A Wave of Positivity Washes Over Crypto
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| By Juan Villaverde & Alex Benfield |
After the 2008 financial crisis, Beijing cranked up its money printing game to stimulate growth. It was like the proverbial money tree we all wish we had, right up until the reality of excessive borrowing came home to roost.
Now, the yuan's the one taking the hit, adjusting against the U.S. dollar like an underpaid intern asked to work overtime.
After a glorious uphill hike against the dollar since last November, the yuan tripped and tumbled down over 7% year to date. Although some might see this as a positive — since a weak yuan could pump up China’s export-driven economy — Xi Jinping and his posse aren’t cheering.
You see, Xi envisions the yuan flexing its muscles against the U.S. dollar. So much so that he's rearranged the seating chart at the Bank of China to make room for his cronies.
And why does this matter to you, you ask? Well, China's habit of injecting liquidity has been one of the main gears keeping global asset prices chugging along.
If that gear grinds to a halt … our asset-value joyride might start feeling some bumps.
But hold your horses. This doesn't mean your assets are going to tumble down a ravine. We're just hitting a rough patch on our journey from a declining to a rising global liquidity environment that began late 2022.
A little pause — like the ones at the top of a roller-coaster ride — is expected. But the duration of this thrill ride depends on how the U.S. and China play their cards.
Rumor has it that a backstage deal might make the U.S. dollar take a dive, letting the yuan strut around like a champ. This would be Beijing's cue to turn on the liquidity tap again.
Given its sky-high debt levels, China, much like the West, isn't thrilled about a strong currency. If the yuan and dollar both decided to take a synchronized dive, we'd still see rising asset prices — good news for the now rising crypto bull market.
However, the problem child in this scenario is currency volatility popping in like an uninvited guest and forcing everyone into defense mode. That’s because currency volatility can have devastating economic consequences such as companies withdrawing their operations and investments in a country if it is deemed too risky to trade with, leading to fewer jobs and opportunities.
Looking at the bigger picture, this yuan-defense saga is probably just a miniseries in the grand scheme of things.
In a few weeks or months, Beijing might switch back to their old “money for everyone” policy. This will likely send asset prices — especially crypto — on another skyward journey.
Now, let’s check in with Alex to get a better idea of what exactly has contributed to the recent surge in crypto.
In the world of finance, the U.S. dollar still reigns supreme.
However, as 2023 progresses, the U.S. Dollar Index — a gauge of the greenback's value against a basket of other currencies — is on a downward trajectory. After some erratic movements earlier in the year, the DXY has been in retreat since June and has now slipped below the crucial 100 mark.
The dollar's dwindling strength might account for some of the recent fluctuations in asset markets, but it's not the sole factor.
Specifically, these three elements have played a role in the recent crypto rally: Inflation has been decreasing, interest rate hikes have slowed and there's been a perceptible shift in sentiment regarding regulations.
In fact, Bitcoin (BTC, “A-”) finally crossed back above $31,000 this week, igniting enthusiasm among investors. If BTC can hold above $31,000 for a few more days, then this rally’s next stop is $36,000, with $40,000 potentially in the cards in the near future.
Market sentiment hasn’t been this upbeat in well over a year. So, what's behind this newfound optimism?
The buzzword of the week is undoubtedly Ripple (XRP, “B-”). Yesterday’s verdict in the Ripple versus Securities and Exchange Commission case made headlines, with the court ruling in Ripple's favor.
The ruling states that Ripple’s digital token XRP is not a security, and that Ripple did not breach securities sale laws. This ruling provided some much-needed clarity, assuaging investor concerns over the potential classification of various cryptocurrencies as securities.
However, this is not just about one company's victory; it's about the ripple effects (no pun intended) this ruling could have on the broader crypto industry.
The ruling effectively challenges the SEC's stance on cryptocurrencies and may make it harder for it to win similar cases in the future.
I mean, if I were one of the lawyers at Coinbase, I certainly would have been celebrating last night. A decision like this is a significant aid in their case against the SEC.
In essence, this landmark ruling has set a legal precedent that provides a blueprint for other cryptocurrency companies to defend their tokens against security classification. This could potentially open the doors for increased innovation and growth in the sector, allowing crypto companies to operate with greater confidence and less regulatory uncertainty.
While we cannot underestimate the potential for appeal, the ruling certainly contributes to the wave of positivity washing over the crypto industry. It has helped to redraw the regulatory landscape, turning it into a more hospitable environment for crypto firms.
This, along with falling inflation, slowing interest rate hikes and a weakening dollar, could create a potent mix that propels crypto prices even higher in the near term.
The era of crypto is upon us, and it's gaining ground faster than ever.
Best,
Juan & Alex
