The Crypto Crash

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The Crypto Crash

 

by David Reavill

 

What is happening in the Crypto Markets is simply stunning. Bitcoin, the most widely traded of all the Crypto, had declined by an incredible 96% in just the last six months. It is one of the most significant financial crashes of all time.

It would be easy to dismiss this as simply a fad investment gone wrong. But that would be a mistake. Cryptos are the proverbial “canary in the coal mine,” to use a favorite expression of Wall Street.

Just like the miner’s canary, which warned that conditions in the mine were unsafe,  Cryptos are a harbinger of the future, indicating that something is very wrong in the Global Financial Markets. And like the tiny canary, Cryptos are likely the most vulnerable of investment vehicles. So this recent crash is sending a clear message that things have turned dire.

This Crash is all very reminiscent of the Great Financial Crisis of 2008. The mortgage industry first felt the impending heat of a significant market decline. Major mortgage brokers, like Countrywide Credit, crashed back then. But many ignored their warning, feeling that this event was isolated and would never affect traditional investments such as stocks and bonds. They were wrong.

The contagion from the mortgage-backed markets eventually spread to the entire financial arena. Not because the other markets, traditional stocks, and bonds, had any exposure to mortgages but because the same disease that plagued mortgages also plagued stocks and bonds.

And that disease is leverage.

Our financial world rests upon a literal mountain of debt. Current Household Debt is $4.6 Trillion,  Corporate Debt stands at $12.5 Trillion, while Federal Government Debt reached $30.5 Trillion.

When times are good, these levels of debt may be no problem. Everything will be fine if the borrowers can make their interest payments and their collateral for the loan remains solid.

The Federal Government does not have a credit issue; its collateral is the entire country. And its cash flow derives from its unlimited ability to tax you and me. There are other issues with Government debt, but we’ll address those in another article.

On the other hand, corporate and personal debt can have significant problems if they need more cash flow to make the debt payments or their collateral declines. In either case, there is the potential for default on their loans.

So, let’s examine how this decline in the Crypto Markets may infect the financial system. Most who hold Crypto Currencies consider it money, cash, available to make purchases and invest. I am not aware of anyone using Crypto as collateral. That is, take a loan out against the Crypto position. But I’m sure everyone would include their Crypto holdings in calculating their current net worth.

And why not? Cryptos are an investment like any other.

As Cryptos increased in price, something called the “Wealth Effect” occurred. People, justifiable, felt that they were worth more, that they could spend more and invest more, based on their appreciating Crypto holdings.

Today, the reverse of that is happening. Let’s call it the poverty effect. Crypto holders realize they are worth a lot less today than in April. Naturally, they cut back on their spending and perhaps stop investing. If things get tight enough, they may withdraw financially.

Remember that these Crypto investors don’t live in a vacuum. Many carry other obligations, such as credit cards, mortgages, and other loans. Those bills still have to be paid. And if they’re using Crypto to pay for those expenses, today, they must sell ten times the Bitcoin, for instance, to make the same house payment as they needed to sell in April.

Selling begets selling.

Undoubtedly, a sizable portion of the investment public invests in Cryptos. If these people withdraw from investing, it is bound to impact the financial markets significantly.

So here’s today’s message. The Crypto Crash may seem far away and removed. But it can spread like wildfire and affect us all. Just because we don’t own Crypto, we should not feel immune from its effects.

Our task is to make our investments as “fireproof” as possible.

Econ Briefs

We’ve had two good news days in a row. Yesterday it was the very positive Inflation Results from the US. Today it appears that China may be relaxing its Covid Policies.

Yesterday, you’ll recall the Consumer Price Index at only 7.7%, the lowest monthly rate. And an indication to the market that we may have turned the corner on inflation. A giant market rally ensued,  the Dow up 1,200 points, more than 3%, the S&P up more than 5%, and the winner on the day, NASDAQ, 5.5%. Bond also rallied, and even the beleaguered Crypto markets rallied, with all the major Crypto Currencies up more than a percent.

This morning the good times look to continue, as China announced that it is relaxing some of its more strict lock-down policies. Particularly its traveler restrictions, which will have especially pleased business people. Admittedly, these changes are incremental, but China observers are optimistic that this will become a trend.

It will be a real boon to international trade if China returns online. And we see that reflected in Industrial Commodities around the world this morning. Currently, we’re seeing West Texas Intermediate oil up 3%, Copper up 2%, Lumber up 3%, and Nickel up 5%. According to Credit Suisse, analysts estimate that if China came online, it would mean an additional demand of half a million barrels of oil per day. That would be excellent news for oil-producing states such as Russia and Saudi Arabia.

On the calendar this morning is the Michigan Survey of Consumer Sentiment. Wall Street expects this measure of the overall economy to show little change.

Reporting later this afternoon will be Baker Hughes’s latest count on the number of active oil wells in the country. Last week they said 613 rigs were operating, about a third fewer than our peak oil year of 2019.


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Greg
Greg
14 days ago

Then there’s the FTX bankruptcy with its Ukraine connection.

GuvGeek
GuvGeek
14 days ago

Crypto Currency is telling us the Future! What little savings Americans have is being depleted to stay afloat. If the Democrats are allowed to get away with yet another Election Steal there won’t be an America by November of 2024. Traitor Joe is not going to change course, so the Markets will crumble, Cash will be Trash, and the Dollar will fail. Gold won’t be any good either, you can’t eat gold.

At the point of collapse, the vast Majority of people who occupied any Federal Elective Office for the last 20 or 30 years will have a price on their heads, along with the Elites. I have no doubt that they will be hunted down. Since the crash of the Dollar will topple Governments around the World, other Governments will want a Pound of their flesh too. Pretty much all of the Elite class’s physical Wealth will be confiscated. Once the Dollar Collapses the Elites nor the US Government will have any power because neither will have any wealth. Good luck with what’s left of the US Government trying to confiscate property from the well over 100,000,000 well armed Americans after you trashed their lives and future! The Government doesn’t own the Country, The People do and will make the Government understand that fact because they will have no other choice!

I’m now looking at my options for weathering a total Government Collapse, because it looks like the UniParty may have stolen this election and The People will not have control of the Government. Imagine that the Greatest Country in the History of the World will Collapse because a little over 1,000 people stole an Election and the Courts didn’t have the Balls to even look at the obvious evidence of a Coup via Election Fraud. Incredible! Everyone with a brain is moving to the South. In all likelihood the South will rise again, but it will be an America First REPUBLICAN South! I don\t know what will happen to the Northeast and West Coast, and frankly, “I don’t give a Damn.”

Ronnie
Ronnie
13 days ago
Reply to  GuvGeek

Hopefully I’m dead before it happens. I’m getting too old to think about moving. Well at least I’m in a red county and can probably die peacefully.

GuvGeek
GuvGeek
13 days ago
Reply to  Ronnie

I retired to a Red State surrounded by Red States for a reason. When 0bama won in 2012, I knew America was in trouble. Unfortunately, my youngest daughter is talking about moving overseas like her older sister after college. My children are dual citizens and have that option.