Cryptocurrencies

Understanding the crypto and Bitcoin (BTC) industry in the face of economic readjustments – Cryptocurrencies

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The next few years will mark profound economic readjustments. In reality, these readjustments are already noticeable, and the current fundamental reaction from cryptos and Bitcoin (BTC) gives a good glimpse of what may be in the coming years. There are clearly long-term signals: economic, monetary and financial. This article allows us to understand the economic place currently occupied by cryptocurrencies and the already perceptible links between economy and cryptos.


Major long-term signals

The crypto industry takes on a systemic scale

There are two currency revolutions going on today: the free money market and the lack of an institution. In 2018, the number of crypto users could be estimated at 35 million. It’s almost 100 million in the first half of 2020. In the meantime, Libra has passed. It provoked a backlash from governments, which suddenly decided to take the industry seriously. After the banks in 2017/2018, governments are taking a keen interest in cryptos. Simply because the industry raises systemic issues.

With hindsight, we realize that cryptos are a monetary advance at least equivalent to bills of exchange or banknotes. Could we even speculate by saying the parts. What could be “A new stage in the evolution of money” (IMF, August 2020) is becoming a reality.

Cryptos are inserting themselves into the daily landscape (Pay Pal, Banks, Investments, etc.) and are slowly taking on a systemic scale. Governments and central banks are trying to regain control 10 behind by trying to launch their own cryptos or by putting in place regulation. There is issues of economic sovereignty with the currently established systemic order.

Cryptos: an economic revolution?

There are two main economic revolutions in cryptos:

  • The first revolution ; we know it: the absence of law, strictly speaking, and therefore the absence of an institution with centralized power. As well as the absence of monetary degradation with the limit of the currency in circulation.
  • The second revolution economic ; it takes shape slowly and raises systemic issues: the free money market. Everyone can freely choose HIS own currency. It is a revolution for economic freedom (freedom which, let us remember, is directly threatened by monetary degradation in the extreme). It is a redesign of modern conceptions of the coinage state.

Therefore, two economic dynamics are to be distinguished:

  1. the growth of central monetary insecurity for the next few decades;
  2. the possibility of agents to choose their preferred currency.

We could make a comparison with many empires or city-states where monetary degradation has benefited underground currencies. (in historical response to central monetary degradation and to demographic, economic or social tensions). We only do repeat millennial historical figure version 2.0. The difference is the organized and structured nature of these currencies that make them direct competitors to institutional currencies.

Clear economic and financial fundamentals

Cryptos in general (especially the most important), react to fairly precise economic and financial logic. There is no reason why this should not be the case in the next dozen of months.

Bitcoin Dollar

The chart above shows Bitcoin with the financial stress index established by FRED (in blue). The chart shows that there is a good respondent of the price of BTC to liquidity / risk logic. This chart tends to show that Bitcoin starts a bullish rally after each financial stress easing. This was the case after the economic slowdown (decrease in growth rate) of 2015/2016, and again from the slowdown of 2018/2019, and partly after the less notable one of 2012/2013.

The current crisis has generated a historic increase in financial stress and is expected to imply the continuation of very high economic and financial stress until at least 2022. The more cumulative this risk, the greater the chances of a bullish rally in Bitcoin –in our example– will be important. It is a cyclical reaction of Bitcoin to economic and financial cycles.

Pandemic: an economic blessing for cryptos?

The current economic readjustments are not long term readjustments, but very long term ones. The magnitude of the current economic shock attests to this (2020 recession 4 to 5 times greater than that of 2009). Changes in economic stress (trust) and financial (mainly volatility) are of such magnitude that it can constitute a definitive signal on the cryptos. That is to say their insertion into the landscape not only financial, but economic.

Pub

Cryptoassets are highly volatile unregulated investment products. No EU investor protection. Your capital is at risk.

There is clearly a fundamental long and long term signal in cryptos. Cryptos have been the big winners in this first phase of the crisis, there is no reason why this should not be the case in the second phase of the crisis.

The advent of a new economic era

Future structural readjustments

By readjustments we mean all the economic rebalancing that may occur over a certain period: shift from disinflation to inflation, shift from lower rates to higher rates, shift from increasing corporate profitability to drop in profitability, shift from rising debt to falling debt, etc. Or vice versa.

The covid crisis implies such an intensification of the trends observed over the last 40 years that it is almost certain to see many readjustments coming out of this crisis. [Réajustements sur lesquels je suis revenus dans mes diverses publications].

Bank of England interest rate

This graph shows the Bank of England interest rate since 1694. The choice of rates in the representation of economic adjustment is important. For example, between 1945 and 1980, rates continued to rise, in parallel with inflation and the reverse of debt. Since 1980, we have seen an opposite balance. This makes it possible to highlight the unsustainability of the downward movement on rates without gradual economic tensions.. This is what further caused the spread of cryptocurrencies in the financial landscape. [voir mon article à ce sujet].

In the coming years we will certainly be faced with new economic trends. Central banks have seized it well. To avoid 0% growth and higher rates, central banks should maintain strong injections of liquidity. In doing so, they will systematically fuel immediate demand for cryptos (drop in velocity, drop in currencies, etc.). As well as long term demand (cumulative effect of budgetary constraints for States involving monetary tensions).

The advent of decentralization and AI thanks to cryptos?

Obviously, we are reaching the human limits of the knowledge economy. This suggests an increased demand for an extension of these limits: Artificial Intelligence. To this must be added the centralization of economic power that has manifested itself over the past 40 years, mainly for the benefit of states (and in part of companies). It’s a limit to economic growth. The resulting effect is that of need for decentralization and innovation. The cryptos meet economic demand for the next 15 to 20 years at least (more in monetary matters).

The need for decentralization, monetary security, and innovation is a component of the present and the future. This favors sectors like those of the Defi, whose total capitalization is increasing significantly in 2020. This translates more concretely into the rise in the price of pillar assets in the crypto industry such as Ethereum. This effect is global, which should greatly benefit the new world powers such as China by the 2030s.

We are already seeing this break in the rebound that followed the March stall. Bitcoin’s rebound is almost 90%, compared to more than 260% for ETH.

Cryptos did not appear by chance. They answer –in opposition to the current economic equilibrium– to needs characteristic of our time. Their inclusion in the economic process seems to be becoming a reality. Result of a democratization process: speculation, then financialization and economic “institutionalization”. The Covid crisis has revealed long-term trends ahead, which should greatly benefit the crypto industry at large.

Pub

Cryptoassets are highly volatile unregulated investment products. No EU investor protection. Your capital is at risk.

More than a financial issue, cryptos are slowly entering the crux of the matter: the economy. The fundamental economic developments to come will then have to be put into perspective with cryptos. Once again, cryptos are in keeping with a version 2.0 millennial historical figure: a reaction to abusive currency degradation and the resulting centralization of power.

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