Within the author's column, Alexei Voronin, the founder of the SmartValley decentralized scoring platform, discusses the looming monetary supercrisis and the special role of cryptocurrencies in it.
Earlier this year, Bitcoin collapsed into a protracted correction of 70 percent of its peak, and its recovery is significantly delayed, generating new panic attacks in each regular strait below $6,000. Things stand even worse with altcoins, as according to Bloomberg, they fell even more, and about 70 percent of them lost more than 90 percent of their value. In this situation of strategic uncertainty, every active participant of the crypto market is trying to understand and predict what will happen next.
In proposing my analysis of the future development of events regarding the rate of Bitcoin, I proceed from the fact that the causes and logic of what is happening (including in the crypto economy) should be sought on the maximally-general control loop that the American economy is for the world, and the U.S. "today is the only superpower in the world," as Vladimir Putin said. In this context, the crypto market is a subculture, although specific, but completely dependent on the logic of the trends emerging at the level of global macroeconomics.
View of the Current Situation from Macroeconomic Heights
The "paradise" in the financial markets ended approximately in early 2018, when the QT (quantitative tightening) program was launched to reduce the balance of the Fed. The giant liquidity-sucking pump lead to a consistent devaluation of all peripheral currencies, including cryptocurrencies.
For several months now, the dollar has been growing relative to all currencies, because the U.S. literally vacuums it from around the world, regularly raising the rate of the Fed and not allowing the recalculation of previous loans. All of this fiat automatically becomes cheaper under the pressure of a huge amount of debts from commercial banks in dollars. Because of the constant outflow of capital and the lack of reserves, it becomes increasingly difficult for nationals to repay debts to their foreign partners in dollars.
Following the results of the first half of 2018, the U.S. dollar grew against all currencies of the world. To some it grew by a few percent, and to some others it just "routed" by tens of percents (the Turkish currency, for example). It is not necessary to think that the crypto economy is an island of crypto anarchists isolated from the world economy, which these powerful turbulent currents do not affect in any way.
It gets better, as this week the U.S. regulator withdrew another $10 billion from the system. The balance of the Federal Reserve is now $4.3 trillion, which is almost $200 billion less than peak values. That is, the amount of available liquidity in the system is rapidly falling and we get a credit squeeze. But the most frightening thing is that starting from July, the Fed will withdraw even more from the system at $40 billion a month. That is, every month the Fed will squeeze more money from the market than its counterpart, the European Central Bank, pours in during the same period (30 billion euros), thereby stopping any increase in liquidity even in related currency segments. As a result, "free" money will vanish in circulation, many banks and markets are beginning to choke, and the situation is turning into an increasingly stormy one.
How specifically does this affect the stock markets? For the seventh session in a row, the Dow Jones index closed under the minus sign. Recently, the index of the 30 American blue chips looks clearly weaker than other "colleagues" in the shop (S&P 500, Nasdaq, and Russell). Growth on stock exchanges in the U.S. is no longer a broad front and is gradually fading, as there are more and more indicators that the bull market, which had originated in March 2009, is coming to an end, and doomsday is ahead.
The "Hour X" Is Nigh
When the Fed starts to suffocate from rising interest rates and the first institutions fall under the influence of this accelerating pump (for example, Deutsche Bank has the greatest chance of repeating the "success" of Lehman Brothers), then people will start to leave the falling stock market (and not only it). The names of the victims may vary, but the fact that the QT deflationary spiral will eventually overwhelm some of the super large players from the "to big to fail" category is 100 percent, in my opinion.
And it is this X hour that will witness a dramatic outcome and we will see whether Bitcoin can seize the initiative at this moment of panic and become the protective asset for investors fleeing the burning stock market. Or is Bitcoin the same peripheral currency as the Turkish lira, the Russian ruble, or the Brazilian real, which is destined to be the first to burn in the flames of this world crisis?
And this is the key issue of the entire layout. With the current situation, everything is more or less clear, as Bitcoin is behaving like an ordinary peripheral currency, which is moderately weakened by the American vacuum cleaner. There are no more dollars in the market (for the growth of the cryptocurrency market), which is confirmed by other subtle indicators, indicating a growing collateral on debt in the world banking system.
So, what will explode faster with such a controversial policy, the stock market or the U.S. public debt that is increasingly expensive to maintain? And when something of this sort happens, where will the multibillion capitals rush to seek refuge in our epoch of digital postmodern? Both of these questions are not idle at all. Therefore, when the point of final deformation of the market due to the work of the Fed vacuum cleaner will be achieved, everything can instantly change. This will be the moment of truth for Bitcoin, gold, and others which of them will take the role of a defensive asset in the 21st century?
Cryptocurrency as a Possible Way Out
The well-known American politician Ron Paul, who ran for the presidency of the United States in 1988, made a sensational statement a few days ago. He suggested that the United States should consider the possibility of replacing the dollar with a combination of two assets in the form of gold and cryptocurrencies. He is going to create a lobby to promote this idea in the U.S. government.
According to the politician, he is seriously considering an alternative to the U.S. dollar. And the scenario for replacing this asset with gold and cryptocurrencies, he said, is quite likely. This will eliminate the shortcomings of the current U.S. financial model, which is gradually coming to a standstill. In addition, the politician accuses certain officials and large corporations of creating a catastrophic situation and sees the current independence of Bitcoin as a guarantee of preventing such a crisis situation in the future.
More recently, Steve Bannon, a former adviser to the U.S. president, a representative of the Republican party in the White House, an influential U.S. politician, and multimillionaire, also announced the creation of a fundamentally new cryptocurrency as a direct competitor to the dollar for approximately the same reasons.
The epidemic of related ideas for the coverage of fiat money by cryptocurrency assets is already in the air in contrast to the rapidly-printed U.S. dollar, as many are proposing to do exactly the opposite, and Steve Bennon and Ron Paul are not the first on the matter.
The well-known millionaire and Bitcoin enthusiast John McAfee recently also announced the release of his own private fiat currency that will be backed by leading cryptocurrencies. He said this in his tweet, describing the main idea of his project as follows:
What's odd is that tomorrow night I am going to make an announcement of the new "McAfee Coin,” based on a radical new concept: fiat currencies (collectible) backed by crypto—the reverse of what banks are attempting. Seriously.
This repeats the ideas of Ron Paul, who is going to lobby for the release of a similar currency no longer as a private currency, but as a statewide American project.
In Brief Summary
To put an end to the fate of Bitcoin in the long run, you need to wait for the outcome of the accelerating monetary supercrisis, which will explode roughly in 2019 to 2020. It is then that the final fate of Bitcoin and the likes will be decided. In the meantime, Bitcoin is simply doomed to constant pressure on its rate (and a protracted flat at best), behaving like a typical peripheral currency of developing countries. Bolivar will not tolerate two. While the world has a strong dollar, the volatile and unpredictable Bitcoin will not be perceived as an equivalent to the dollar alternative, but only as a dubious refuge for the marginalized and the profiteers.
And only the finale of the grandiose monetary stalemate, into which the U.S. is peacefully leading the world, will show in the end who will win the jackpot in the form of a defensive asset status, whose price will grow by many hundreds of times.
Gentlemen, place your bets!