The Coming Crash
Global markets will likely crash in the next ~2 months, and how I believe Bitcoin & crypto will be affected.
1. Unemployment Benefits Ending
Enhanced unemployed benefits for ~14m+ (in US alone) are scheduled to end completely by Sept. (~10 states have ended early).
Transfer payments are a big component of 'CARES' act that helped boost incomes above normal levels since the pandemic.
2. Rent Eviction Moratoriums, Mortgage Forbearance, Student Loans Deferment Periods, etc
Along with the phase out of Enhanced UI benefits / PUA, we have a number of factors on the opposite side of the equation that will increase expenses / debt payments for millions.
3. These factors will act as a headwind, preventing capital from finding its way into many parts of the economy.
Higher Expenses (debt payments) = Credit Contraction = Currency Destruction (i.e. less discretionary spending for risk-on assets) / Lower Inflation
4. Delta Cases as a Black Swan
COVID 'Delta' variant case numbers have thus far been hidden under 'normal' COVID cases (hiding their increase).
The 'Delta' strain is also much more contagious, & could be novel enough to exhibit resiliency against readily available vaccinations in some cases.
5. Housing Market Topping ?
a.) Home buyer sentiment (leading indicator) - hits all time low, even as incomes risk. What will happen when incomes fall off a cliff in Sept?
b.) Weeks of work needed to buy median home reaches near record high - Levels not seen since 2008 GFC.
6. Leverage Near All-Time Highs
Traders borrowing funds that they do not own (margin credit), to purchase speculative assets in hopes that they will continue to go up forever is at record levels.
More margin / leverage = more volatile swings as pressure mounts
7. Brokers & Exchanges assign 'buying / leverage' power based on current value of the underlying held account assets.
This is great when said underlying assets continue to go up (more margin is allowed as collateral value increases) - when this reverts, the opposite occurs.
8. Bond Market Bullish & Lower Yields
When financial conditions get tight, yields head lower (as demand for credit decreases) - therefore, when yields lower, equities soon follow.
9. High-Spec Retail Saturated Meme Stocks Topping
One of the most relatable signs of the current reflation trade has been signature 'Meme' stocks such as Gamestop (GME) & AMC.
One thing is easily identifiable : Everyone in retail who 'wanted a piece', has already had a chance.
Typically higher beta meme stocks retrace first, prior to ultimate ‘ bubble pop ’.
As is the case with the current extremes represented in the stock market bubble, ' meme ‘ stocks also encompass names such as Tesla (TSLA).
This is important, as when we look back in history to prior bubbles that had also experienced such a degree of extension, we too see tech stocks bubbling & popping prior to names held more broadly in a given index. See ‘RCA’ stock (1929), ‘Pets.com’ (1999 - 2000).
10. High-Spec Retail Saturated Cryptos Reverting
Alts, especially hype driven 'retail friendly' alts, love to revert to their prior break-out points post hype cycle. Typically this means a complete cycle retrace.
One look at the charts on many, and it's clear to see.
11. How Will $BTC / Alts be affected ?
A relevant comparison could be the March '20 COVID crash - a margin-driven liquidity evt. affecting markets.
One pro in crypto's corner : A ~50% haircut from ATH's has already taken place, so further selling could be muted below $30k.
Ideal scenario would be to see volume trend increase while price decrease, showing trend of increasing demand as price trends lower.
With that said however, it is not unreasonable to assume aforementioned high-spec retail driven 'meme' altcoins to suffer most dramatic volatility during any market event.
$BTC could fair best (ala March '20), rallying off oversold levels - potentially providing an entry of a lifetime.
12. Conclusion
Many believe inflation (on assets, goods & services) is here to stay, at least in short-term.
The data shows this likely not to be the case.
$BTC & Crypto more broadly could take a brief hit in this scenario, but selling pressure could be muted as many coins are well off their highs.
For further thoughts, feel free to follow me on Twitter @godeLives , where I post short-form on subjects related to crypto, markets and psychology. For further discussion outside of this substack, join us over at @TheCryptoStudy discord.