A discussion on macroeconomic factors affecting cryptocurrencies

I think we can all agree cryptocurrency is a pretty awesome concept, but most of the posts about price I see discuss charting, new crypto developments, the amazing use cases and so on. But I think there are some broader global trends we need to look at, the macroeconomic factors that drive the economies around us. I want to spark a discussion about what a recession will do to cryptocurrency.

Skip to the second part if you do not need to hear the preamble.

Part 1

First off, let me explain my position so nobody gets it into their head I am a crypto hater.

So I live between three countries at the moment and exchanging money is a huge hassle every time for a few key reasons.

1. It takes time. Technologies like TransferWise (Wise) have sped up the process significantly, most of the time I can have money from Europe to Oceania in a matter of hours, instead of days, or even weeks with traditional transfers. Plus it can be done for a few bucks, it’s cheap. However, pretty damn annoying, when I add money to TransferWise, my bank(s) add a two-week money hold. So, if I send 1000 bucks today, they hold an additional 1000 bucks for two weeks. Understandably this is inconvenient as hell.

2. Costs, again exchanging money or sending abroad through banks is almost always a rip-off, they might offer cards which let you do it for “free” but their exchange rate is usually 3% off the real rate, so they are charging you there.

3. Sending money to other people is painful if they are outside your country, or often even inside your country. The other week I loaned a friend some money for an apartment deposit, and we thought about sending it in crypto but usually EU banks are reasonably fast. Thought what the hell, fiat is fine. 8 business days later and the money has not cleared.

So, using a crypto like Stella, for example (I know there are others), makes it so fast and easy for people like me to shift money around as needed, send to other people etc. The delays come when exchanging to fiat as they have to go through the bank.

​

The use case for cryptocurrency is there, decentralized, you can pay in some places, there are bitcoin ATMs around, whatever. Great. There are also a million other great uses for blockchain tech.

Whether that is a reason it should increase in value, or not, that is not an argument I am getting in to. My point was just that I am pro cryptocurrency but later this year I will be looking at the global economy and perhaps planning an exit entirely for the time being.

---------------------------------------------------------------------------------------------------------

Part 2

Now what I wanted to discuss was that we are not all here buying crypto because we believe it is useful, there are plenty of people holding for regular use no doubt. But most of us are buying crypto because we are investors, and we want to make some money from this awesome technology right.

Previously in 2017 we saw a huge bull-run that came crashing spectacularly down, and it happened on its own. There was not some huge economic meltdown or global recession that spurred it. Crypto was in its own bubble. It still is somewhat today, but I think today, the difference is that we now have huge institutional interest in crypto currencies. Something like 40% of crypto is held by 1000 crypto wallets. With about 2300-2400 accounts which are whales. I read this a couple months ago so it could be more now, or less. But I would bet more given we had a dip in-between and another bull run. I would also bet that this 40% figure is probably not even representative of all the big crypto investors. I am sure with institutional money, they are dividing it up into many wallets to avoid the risk of the whole investment being stolen, or the codes lost, risk management right.

Anyway, the point here is that institutions are following the global economic trends because they are affected by it big time. When there is a market snap, they are almost always the first to get out with their money, then the banks probably short everything, and make money on the way down. If the general market is going down, you can bet that they will be pulling their liquidity out from cryptocurrencies as fast as they can to cover anything they need to In the case of a market collapse.

This, in my opinion, means that crypto is not in the same little safe (or dangerous) bubble which it was in before. It is getting tied closer to global economies and will be at risk in a crash. BTC and stocks are linked more closely than ever - Bloomberg.

The alternative scenario is that crypto is seen as a store of value and investors will flock to it like gold in uncertainty, but I am not sold on this theory yet despite some big names like Mark Cuban saying as much. It is possible though.

So moving forward to macroeconomic events that may be in the wind for us. Bull run probably is not over for now, and there is a ways to go, and a logarithmic growth curve of Bitcoin shows we are not at the same level of the run as we were in 2017. Logarithmic Growth Chart (LookIntoBitcoin)

​

https://preview.redd.it/sw6ti10zb5r61.png?width=1615&format=png&auto=webp&s=9eb4d230215d3e9c670b5d77b53ff19dfe9826cb

So forgetting the charts, for now, let us look at some of the most important macro events we have going on now affecting crypto.

1. A global pandemic, fear, anxiety, joblessness, etc., recession.

2. Mass stimulus by governments rights across the globe promoting spending - Biden trillion dollar stimulus (2021)

3. A huge chunk of the world, sitting at home, on their computers, with not a lot to spend their money on - UK Spending drop as new lockdowns hit (2021)

4. Simpler than ever processes to set up wallets on exchanges etc. and adoption by big companies, which is driving media and interest into crypto. - Paypal introduces crypto

5. Typical investments like stocks getting absolutely wrecked by the pandemic, driving people to seek other returns. - Investors seek sake haven from Covid-19 (2020)

6. Bond yields being low for a long time. - Treasury yield lowest in 234 years (2020)

These large events, in my opinion, are part of the reason crypto is thriving at the moment, outside of the usual reasons people go into crypto. I mean what are you going to spend your money on when you cannot go out, cannot party, cannot travel. This is not the case everywhere, but it is/was in most of Europe, Asia and plenty of places in the US.

Now, before corona hit many speculated, we were due for a global recession, the bond yield had inverted Link (March 2019) (so short-term bonds had more yield than long term, which makes little sense as generally the longer period of time = more risk) - Link. This inversion is seen as a major indicator for an impending recession - Reuters on why inverted yields mean recession. My old finance professor comes to mind. What happened? Corona hit, and we had a recession. With massive stimulus globally to try and keep the world turning. Now with vaccine penetrations growing, hopefully by the end of the year developed countries will have people getting out and about again.

This poses a few possible outcomes and problems in my mind, with some that will directly, and indirectly affect cryptocurrencies. They are not mutually exclusive, nor are they collectively exhaustive, and the complexity of these interactions are

1. Stimulus will end, those unemployed are now screwed in many countries. They simply will not have money to spend on crypto, or on other things to make the economy go around, so the institutions can post profits and afford to invest in crypto.

2. Just because everyone is vaccinated, this does not mean the recovery is going to magically rebound. It will take a long time for people to find jobs again. Job hiring in itself is time consuming and not instant. Further, many jobs people had previously won’t even exist, or not for a time. Think about brick-and-mortar stores, many have switched to online purchasing and there is a good chance they will stick with it. All those retail workers, people in restaurants, etc., they might not find work in their career anymore, at least not immediately. Sure, now we will need more delivery drivers, people building websites, and people in other areas, but reskilling takes time, some people in those jobs previously do not own cars, have no tech experience, or are older and it is hard for them to get reskilled and hard to get hired again. Another issue is that many of the brick-and-mortar businesses simply do not exist anymore. Buying premises, getting business running again will take a really long time, especially after so many were so low on cash in the last 12 months, where does the investment come from?

3. When people are vaccinated, they will be dealing with the above problems, but they will also be spending money out in the real world. I can imagine this summer if things are opened up (Northern hemisphere) will be a crazy time of partying, joy, and activity. Money may not be going into crypto, it may be going into the real world.

4. If there is money going into the real world, we might see a boom in the traditional investment areas which were so unprofitable during the Covid-19 pandemic. This means that crypto is less attractive as an asset for institutions and individuals as there is money to be made elsewhere more safely and with less speculative volatility, real profits from well-known and established companies recovering big time post-pandemic.

5. Austerity measures globally to cut debts. There are plenty of conservative governments who will wish to implement austerity measures to bring down huge national debts following covid-19. Honestly, I am not sure what cause-effect relationships come from this. But if somebody wants to discuss it, go ahead.

So, to wrap this up. I pose you with the ideas posted and would like to see some discussion on what you think are the consequences of macroeconomic factors globally on crypto this year. Do you trust the charts to follow the pattern of the previous bull run?
What do you think could be a driver of growth or decline in crypto this year? When do you feel the biggest change will come?

Happy Easter