- Several economic health indicators hint at a possible recession globally (including in the US).
- Indicators can’t accurately predict when a major recession will happen, but will this recession affect crypto investors?
Finance expert, Michael J. Burry, rose to fame following his accurate prediction of the 2008 financial crisis. His investment fund profited billions of dollars during the 2008 housing market crash. Also, Burry liquidated nearly all his investment portfolio during Q2 2022. His fame led to him being portrayed in a movie titled “The Big Short.”
It might be a good time to invest in digital assets since no one can predict when traditional markets will recover before entering another recession. Experienced investors (including Burry) also miss incredible market rallies; below are examples of some of their misses. In May 2017, Burry predicted World War 3 and a financial meltdown worldwide.
However, the S&P 500 surged 20 percent nine months later. By December 2021, the index rose 100 percent higher than Burry’s predicted short entry price. In December 2020, Burry opened a short position on Tesla stock and justified his stance by saying that the stock’s price was ridiculous. However, Tesla’s stock price rose a further 47 percent 35 days after Burry’s remarks. Ten months later, Tesla’s stock price soared another 105 percent.
A significant recession might happen, but the exact period is unknown
Traders need to realize that the US Dollar index has been bullish compared to other top global currencies. It hit its peak level in two decades. It proves that investors are selling their stocks, leaving corporate debt and foreign currencies to seek shelter in cash positions. Furthermore, there was a wider gap in the US Treasury’s 2-year and 10-year notes, reaching a new peak of -0.57 percent last Thursday.
Usually, analysts interpret an inverted yield curve as the peak sign of a recession. An inverted yield curve occurs when long-term government bonds have lower yields than short-term government bonds. In addition to these worries, the US Fed disclosed $2.36 trillion in overnight reverse repurchase agreements, its highest ever.
When there is a reverse repurchase, market participants lend cash to the US Fed in exchange for agency-backed securities and US treasuries. The excess cash on investors’ balance sheets shows little trust in counterparty credit risk, indicating bearishness. After three critical macroeconomic indicators reached levels not seen in more than 20 years, there is a need to answer two crucial questions.
First, what would be the relationship between Bitcoin (BTC), Ether (ETH), and the traditional markets? Second, if the S&P 500 declines by 20 percent and the housing market crashes, what effect would that have on investors? Even when residents can use cryptos to pay their bills, healthcare services, energy prices, and food still depend heavily on the US Dollar.
Imports, exports, actual trading, and several other international commodity transactions are usually priced in USD. Hence, if someone uses Bitcoin or altcoins to pay for their expenses, it is likely that crypto holders would still convert their cryptos to fiat at some point.
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USD borrowing costs and economies
The most important lesson from an ineffective circular trade exclusively with digital currencies is that nearly everyone still depends on the USD’s borrowing cost and strength. Every market is affected except those that live in a cave, on communist islands, or on a self-sufficient land. It is impossible to predict the effect of another 20 percent crash in stock markets or a crash in the housing market on Bitcoin and Ether.
Some investors would attempt to lessen their exposure to the crypto winter and move their funds into secure cash positions. However, there would also be another group of investors seeking non-forfeitable assets or protection against inflation.
Hence, Michael J. Burry’s story is essential now, with nearly all pundits and market analysts predicting a crash in housing prices or a market crash in the near term. Bitcoin and Ether are about to experience their first global recession. But based on the March 2020 experience when the COVID-19 crisis triggered panic selling, those that held for the long-term enjoyed the rewards.