Are we on the Cusp of a 2017 Type Crypto Rally?

As central banks and governments around the world implement extraordinary measures to prop up the global economy from the coronavirus outbreak, many investors warn that government stimulus won’t stave off the damaging effects of the pandemic to the global economy. There are two camps which have formed. One camp of investors has warned that a zero and negative interest rates environment as well as an unprecedented amount of money being printed with no end in sight will lead to a nasty hyper-inflationary cycle. There is another camp of investors that is calling for a deflationary outcome with high unemployment and low global growth, despite the extraordinary government intervention to prop up financial markets.  

I agree with the latter POV, at least in the short to intermediate time period (2-3 years). However a deflationary period in global markets could be the impetus to the next cryptocurrency boom. First of all when the economy is stagnant, central banks have a few tools they can implement to stimulate the economy. One of those tools is lowering the short-term interest rate. Although US interest rates have been near zero for a very long time, Jay Powell and the Federal Reserve left some wiggle room with interest rates despite the political pressure from President Donald Trump to cut rates to zero.  Eventually the Federal Reserve cut rates to zero early this year in response to the coronavirus pandemic outbreak. 

The result of the Fed cutting rates has led to the net present value of assets that generate positive cash flows to increase, making those assets more valuable. Hence, why we are witnessing the recent historic rally in equities. 

However equity markets are disconnected from reality because of government intervention. Even though the unprecedented amount of fire power through tools such as quantitative easing and low interest rate policies have allows debtors to continue to pay their debt at a lower cost; which continues the debt merry go round until the bubble bursts. A key point to highlight here is that although some debtors are able to meet their debt obligation, they have increased their total debt making the declines more severe when shocks in the market will likely occur in the second half of the year or first half of 2021. 

Debt! And More Debt!

“We definitely feel that the markets are way ahead of reality. We really are telling every client to tap the market if they can because we think the pricing now couldn’t get any better,”

Manolo Falco, investment banking co-head at Citigroup
source: Financial Times

The central bank intervention in financial markets around the world has caused a dangerous reflexive cycle in the corporate debt markets. Corporations have been borrowing at a furious pace as a strategic path to get through the economic fallout of the coronavirus pandemic. For example, U.S. investment-grade bonds sales hit $1 trillion in the first half of 2020. Despite record pace of the bond market, there have been bankruptcies and restructuring of debt at a record pace and more defaults are expected in the second half of the year. The damage to the U.S. and global economy is significant. 

Dismal Unemployment Picture

Furthermore, US companies have accumulated enormous amounts of debt amidst a backdrop of a shaky job market with double-digit unemployment, declining global growth, a continuing health crisis and protests against police brutality are raging across the United States. These conditions are a recipe for a prolonged deflationary period. The truth is that despite unprecedented measures of QE, lowering the short-term interest rates has not worked for central bankers. Just look at Japan’s last 3 decades for an example of how monetary stimulus can fail to ignite an economic engine. 

Are We Heading For Another Crypto Boom? 

We are now in an environment within the legacy markets where things have been turned upside down; investors have trouble parking their money in interest-bearing assets because there are very few that yield positive returns. So investors will be left with putting their money to work in riskier assets in search of yield. Because of these global macro trends, I believe we will see a wave of institutional macro investors accumulate large positions in cryptocurrencies such as bitcoin. We are already beginning to see this happen with the announcement last month of Paul Tudor Jones entering the cryptocurrency space. As the saying goes, “a rising tide lifts all boats.” and a sustained bull rally for BTC will have a huge impact on the alt-coin market with tokens such as EOS, ETH and DAPP to name a few tokens which stands to benefit from a 2017 type rally.   

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