Back to the list

Kill Shot For The Stocks Or Lifeline For The Crypto: The Fed Dilemma

Anastasia Ermolaeva

2018 was marked by the crypto market fully controlled by bears. This year’s final note in the bearish symphony turned out to be the last two months when over $100B has left the market, pushing its capitalisation down to less than $110B, returning the crypto community to the early August of 2017. This recent decline knockdowned many investors who being led by the panic disposed of their remaining digital assets. The rest of the community is questioning whether it is the beginning of the definitive end or there is still any hope for the bright future. Well, the incumbent economy is trying to give signals that maybe we all should listen to.

The stock market is performing the worst December in the last 16 years. Since the beginning of the month the S&P 500 has fallen 7.945% and there are no signs it can redeem itself by the end of the year as on Monday it dropped again by 1.09%. 104 companies of the S&P 500 reported their earnings-per-share guidance for the fourth quarter of 2018 and 69% of them were negative in comparison with the previous quarter’s indicator when 77% were positive. What is more, business is lowering estimations of the earnings growth rate for Q4 2018 by 3.3% to 13.4% comparing to estimations of September 30. On the one hand, business is trying to have a bigger opportunity to beat forecasts by their actual performance so that it can support the declining market or at least prevent it from even a greater crash. On the other hand lowering estimations is just another indication that things are not going well.

The majority of the investors in the S&P 500 shares is the Wall Street, that cannot but get concerned about the current state of the stock market and thus they may start to consider crypto assets as subjects of their investments and begin to transfer their capital to them, which could be one of the reasons for the recent digital market drop so that they could purchase digital assets at low prices.

As for the bond market in particular, on the first week of December the U.S. Treasury yield curve inverted. What does it mean and how does it affect the economy? Well, it means that long-term debt instruments such as 30-year Treasuries are generating lower yields than short-term ones of the same credit quality. Normally yields are higher on the securities with longer maturity dates as changes of securities value and interest rates are less predictable over the long term and investors are optimistic about the nearest future and prefer to make profits via shorter-term assets.

However, when they are more willing to lock in their money in longer-term bonds, which increases the demand for them, triggers price growth, subsequently lowers yields as well as inverts the curve, it could be seen as a predictor of an upcoming economic recession just like in 2000 when the yield curve inverted and the US equity market collapsed. History tends to repeat itself and therefore crypto assets, which are not that tightly correlated with the traditional economic sector, could become an alternative option as investment subject.

Moreover, on the upcoming Wednesday Fed may raise the federal funds rate by another 0.25% for the fourth time this year and the following events may take one of two courses, in each of them there will be someone disgruntled. The rate hike may lead to the US dollar getting even stronger, which will make instruments nominated in dollars more attractive and increase the cost of state debts nominated in the American currency as well as trade liabilities, which will eventually provoke a drop of other fiat currencies, highly dependant on dollars due to tight business relationships with the US. However, considering there is no overheating of the US economy right now, the rate hike may cause the drop of the US dollar, which will bring down the already bearish stock market even more greatly and thus cause the beginning of the financial crisis. Therefore there were reports that Fed could take a new wait-and-see approach instead of raising the rate.

Taking into account that this news brought up the Dow Jones Industrial Average by more than 700 points in the last hour of trading on the 6th of December, there is a high possibility that the stock market may fall in case of the Fed sticking to its initial plans, which will make investors to look for other investment opportunities and find them in the crypto space.

If the first scenario works out, other countries and their companies will strive to decrease their dependence on the American currency, which remains the main international reserve currency, makes up to 64% of all central bank foreign exchange reserves and in 2018 has represented close to 90% of the daily trading volume with an average turnover of $4,500B. Moreover, the countries, that are under the US sanctions, are trying to implement this dedolarrization strategy by concluding trading contracts and proceeding them in national currencies instead of the dollar. Russia has been making these attempts with Latin America while Iran has succeeded in banning the American fiat from its oil contracts with India. Nevertheless, these deals are single successful cases and the Washington sanctions still take away a lot of economic opportunities from their targets. While national currencies are not that attractive to trading partners and not able to shatter the US power, digital currencies may become the solution for the dedollarization of the world business and trade.

Finally, global payments via the SWIFT international system are relatively efficient only in countries with developed networks of banks-correspondents, while in regions like Africa transactions can be proceeded for days and imposed with high fees, while payments via blockchain with virtual currencies can reach these isolated from the world financial system regions way faster and not cost a fortune. Considering all these global needs for digital currencies to be implemented and widely spread, we may hope that crypto will not go anywhere and bears will have to give way to bulls.

Back to the list