to raise cash. This cross-asset wave of forced selling has caused volatility in the Nasdaq and the VIX index to rise simultaneously.

Macroeconomic Uncertainty and the Fed's Dilemma

At the macro level, the Federal Reserve's policy trajectory has again become obscure. Market expectations for a rate cut in December have swung sharply from 34% to 63% in just one day. Although employment data is mixed and inflation risks have not been fully eliminated, the end of the "Free Money" era could slow AI data center spending and cool the economy, giving the Fed a reason to lower rates.

Meanwhile, the 10-year US Treasury yield, typically seen as a safe asset, has recently rebounded, while the yield on Japanese government bonds (30-year JGB yield hit 3.3%) also deserves attention, as this may erode the long-term appeal of US Treasuries.

Peter Tchir concludes that the risks facing the current economy are greater than ever before. If crypto assets fail to stabilize, the resulting liquidity tightening and wealth shrinkage will not only end the tech stock party but could drag down overall macroeconomic growth.

Everyone is holding their breath: Bitcoin's stabilization will be the first signal that the "pain trade" is over.

Goldman Sachs trader Brian Garrett said: "Many clients we talk to believe that if Bitcoin trading improves, year-end rallies may appear again."

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