The market response to the announcement of a possible vaccine has been historic. While stocks have generally risen, commodities such as gold have fallen. In its perfect fundamental logic, cryptos such as Bitcoin (BTC) remained in between stocks and precious metals. The continuation of a strong economic risk in the coming months could accentuate the risks of readjustments in the markets.
Cryptos assert their independence
An unprecedented historical context
This situation of extreme financial (and soon economic) readjustments implies decisive market movements. The last few weeks have probably opened the trend until the end of the year. So far, the youth of cryptos in the financial landscape exposes them to an unprecedented situation. We will focus here mainly on Bitcoin to decipher the latest market movements.
For the moment, the weekly trend on Bitcoin for example remains strong. The risk would essentially be on the daily trend for February. The fact that Bitcoin seems to be slowing its ascent at the moment is for example encouraged by the presence of the July 2019 resistance on the MACD. Once again, the risk that prevails over the price of Bitcoin is not an easing of economic tensions, nor a better growth outlook, but a liquidity effect as was the case in early 2020.
Since the beginning of November, the equity market has clearly overvalued itself in a very short period of time. The announcement of the vaccine has caused a windfall effect for the next two to five years. Nevertheless, the economic threat is very real for the coming months, which the markets refuse to see for lack of economic news. These latter movements increase the risk of financial instability in the medium term because of distortions between short- and long-term expectations.
The coming months will be decisive
The graph below shows the seasonality of Bitcoin between 2016 and 2019. Although the study is effective over a short period of time, it gives a good overview of the most profitable periods for Bitcoin. Bitcoin generally benefits from the spring and a little less from the fall. Conversely, the months of January, September or March are rather correction months for Bitcoin.
November is often a month with two extremes: a strong rise or a fairly strong fall. This is not quite the case in December: strong increase or weak decrease. The prices could thus enter a consolidation phase - with a bullish basis - in the coming months.
Between gold and equities
In their economic definition, it would seem that cryptos are halfway between equities and precious metals. Cryptos are too secure to be stocks and too innovative to be precious metals. They respond to an economic scheme that is millennia old in the History of Civilizations, with the difference that the intensity of the scheme is at odds with History itself.
Gold does not resist the easing of economic risk, which often benefits stocks at the beginning of a bull cycle. Between the two, cryptos show notable consistency. So far, cryptos have benefited from a double fundamental effect:
- A secure demand against traditional currencies;
- A demand for innovation (democratization as with PayPal).
The fact that the security demand has stopped with the announcement of the vaccine implies a structural upward slowdown on cryptos; without changing the trend.
The risk therefore remains essentially that of seeing a decrease in demand for innovation due, for example, to a possible stock correction in the winter. In any case, while equities are often still losing out in 2020 and gold is up by a third, Bitcoin has more than doubled since January 1. This crisis has provoked fundamental economic trends in favor of industries such as the cryptomoney industry.
The cryptos industry sacred to the economy
The enthronement of a new phase of innovation
Faster discovery of a possible vaccine also accelerates the prospects for recovery. Nevertheless, the prospects for technological transition are well amplified.
The capitalization of Bitcoin is approximately $280 billion for the beginning of November 2020, compared to nearly $50 billion for ETH, more than $16 billion for Thether and more than $10 billion for ripple. These 4 first cryptos alone represent more than $350bn at the beginning of November 2020. For comparison, the capitalization of the BTC was around $75bn exactly two years ago before the lowest point of $59bn in February 2019. This capitalization was $15 billion in December 2016.
For comparison, Bitcoin represented 0.6% of French GDP at the end of 2016. This is nearly 13% today. We arrive at this observation of the Creative Destruction of Schumpeter. The major revolutions were those of steam (trains, mechanical work, etc...), oil and electricity (cars, cinema, etc...) and finally computing (internet, equipment and now artificial intelligence and cryptos). Cryptos are a derivative of the end of Schumpeter's long innovation cycle.
Each new long innovation benefits from the decline of the previous long innovation. When, for example, oil and electricity have almost completely replaced steam. During this transition phase, the nascent technology feeds on the previous one, increasing average productivity, growth, and standard of living. The fact that technologies such as AI or cryptos will become a source of gradual economic growth over the next 10 to 20 years confirms the fact that cryptos are currently in the process of moving beyond the financial stage.
The 2020s will be decisive for the economic importance of cryptos. We are on key levels in the history of economic innovation. Although cryptos are still far from being capitalized at the top of the innovation cycle (Apple, Amazon, etc...), or even far from being valued at several trillions of dollars in gold, they are slowly asserting themselves in the economic landscape. When a technology begins to weigh more than ten percent of an economy, there is little chance that the resulting dynamic process will be stopped.
Vaccine will not save the economy!
In a more current approach to the economic situation, the vaccine will not eliminate the health threat for another six months. If to this economic health threat we add the (cumulative) risk of indebtedness, unemployment, bankruptcies, a significant drop in investments, etc... It is obvious that the crisis, even with vaccine, is not and will not be over. We have at least until 2022 to see a real relaxation of economic risk.
The technological transition is not hindered by the announcement of a vaccine, quite the contrary. Economic agents have become more quickly familiar with these technologies, which have shown their effectiveness against purely human risks (pandemics, wars, etc.). The arrival of a possible vaccine will have a real impact on economic risk from the second half of 2021 (if ideally disseminated).
Another aspect that needs to be grasped is that the end of the health risk that is approaching in the coming months will cause an intensification of risks of the budgetary type. The fact that public revenue is highly dependent on debt, and that debt service increases in the long term (and not the debt burden!), will be factors that intensify the institutional (and therefore monetary) risk that peaks in 2021/2022. Monetary risk, even implicit, from which currency cryptos would greatly benefit.
Long-term structural signs, such as financial stress, show that this crisis, which is not over, will largely benefit new technologies. The presence of a strong systemic risk in the coming decades will also amplify the long-term upward potential of cryptos. All the manifestations of institutional risk in the history of a civilization have been periods of intense readjustment that have created strategic long-term opportunities.
The announcement of a possible vaccine was a psychological, but not an economic, breakthrough. Precious metals were impacted, unlike stocks. For their part, in total respect of their fundamentals, cryptos remain stable. This could foreshadow the global trend of the coming weeks. However, the fact that the economy is leading the stock market in the medium term structurally increases the risk of a correction once the upward movement in equities is over.
Beyond this risky phase, the announcement of a possible vaccine even tends to increase institutional risk, which should be largely beneficial to the security interest of investors; added to the global private recovery. In other words, the gradual emergence from the crisis should accelerate the trends observed in most cryptos.
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