Crypto: A Look At Where Demand Is Hiding

The bloom is off the crypto rose.  People, like comedian John Oliver are taking shots at bitcoin. Even JP Morgan Chairman Jamie Dimon’s dire bitcoin predictions don’t seem so ridiculous any longer.  It is a safe bet to state that confidence in crypto is about as low as it has been in quite a long time.

With this in mind, I recently suggested that a V shaped price recovery was unlikely and that the three problems that stood in the way of higher prices were the obvious: the threat of restrictive government regulation, poor security and transaction speeds bordering on snail speed.  Yet as critical as these are to rebuilding investor confidence, each of issues has a solution – it’s just going to take time.

But what’s a hungry investor to do in the meantime?

Inflation and Uncertainty: The Perfect Storm

By time, we aren’t talking about a few days, it could be many days and months, maybe even longer.   But what if some powerful external force caused a change in investor mindset that sent demand for crypto heading higher once again?

What we are talking about is the fear of significantly higher inflation where investors turn to bitcoin, ether, Ripple and other altcoins as a storehouse of value.  Does this sound far fetched? Not really when if you consider the following.

The Dow Jones Industrials at about 24,700 is near it’s all time high of 26,616.  Stocks are fully valued. There is no disagreement. The pull back in prices since January relates to higher interest rates as inflation is now running ahead of the 2% target set by the Fed.

The Fed’s job is to use monetary policy to manage inflation and balance that against economic growth.  This is easier said than done. It took nearly a decade of Quantitative Easing and more than $3.7 trillion to raise inflation from zero to 2%.  Signs now suggest that Quantitative Easing went to far. That would be something of a perfect storm for crypto. That’s the message from the CNBC Fed Survey for March. The average forecast sees the yield on the 10-year benchmark Treasury ending the year at 3.17% and rising to 3.54% by next year. Quoting Peter Tanous, Chairman of Lynx Investment Advisory: “When the 10-Year goes above 3%, we’ll finally realize the enormous burden we face servicing the national debt”.

Anything like a 3.5% rate on the 10-Year Note implies that inflation is running more than 50% above target levels.  That isn’t the end of the world but it dramatically changes the nature of Fed policy compared to anytime in the last decade.

Potential Trade Wars Create Uncertainty

In the event of a trade war, would you rather own dollars, euros, yen of some other asset? That is a trick question. There is no right answer because a trade war would create loads of fear and that sends investors searching for safe havens: perhaps gold or something else, crypto currencies.

Here is a caveat.  Considering the source of the tariffs on aluminum and steel came from POTUS and we understand the nature of his negotiating style, the prospect of a real trade war is less than it may appear.  Nevertheless, POTUS is the uncertainty and uncertainty will send investors searching for safety in their investments.

Storehouse of Value

The picture that is emerging is one of greater monetary uncertainty than anytime in recent years.  Usually this means good things for the price of gold. At the time of this writing, gold was trading at $1310.50 which is below the 2011 peak of $1831.  So gold bugs can argue with authority of golds virtues.

But when investors are looking for a storehouse of value which offers the greater value, a shiny asset that is down 28% from it’s all time high or an asset that is less proven and more speculative but down over 60%?  

The odds favor gold but that doesn’t mean investors in bitcoin and altcoins will be left out.

Conventional thinking calls for the definition of a storehouse of value to include adjectives like stable and predictable.  Clearly cryptocurrencies don’t yet match that description. So after the collapse of prices, it might be better to describe crypto as a reservoir of value where during periods of heightened uncertainty, investors will want to store their assets. By itself, this could be an important key to the current crypto price puzzle.

 Featured image courtesy of Shutterstock.

James Waggoner is a veteran Wall Street analyst and hedge fund manager who has spent the past few years researching the fintech possibilities of cryptocurrencies. He has a special passion for writing about the future of crypto.