- The money supply in the US normally grows about 7% per year. However the COVID relief funds, which in November last year were estimated to be US$5 trillion, increased the money supply by 27%
- The vast majority of major digital currencies, such as Bitcoin are held by institutional investors (corporations, hedge funds etc.) rather than retail investors (singular investors).
In the 1989 single In a New York Minute from American singer/songwriter Don Henley, the chorus sees Henley posit:
“In a New York minute
Everything can change
In a New York minute
Things can get pretty strange”
I often think of these lyrics when trying to analyse what is happening in the crypto world, such is the rapid and, at many times, unpredictable movements of the market.
If you’ve been following the crypto market for any significant period of time, you’ll know that things have recently taken a rather abrupt turn as prices across the market have continued to plummet over the past couple of months.
It’s quite remarkable when you consider that in November, the market’s golden child and largest digital currency, Bitcoin, hit a new all-time high of around US$68,500. Fast forward a little over two months and BTC’s price has fallen to US$37,000 – a fall of 46%.
Is the current trajectory following a pattern??
Of course, this is not the first time the market has done a complete 180 just when it seemed as though the market’s monumental rise would continue on for eternity. Last year in April, right as Bitcoin had reached its previous record high of US$63,500, the premier crypto lost over half its value in the space of a couple of months.
In fact, it, it wasn’t until the very end of July, Bitcoin once again began its ascension to the aforementioned November high.
Of course, Bitcoin’s fate largely determines the fate of the thousands of other cryptos on the market. There were a couple of exceptions back in mid 2021, such as the NFT gaming crypto, AXS – the native token of Axie Infinity, which, despite the market falling around it, managed to make some astounding gains during that time.
This most recent market crash has also seen some lesser known cryptos bucking the trend, including Web 3.0 Infrastructure token MXC, whose price, according to CoinMarketCap, has grown 48% in the past 30 days.
So, if last year’s market trajectory is anything to go by, Bitcoin may again bounce back.
Consider this: Bitcoin’s price in April peaked at US$63,500 on April 14. From there, it was a rather steep descent to its lowest point of US$29,800 on July 20, before it once again began a climb to its November high. That crash lasted a little over three months.
Bitcoin’s new high was reached on November 11, when it hit US$68,500. Today, January 31, means we’re just a couple of weeks shy of a three month decline. This could mean that any day now, Bitcoin’s fate may turn.
Of course, there are some things to consider.
Image Source: © Route66 | Megapixl.com
What’s different this time around?
First of all, in late July, 2021, the US inflation rate had not yet been publicly revealed. In fact, it was in October, it was revealed that the US inflation rate had risen by 6.2% from the previous year – the highest jump in 31 years.
The reasons for the inflation rate, as measured by the Consumer Price Index (CPI), included continuing disruptions in global supply chains due to the Covid-19 pandemic, turmoil in the labor markets and strong consumer demand after local economies were reopened.
Inflation shows no signs of slowing down.
The money supply in the US normally grows about 7% per year. However, the COVID relief funds, which in November last year were estimated to be US$5 trillion, increased the money supply by 27%.
According to Modern Monetary Theory, high levels of money printing by the US Treasury can solve the national economy to a point, but then the government is inevitably forced to raise interest rates to rein in the excess money.
This could be a problem for homeowners who may soon see a marked increase in their monthly mortgages. In the worst-case scenario, this could lead to scenes which we saw in 2008, where thousands upon thousands of people were forced to foreclose on their payments, leaving the banks to acquire the properties.
At best, rising interest rates will still see many people forced to tighten the reins on their spending.
What does this mean for crypto?
There was once a theory that Bitcoin acted as a hedge against inflation. So much so that it’s still referred to by some as “digital gold”. However in the months since October, Bitcoin’s plummeting price has cast enormous doubt on that theory.
The truth is: crypto is a highly volatile and risky asset and therefore can be seen as a frivolous expense. Even the most pro-crypto experts advise that investors should commit no more than a maximum of five percent of their portfolios towards cryptocurrency.
This doesn’t necessarily mean doom and gloom for the crypto market, as the vast majority of major digital currencies, such as Bitcoin are held by institutional investors (corporations, hedge funds etc.) rather than retail investors (singular investors).
And as is the way of economies, like the US, there are, in fact, two economies: one for the corporations and one for the average Joe.
What we know for sure, is that eventually the taxpayer is going to end up paying for all the extra money that’s been printed over the past couple of years.
This will tighten the belt on a lot of people’s budgets, which may we’ll see less investment in risky assets – of which crypto is quite possibly the riskiest, at least on a mass scale.
The good news, at least in the short term, is that that hasn’t happened yet. However, things move rapidly in the crypto space. So, the best thing is to be prepared when it does. Because, well, in a New York Minute, everything can change.