The economic crisis is imminent. Should I sell bitcoin to save my life?

In the past few days, as the number of new coronavirus cases and deaths has increased, almost all assets worldwide have fallen.

Recently, the Dow Jones Index fell 3,000 points, a record high of 12.9%, while the S & P 500 Index fell nearly 12%, which was also the worst day ever.

What we are seeing is that the global market has fallen into a bear market and a global liquidity crisis, and these crises will soon translate into widespread economic shutdowns.

In essence, the credit market has suffered a severe blow, which has led to a significant rise in the cost of debt repayments and spreads between government bond yields and other bonds.

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Banknote printers around the world are speeding

In response to the recent New Crown virus crisis, the Federal Reserve announced a $ 700 billion bond purchase plan and cut bank overnight rates to 0.0% to 0.25%.

On March 16, 2020, in response to the new crown virus pandemic, the Federal Reserve lowered the deposit reserve ratio to 0% , in other words, it cancelled the deposit reserve ratio of all US deposit institutions.

On Monday, the Federal Reserve announced that it will add a $ 500 billion repurchase program to the $ 700 billion Treasury and mortgage-backed securities purchase program that opened last Sunday.

The so-called repurchase means that the bank provides high-quality collateral (such as treasury bonds) in exchange for the Federal Reserve's reserves (funds). The bank can then use the money to fund short-term business to keep the business running.

On Tuesday, the Federal Reserve continued to blockbuster, and it announced that it would continue to repurchase up to $ 500 billion (equivalent to 98 million BTC) daily until this Friday.

Not enough stimulation

However, the current series of measures taken by the Federal Reserve do not seem to be able to stabilize the market, and investors are still panicking into cash.

Like the Federal Reserve, central banks and governments around the world are working to prevent further economic disasters and possible bankruptcies around the world.

At the same time, the Federal Reserve announced plans to jointly take "coordinated actions of the central bank to strengthen the provision of dollar liquidity" with the European Central Bank, the Bank of England, the Bank of Canada, the Bank of Japan and the Swiss National Bank.

In essence, the Federal Reserve and other central banks are trying to minimize the cost of using the dollar in the global financial system to ease market pressure .

This is important when you consider that 90% of transactions in the foreign exchange market are conducted in US dollars.

But if these financial institutions run out of dollars, it will effectively destroy the entire financial system.

The failure of the Federal Reserve's efforts to stabilize the market, as well as the devaluation of the US dollar, will leave central banks around the world with few interest rate tools available.

The following is the current interest rate situation of global central banks:

  1. Swiss National Bank: -0.75%;
  2. Eurozone: -0.50%;
  3. Bank of Japan: 0.10%;
  4. Bank of England: 0.01%;
  5. Bank of Canada: 0.75%;
  6. Federal Reserve: 0.01%;

Large-scale printing of banknotes to buy assets such as government or corporate bonds (expanding the balance sheet) seems to be the last option.

The following are the quantitative easing plans in each country:

  1. European Central Bank: $ 821.0 billion;
  2. Federal Reserve: $ 700 billion;
  3. China's central bank: $ 100 billion;
  4. Bank of England: $ 330 billion;
  5. Indian central bank: $ 13.5 billion;
  6. RBA: $ 5.5 billion;

So why are these efforts ineffective?

Simply put, the market has lost confidence in these instruments and the reaction has been negative, which means that the more the central bank intervenes, the more panic the market will intensify, which will accelerate the decline.

In historic global coordination, governments and central banks have been willing to do everything possible to increase liquidity to reverse the 2008 crisis, and the effectiveness of these tools has become worse.

Stimulating the market with these measures seems to have played the opposite role in increasing people's confidence in the efficiency of the central bank.

Until the new coronavirus is contained, government stimulus, large-scale repurchases and sharp interest rate cuts will not lift the lock on the global economy.

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As Gabor Gurbacs pointed out, since the financial crisis, the stock of M2 currencies (still highly liquid but not entirely cash assets) has doubled (+8 trillion USD), while the speed of M2 currency circulation (people spend The speed of money) has fallen by 30% .

The newly minted currency (QE / stimulus plan) does not seem to be able to convert it into economy / expenditure.

So why is this crisis different from last time?

This crisis is about the economy, not just finance . Today, the new crown virus has brought the global market to a standstill. During the 2008 financial crisis, house prices fell, borrowers defaulted, and lenders lost money.

In 2008, the Federal Reserve and the US government postponed most of the crisis by bail-out banks because they were the owners of mortgages.

However, this time, it is not only the debtors who cannot repay the mortgage, but all debtors.

All over-leveraged businesses in every industry need to be bail out, not just banks.

Most S & P 500 companies spend more than 50% of their subsidized cash flow on stock repurchases, not investing in the future or going through the crisis we are in now.

Airlines (both Boeing, etc.) have spent $ 45 billion on repurchases, and are now asking for $ 50 billion in bailouts, ridiculous.

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Many S & P 500 companies are playing a music chair game:

  1. Borrow as much money as possible;
  2. Buy back stocks to boost stock prices;
  3. Pay yourself huge bonuses;
  4. Wait for more free money, repeat the above process, and ask for help if you go bankrupt;

So, are we about to enter a global recession?

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Normally, global financial markets adjust every 10 years, and the new crown virus seems to be the key to eliminating the bubble.

Assuming the US, the world's largest economy, is in recession, the rest of the world will not be spared. This can happen if you think that the US stock market is the most overvalued and most indebted market.

The U.S. yield curve has always been a very accurate indicator of recession, and it consists of long-term and short-term interest rates given by Treasury bills.

The yield curve plots the relationship between bond yields and bond maturity. More specifically, the yield curve reflects the perceived risk of bond investors to bonds with different maturities.

As the yield on the benchmark 10-year and 30-year bonds fell to record lows, the entire US Treasury yield curve fell below 1% for the first time, and the yield on the entire one-month Treasury bill fell below zero. This is the first time in the history of the United States that it is extremely close to negative interest rates.

Top 10 peaks of VIX (Volatility Index):

  1. March 16, 2020: 82.69;
  2. November 20, 2008: 80.86;
  3. October 27, 2008: 80.06;
  4. October 24, 2008: 79.13;
  5. March 18, 2020: 76.45;
  6. March 17, 2020: 75.91;
  7. March 12, 2020: 75.47;
  8. November 19, 2008: 74.26;
  9. November 21, 2008: 72.67;
  10. Today: 72.00

Is it possible for us to recover soon?

The global market has fallen back to the level of mid-2009, and if the United States does the same, in the worst case, it may collapse further by 55-60%.

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Global economic growth is expected to continue to show a V-shaped recovery. Even in this optimistic scenario, Daniel Lacalle pointed out that with the recession of the euro area, the stagnation of China, and the flat US, the global economic growth in 2020 will still be less than + 0.8%.

What does this mean for Bitcoin?

As of now, we are in an unknown area, and we cannot fully understand Bitcoin's anti-fragility until we see Bitcoin respond in such an environment.

Over 36 hours, Bitcoin has fallen by more than 50%, while the S & P 500, DAX, Nasdaq, Hong Kong Stock Exchange, Nikkei and a few other global stock markets have dropped by an average of about 20 %.

If you consider how small Bitcoin's cryptocurrency market (the total market capitalization was $ 265 billion before the crash) is small compared to other trillion-dollar global markets, then it's easy to understand why Bitcoin has fallen so dramatically.

As mentioned in the previous article, Bitcoin is in a liquidity crisis, which means that because the number of sellers is greater than the number of buyers, desperate investors are willing to sell Bitcoin at a significantly reduced price to exit the market.

The weak orders of large exchanges mean that the market lacks liquidity and cannot support this sudden decline.

Finally, for Bitcoin, some good news is:

  1. Long-term investors are buying despite the recent decline in currency prices;
  2. Bitcoin may be decoupling from global markets;
  3. Despite recent price declines, Bitcoin's hashrate has performed relatively well;
  4. A lot of money is waiting;
  5. Bitcoin is less than half a day from production;
  6. Bitcoin and Cantilon effect;

Long-term investors are buying despite the recent fall in the currency price

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According to Glassnode data, long-term investors have been buying discounted bitcoin recently and increasing their positions. This is as we expected in the previous article, the rest of the market may be long-term investors who have a high time preference, which is a very positive sign.

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Unchained Capital also confirmed this. The HODL wave indicator shows that in the recent plunge, the main sellers were investors who held the currency for 6 months or less.

During the period from March 11th to March 15th, the entire network has produced about 18.265 million BTC. Most of the mobile BTC comes from short-term holders:

  1. 0.64% (or approximately 116,900 BTC) comes from investors who hold the currency for 1-3 months;
  2. 1.36% (or approximately 248,400 BTC) came from investors who held the currency for 3–6 months;
  3. 0.51% (or approximately 93,200 BTC) comes from investors who have held the currency for 6–12 months;

Bitcoin may be decoupling from global markets

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In the longer time dimension, we can see that Bitcoin is largely unrelated to other mainstream assets, and in the past few days we have seen something very interesting.

In recent days, the stock market and other markets have continued to fall while bitcoin is basically flat. With oil down 20%, global stock markets down 8%, and gold down 3%, Bitcoin has shown some strength.

On March 19, 2020, the global market performed like this;

  1. Bitcoin: + 17%
  2. NASDAQ: + 2.30%
  3. FTSE 100: + 1.40%
  4. Dow: + 0.95%
  5. S & P 500: + 0.47%
  6. Gold: -0.07%

Despite the recent decline in the price of Bitcoin, Bitcoin's hashrate is still performing well

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In the past week, the price of bitcoin has fallen sharply, and its computing power has only dropped by about 10%. This magnitude does not seem obvious.

A lot of money on the sidelines

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Data from @thetokenanaylst

Over the past 14 days, the exchange's stablecoin balance has doubled, from $ 405 million to $ 840 million .

Currently, the exchange holds USD 720 million USDT and USD 120 million USDC, which means that many participants are currently on the sidelines, and a lot of funds are waiting to return to the cryptocurrency market at the right time.

The current bitcoin is in the stage of finding a bottom. Once the market has determined the bottom, this will lay the foundation for bullish sentiment.

Bitcoin and Cantillon effect

The Cantillon effect refers to changes in relative prices caused by changes in the money supply.

The change in relative prices is because the change in the money supply has a specific injection point, so there is a specific flow path in the economy.

Basically, because assets such as stocks and real estate are overpriced, assets such as Bitcoin will become more attractive over time.

p11 U.S. Treasury Secretary Steven Mnuchin and his wife Louise Linton with some freshly printed US dollars

What we know now is that in this crisis, the amount of stimulus and currency introduced by central banks and governments around the world was shocking.

In contrast, the QE1 plan for the Federal Reserve to purchase $ 600 billion in mortgage-backed securities and $ 100 billion in other debt lasted from the end of 2008 to March 2010.

Today, the Federal Reserve is injecting funds equivalent to the 2008-2010 QE1 plan in one day. 30 times the market value of Bitcoin has been printed out of thin air in a week.

For how much money to create, you can compare:

Over the past 18 years, the United States has spent $ 1 trillion on the Afghan war, and the Federal Reserve has printed $ 3.2 trillion in the past four days.

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Figure One Hundred Denominations of Hungarian Currency, One of the Most Inflationary Currencies in the World

This is likely to be the biggest opportunity ever for Bitcoin

Let's face it, when you consider that 40% of Americans have savings of less than $ 400, you can understand how worried the average citizen is.

In this transition to liquidity, many people may temporarily abandon Bitcoin, which is completely understandable. Those who can keep their bitcoin are a very small part of it .

However, in this result, central banks and governments have been printing money to maintain solvency while devaluing the dollar and eroding savings, and then people may start looking for alternatives at some point.

Therefore, this is likely to be the biggest opportunity in Bitcoin's history.

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Fixed income ETFs, such as TLT (20 + UST bonds) and Vanguard S / T investment-grade corporate bond ETFs, have total assets of approximately $ 40 billion and transaction rates of -4% to -5%. Where will investors look for passive investment returns?

Bitcoin halves production less than 60 days

During a recession, it's important to focus on Bitcoin's response thereafter, not during the recession. It is also important to remember that gold was never a true safe haven during the 2008 financial crisis .

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During that period, gold plummeted from $ 1,000 to $ 700, a drop of 30%, similar to the period when the S & P 500 index plummeted by 50%. It was not until 2009 that gold began to climb to $ 1200.

In a liquidity crisis, cash is considered the only safe place to store wealth. However, historically, safe-haven assets were bought after the market found a bottom.

Coinciding with the halving in May 2020, Bitcoin may rebound on a large scale after a year, just like gold in 2009.

Bitcoin has many advantages over gold, such as:

  1. Severability
  2. Verifiability (Gold fraud is common);
  3. Portability (you can transport Bitcoin anywhere in minutes);
  4. No license required (for example, no third party like a gold repository);
  5. Scarcity (21 million BTC VS total unknown gold supply);

After halving bitcoin production in May, the annual new supply rate of bitcoin will drop to about 1.7%. Now, this is important because it means that Bitcoin's inflation rate is lower than gold (2-3%) and the central bank (2%), which makes Bitcoin the hardest form of currency in existence.

Bitcoin is likely to be a scarce and liquid asset that many investors desire.

Yesterday, 700,000,000,000 USD was printed. Today, another 500,000,000,000 USD was printed. At present, we cannot determine when the Fed will stop printing USD. There is no timetable, no restrictions, no guarantees, nothing.

According to the current trajectory, record low interest rates, trillions of dollars of quantitative easing, helicopter funding and more stimulus measures are likely to return to the 1980 level of inflation (15%).

At some point, people will definitely ask themselves: if my money keeps losing value, what's the point of holding it?

On the other hand, for Bitcoin, we already know that there are 1,800 new Bitcoins born every day, and in less than 60 days, this number will be reduced to 900 per day.

No delay, no deposit limit, no withdrawal limit, no transaction limit.

The US dollar, however, has unlimited supply, has no timetable, is easy to create, and its mathematical design loses value over time.

When the world's printing presses are about to run at high speed, Bitcoin will experience a supply shock in less than 2 months.

to sum up:

In essence, the global market has been overly leveraged for the past 50 years. Today, the music chair game is coming to an end and there are not enough seats to choose from.

Over the years, we have been warned that music will stop. Today, with less than 21 million chairs for 7 billion people, Plan B is an opportunity that cannot be seized without sitting down.