Can Crypto Weather This Global Economic Storm?
|By Jurica Dujmovic
We're in the middle of a perfect storm.
Economic stagnation, rising costs of living and aggressive rate hikes are running amok, all while the U.S. dollar is wreaking havoc on currencies all around the world.
In this chaotic environment, investors are turning to crypto, often touted as a safe haven in times of crisis.
But has crypto truly earned this reputation, or is it going to be swept away with the rest of the global economy?
To answer this burning question, I spoke with Jake Boyle, Chief Commercial Officer of Caleb & Brown — a crypto brokerage that provides 24/7 access to personalized brokers.
Jurica Dujmovic: Jake, how bad is it?
Jake Boyle: It's not good. Geopolitical tensions and conflicts, in addition to a global pandemic, have given way to financial volatility that's forced the Federal Reserve's hand. Interest rate hikes are placing all participants in the U.S. economic system under pressure.
At a household level, inflation and increased rates are reducing spending power, while corporate America is seeing overheads rise through raw materials and debt-servicing costs, which are eating into profit margins.
This creates a vicious circle as households spend less with the companies that need increased demand to maintain their performance and thus investment appeal. Add in volatility, and the average U.S. investor is at a crossroads, with those outside the U.S. facing similar challenges, sometimes on a greater scale.
Jurica: How are rate hikes affecting the markets?
Jake: The Fed's one-track policy to ratchet up rates in the fight against inflation looks set to continue into next year. The resulting economic environment — also a factor of sociopolitical volatility and the financial fallout from the pandemic — is leaving households with less real spending power and businesses with rising costs.
Jurica: In these uncertain times, investors are asking what the best method is to weather the storm. Can crypto help? Are there any investment strategies you would recommend?
Jake: Crypto investment strategies present a strong case to help preserve capital, or at the very least, diminish its value destruction.
Positioning in yield-bearing investments can go some way to offsetting the inflation — exceeding 8% — which is eating away at cash reserves investors are holding. Buying and locking up your Ethereum (ETH, Tech/Adoption Grade "A") in the ETH network yields returns similar to dividend payouts.
Not only do the two biggest cryptocurrencies by market cap, ETH and Bitcoin (BTC, Tech/Adoption Grade "A-"), experience less volatility compared to other coins, but the two majors' issuance models can't be modified.
This translates to transparency and certainty of supply — exactly what investors crave in trying times. USD supply controls, however, are at the whim of central banks, so investors are exposed to unpredictable monetary policy, which can negatively impact the effectiveness of their investment strategy with little warning.
Jurica: You mentioned the U.S. dollar. It's undeniable that it's currently the strongest fiat currency in the world. Without a doubt, exposure to the currency is something all investors should do — crypto investors included. Can you elaborate?
Jake: Investors in countries experiencing higher inflation have flocked to the safe haven of the U.S. dollar. Crypto has provided an alternative and accessible route to do so via USD-backed stablecoins such as Tether (USDT) and USD Coin (USDC).
The greenback derives its strength from the U.S.' status as the world's largest economy and the fact that most global trade is denominated in U.S. dollars. As a result, storing value in U.S. dollars will better preserve wealth and spending power versus faster-inflating currencies, such as the euro and Great British pound.
The stablecoin equivalents are more accessible and are free from the currency controls that are placed on citizens trying to acquire fiat USD in nations such as Argentina.
Jurica: Finally, can crypto still be a safe harbor from inflation and other economic calamities facing the global economy?
Jake: Cryptocurrencies are often cited as inflation hedges. This includes BTC in particular, and, more recently, ETH, following the Merge. Their detachment from the traditional financial system means they can avoid central bank and government intervention.
Bitcoin has a deterministic supply schedule that caps the total supply of BTC at 21 million. The amount of Bitcoin introduced into circulation halves every four years and will do so until it reaches maximum supply. Therefore, over the long term, we can expect the asset's scarcity to influence its value more than traditional economic factors.
While most crypto assets have traded down this year, there have been exceptions where growth has prevailed. GMX (GMX, Unrated) and ApeCoin (APE, Unrated) are just two examples which show the innovative streak in crypto is very much alive despite the macroeconomic downturn and some of the malicious activity the crypto space has experienced over the past year.
Investing in crypto may be a prudent option for investors. Investors can sideline their excess funds and take positions in the two highest market cap cryptos, BTC and ETH, when they expect the bottom of the cycle. If they catch it, investors could reap significant rewards if all-time highs are seen again.
If these all-time highs are revisited, both BTC and ETH will have accrued returns in excess of 3.5 times today's prices.
However, catching the bottom is tough, even for the best investor. Enter dollar-cost averaging — a tried and tested strategy. By buying an asset on a fixed and regular basis, the impacts of asset price fluctuations are reduced.
As long as an investor has conviction that the asset will rise in value, this strategy will reward with less risk and less active management, without sacrificing too much upside.
Jurica: Thank you for this chat, Jake. You made some great points!
Jake: My pleasure.
There you have it.
As we all know by now, the current market situation globally isn't good. However, that doesn't mean there will be a lack of good profit opportunities for those shrewd and brave enough to recognize them.
One such opportunity is just around the corner — the big bottom in Bitcoin.
The big bottom, when it comes, is the only time in the four-year crypto cycle that investors can go for BOTH the most profit potential AND the least downside risk … at the same time!
So, which coins are candidates to be the biggest winners? And when exactly is the best time to buy them?
Keep checking in with us and we'll be sure to provide you with more information as it comes in.