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Could Two Sheriffs Share Same Town? Analyst on Role of Bitcoin in Coming Financial Crash

Tue, 07/17/2018 - 13:11
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Igor Grigorenko
Can cryptocurrency replace the US dollar as a protected asset for the XXI century?
Could Two Sheriffs Share Same Town? Analyst on Role of Bitcoin in Coming Financial Crash
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Prosphero Platform’s top analyst on Bitcoin’s role in the impending global monetary crisis.

At the beginning of the year, Bitcoin had a significant fall from its peak value, and its recovery has been slow causing panic every time the price falls below $6,000. According to Bloomberg, altcoins value took a harder hit: about 70 percent of alts lost more than 90 percent of their cost. Amidst strategic uncertainty, every participant of the crypto market is trying to predict what will happen next.

My analysis of the future of Bitcoin’s exchange rate stems from searching for the logic behind crypto's current situation. For the central system of global exchange which is the American economy, the crypto market is a subculture. However, the subculture is not isolated; instead, it relies on the logic of trends that emerge at the global level of macroeconomics.


A macroeconomics look

The period of “paradise” in the financial markets ended around the beginning of 2018 when a program called quantitative tightening (QT) was launched to correct the balance of the Federal Reserve.

This large pump that drains liquidity led to a devaluation of all peripheral currencies, crypto included.

For several months now, the US has been sweeping the world clean of the dollar, regularly increasing the Fed’s stake, and refusing to refinance previous loans, all of which leads to a rise in the dollar’s value. All other fiat currencies have automatically devalued under the stress of large amounts of commercial debt held in the dollar. Due to the constant outflow of capital and a lack of adequate reserves, it is becoming more and more difficult for nations to pay back debts to their foreign partners.

As a result, the end of the first half of 2018 saw a rise in the US dollar compared to other currencies. Some of those fell short by a small percentage; others were crushed by a significant amount (Turkey’s, for example). It’s useless to compare crypto to some island full of economic-anarchists isolated from the world economy, and that the strong turbulent currents of the market are of no concern to them.

This week the US regulator withdrew another $10 bln from the system. The Federal Reserve’s balance is now $4.305 tln, which is almost $200 bln less than its peak value. In other words, the amount of available liquidity in the system is rapidly falling—there is a compression of credit. What is scarier is that starting July, the Fed will be withdrawing even more money to the amount of $40 bln per month. What this means is that every month the Fed will squeeze more money from the market than the European Central Bank puts into it (30 bln euros), thereby stopping any increase in liquidity, even for other comparative currencies. As a result, the amount of money freely in circulation is getting less and less, which leaves many banks practically suffocating, and the situation is growing worse.

How exactly does this affect the stock market? For the seventh session in a row, the Dow Jones has closed in the red. Recently, 30 US blue-chips have been performing poorly compared to the rest of the pack (S&P500, Nasdaq, Russell). The growth that we have seen in the US exchange is gradually dying out, and there are increasing signs that the bullish market started in March 2009 is coming to an end. In other words, a terrible turn of events is approaching.


The final hour

When the first big financial institutions fall, the people will ditch the failing stock market in flocks. The fall of these institutions will result from the suffocating effect of rising interest under the Fed’s accelerated pump. Deutsche Bank is one example of a soon-to-fall institution comparable to Lehman Brothers. While the names of the victims may vary, the fact remains that the deflationary spiral of QT will lead to the collapse of several big players considered “too big to fail.”

And now, during this final hour, we arrive at a dramatic showdown—will Bitcoin take the initiative during this time of panic and become the protected asset for investors who are running from the burning stock market? Or is Bitcoin just as destined as other peripheral currencies, like the Turkish Lira or Brazilian Real, to be the first to burn in the fire of the global crisis?


Cash deficit

This is the key question of this entire layout. The current situation is rather clear: for now, Bitcoin is operating like any other peripheral currency that is moderately weakened by the actions of the American vacuum.

There is no extra cash on the market (for the rise of crypto), and there won’t be any.

This is confirmed by other subtle indicators showing a growing deficit of collateral for debt in the global banking system. So which will blow up faster under such a contradictory economic policy, the stock market, or the rising US national debt?

The next question is, where will the multi-billion dollars of capital find escape in this era of digital postmodernism? The answers to both questions are not clear. That is why when we reach the transformation point of the marginal markets because the Fed’s vacuum, everything can suddenly change. It is this point of bifurcation that will become the moment of truth for Bitcoin, gold, and other currencies—and which of them will become a protected asset for the 21st century?

Crypto as a possible way out

Recently Ron Paul, a former US Congressman who ran for president in 1988, made a sensational statement. He suggested that the US should consider the possibility of replacing the dollar with a combination of two assets—gold and cryptocurrency.

A scenario where the asset is replaced with gold and cryptocurrency is entirely plausible. This alternative would eliminate the shortcomings of the current financial model, which is rapidly approaching a deadlock. Paul blames the government and large corporations for creating the catastrophic economic situation, and he sees Bitcoin’s independence as pivotal in preventing future crashes.

Steve Bannon, multimillionaire and former White House Chief Strategist has also spoken in favor of the launch of an entirely new cryptocurrency that would compete with the US dollar.

Similar ideas that propose replacing the compromised money with cryptocurrency are rampantly spreading; Steve Bannon and Ron Paul are not the first to suggest a complete alternative to the infamously printed US dollar.

The eccentric billionaire and Bitcoin enthusiast John McAfee recently announced the release of his private fiat currency that is backed by other cryptocurrencies. In a Twitter post, he describes the main idea of his project:  

What's odd is that tomorrow night I am going to make an announcement of the new "McAfee Coin", based on a radical new concept: Fiat currencies (collectible) backed by crypto- the reverse of what banks are attempting. Seriously.”

This idea is the same as the Paul’s, who is going to lobby for the release of a similar coin that would be not private, but a federally funded project.


Growing problems with fiat

Bureaucratic obsession with total compliance and the mania of AML has swept the world, and it is the biggest problem that international trade faces. Curiously, UN data shows that global drug trafficking is at its highest historical point.

In other words, the modern methods of fighting money laundering and financial terrorism are not generating meaningful results, except that they are tremendously lowering the productive work of financial organizations. Transaction costs and problematic payments are becoming a growing avalanche.

Today a tremendous burden is shackling the growing global economy. I would not at all be surprised if the original cause of the looming crisis happens to be this excessive regulation and modern witch hunt. Iran has already officially announced that it will use bitcoin for its trading accounts upon the imposition of new sanctions, and some countries are already doing this unofficially albeit in a very limited amount. The process of distancing from the madness of the regulators is not yet clear, but it is in the making and gaining momentum!

To say anything of Bitcoin’s future in the long term, we must await the imminent monetary crisis that will engulf the market around 2019 and 2020. It is then and only after the fact that the fate of Bitcoin and other cryptos will be decided.

For now, in the short term, Bitcoin is fated to suffer constant pressure (an extended flat period at best), behaving like any other typical peripheral currency of a developing country.

This town ain’t big enough for the both of them: while the dollar rules the world, the volatile and unpredictable Bitcoin will not be considered a viable alternative to US dollar. It will remain a dubious refuge for the speculators, and the many that are marginalized in the global economy.

Moreover, only the end to the grand monetary gridlock that is sadly led by the US will show us which asset will become protected and have its price skyrocket by the hundreds or even thousands.

If I am correct in my prediction, then yes, it could very well be the case that one Bitcoin will be worth one mln dollars. However, it is important to note that those one mln dollars will not be worth the same by then as they are now.  


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About the author

Igor Grigorenko worked in IT for over 15 years, assisting to creation of a number of ICO accelerators and several large ICO projects