It has been an interesting few weeks in crypto-land. We have seen new highs, quick drops, a rise in bitcoin of $1000 in less than an hour, followed by another drop (but overall momentum is still heading up).
Crypto has even made political news, with the first time a sitting US president has ever mentioned bitcoin. It comes as no surprise to many long-term crypto enthusiasts that Mister Drumpf is not a fan of bitcoin; especially as it could possibly displace the US dollar and become a new settlement currency for many nations.
We have also seen US Congress present Facebook and Mister Zuckerberg with a “cease and desist” order against his proposed Libra cryptocurrency, before the project even has a single user. Like bitcoin, Libra could also be possibly used as a worldwide settlement currency, and the primacy of the USD could be threatened.
For those watching the broader economic markets, it paints an interesting picture. We have literally seen things which have never occurred before.
For hundreds of years of recorded history, there have been patterns in world economies. When there is war or rumours of war, or ‘bad’ economic data, this news tends to push defensive assets up and stock markets down. For example, the war in Vietnam, war in the Gulf and the 2001 “War on Terror” saw stock markets go down whilst bonds and property prices went up.
When times were peaceful and economic news was ‘good’, bonds and properties relaxed or stagnated, and stock markets surged ahead. It has been thus for centuries.
Traditionally a defensive asset and a hedge against inflation, precious metals such as gold and silver were among those assets which rose in ‘bad’ times and sank when the stock market rose. Watching the broader markets, it was like a see-saw: stocks down, property up; stocks up, gold down.
This is not real, this is not really happening…
Tori Amos’ words from “Cornflake Girl” sprang to mind when we saw, for the first time, gold hit an all-time-high of $2000 per ounce. “This is not real, this is not really happening…” How could gold reach an all-time-high while stock markets were surging? Bitcoin hit new highs, as did stocks, as did gold, and property as well. It was unprecedented.
There could only be one explanation; and although it could be good news for crypto, it was not reassuring news for world economies.
Since 1945, the USD has become the favoured currency for all international settlements. Gold was priced in USD, as was oil, as were all world currencies. Anyone from any country wishing to buy gold, oil or other commodities, first had to purchase the USD, and then use this to purchase the final asset. This helped to prop up the value of the US dollar, regardless of how the US economy was performing for the past 70+ years.
Most people who travel are used to changing local currency to destination currency, but many are not aware that your Australian or Canadian dollars are first converted to USD, and then the USD is converted to Thai Baht or Indonesian Rupiah. This “middle step” seems unnecessary but it has been hugely beneficial to the US economy for almost a century.
What happens if the USD falls?
Considering that most assets are priced in US dollars, it can be almost impossible to see a fall before it occurs, and difficult to see a fall whilst it’s happening, or recognise it after it has happened. The USD is like the wind: you can mostly recognise it by what it affects.
Understand that when defensive assets like gold or bitcoin are up at the same time as forward-looking instruments like the stock market, this is your #1 contrarian red flag. When all around you seems to be getting larger, it could be an indication that you are shrinking.
Your #2 red flag is when you see other obscure currencies seeming to strengthen against the USD. In July the Japanese yen rose at the same time as the Indonesian rupiah. This was not because those heavily-indebted countries with their hundreds-to-one ratio currencies were all of a sudden doing something terrific with their economies…
Even the beleaguered Mexican Peso seemed to rise, from $0.50 in June to $0.53 by July. You can pretty well guarantee that this is not because of anything which Mexico did to dramatically improve their economy by 6% in a month.
All of the above currencies, like gold and bitcoin, are measured in US dollars. So if the US dollar was in fact falling, one would expect to see other currencies rise, comparatively. This is, in fact, happening.
“Pass the Parcel” versus “Hot Potato”
In the child’s game of “Pass the Parcel”, whoever has the parcel at the end of the game is usually the winner. Compare that to the game of “Hot Potato” or “Old Maid”, where the player who ends up with the named item at the end, is always the loser. What would you expect to see if the USD was now the infamous “Hot Potato”? People would be passing the thing away as quickly as it came, and seeking to hold almost anything except the dreaded item.
We have seen investment assets rise in price “across the board” for possibly the first time in living memory. This is one possible indication that investors are ditching their dollars and accumulating anything that is not a dollar (stocks, gold, bitcoin, property and so on).
Investors have ditched cash to buy stocks. Cashed-up companies have offloaded their chequebooks to buy back their own stock, or considered buying other companies in aggressive takeover bids. It’s almost like investors and CEO’s alike, want anything except “the Benjamins”.
We have seen obscure currencies from indebted countries rising for no apparent reason, other than that they are measured in USD. This is another indication that the USD is shrinking.
Gold prices have hit historical record highs in Australia ($2000/oz) and the highest levels against the USD since the infamous GFC threatened to shutter many of the banks in USA and Europe. This is good news for goldbugs and bad news for the USD outlook.
The US Congress has threatened legal action against an alternative currency (Facebook’s Libra), and the US president has publicly declared bitcoin to be an enemy of the people. These are further indications that the USD is feeling downward pressure or facing irrelevancy.
The good news is, there are plenty of other places to invest.
There is always a “boom” on, somewhere…
It has been true for most of world history: when stocks go south for the winter, property and bonds go up; and vice versa. During the GFC when the western economies almost came to a shuddering stop, the Chinese economy soared. In economics, as in life, what is bad news for some is excellent news for others.
When we see many indicators that the US economy may be in trouble (again) and the US dollar is facing downward pressure, the wise investors do not panic. We merely look for alternatives.
Who would benefit if the US economy slowed down and the USD fell? The answers to these questions could well be: a) China, and other emerging economies, and b) bitcoin.
Although the Chinese government has banned bitcoin on almost 2000 separate occasions, last month they finally and formally recognised bitcoin as an asset. Yes, this may mean that the Chinese government wishes to make bitcoin taxable and trackable, sure, but the formal recognition brings a degree of respectability to a currency which has often been seen as a tool used by rebels, nerds or criminals.
It is of interest to note that the USD is used in more crimes than cryptocurrency (by a factor of around 80 000%), and on the day when Donald Trump tweeted his dislike for bitcoin, investors bought more BTC, pushing the price up even higher.
Stay woke, fam…
The kids on the street say “Stay Woke”, as in “stay aware”; we suggest staying aware of broader markets. Don’t just watch the daily price of bitcoin and crypto, as you may miss the bigger pictures (plural). One picture is that, despite a rise of $1000 in an hour, or a drop of $500 tomorrow, bitcoin is still up massively from last year, up over the last three years and massively up on the last decade.
Another picture is that there are multiple markets in many countries, and when you stand back from the singular charts and local static, you may see widespread patterns emerging.
We at Boston Trading foresee a day when international money transfers or settlements are completed without a US dollar. They may be completed in bitcoin, or it may be Libra, or it may be another cryptocurrency. We do not have crystal balls and we cannot predict the future ‘exactly’, but what we can foresee, is making us want to exit the USD and embrace more cryptos. We look forward to seeing you on the journey with us.
Winners this month in the crypto space:
Binance Coin up 250%
Basic Attention Token 123%
Snagride up 278%
Chainlink up 212%
BostonCoin price at 30/07/2019 30.1307981 NAV 27.3916346
We have also been investing into a new coin, CEL, from Celsius Network. Expect to see a new Cryllionaire Chat on Youtube about this exciting project in the next week or two. ###
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