Cryptos can’t seem to maintain upward momentum – despite a great fundamental outlook. The problem for cryptos is the macro environment – and potentially the biggest liquidity crisis since 2008.
We know – no one wants to hear it.
For the moment any upside for crypto is likely capped, and the downside could be substantial. The banking crisis that started last year was never solved, and it could be entering its acute phase as we write these words.
In short – cryptos and every other risk asset globally are staring into the abyss!
The real worry now is that liquidity is so strained after years of aggressive Central Bank policy that safe assets like government bonds are on the chopping block, and cryptos could see a huge downward move in the coming months.
Buckle up – this one could get nasty…
The Wave of Global Liquidity Ended
Inflation is a problem that never goes away. At least in the world of post gold-standard fiat currency. Central Banks want their product (money) to retain value for a little while longer – so rates have been elevated compared to recent history.
In fact, despite all the nice talk from Central Bankers, rates in the USA and UK are still on hold. The balance sheet at the FED is contracting, which makes global liquidity look strained. Crypto as an asset class are highly leveraged to global liquidity.
One place that rates moved up recently is Japan. For the first time in 17 years!
It wasn’t a big rate rise – Japan is currently charging 0.1% for money. Even with such a small rate, the financial system is showing signs of stress. All this points to less money in the markets.
With liquidity falling, cryptos are facing a bad market that is getting worse.
Potential For Massive Problems
The Norinchukin bond liquidation is a big deal.
Norinchukin is a Japanese investment bank, and it is facing huge losses in its bond portfolio. To address this, Norinchukin is selling off tens of billions in US and EU bonds. You read that right – tens of billions $$$ in high grade bonds.
Here is a fun fact – as of June 2024 – Norinchukin is Japan’s 5th largest bank with nearly $1 trillion in assets (give or take $100 billion). So, it is a big bank, it is facing incredible losses, and it remains to be seen if this is a systemic problem.
The bank cites bad bets on low-yield offshore bonds as the cause of the problem, which could portend other issues in the Japanese banking system (which is a tinderbox – just ask Kyle Bass).
Have we been in the eye of the storm?
The storm we are referring to is the banking crisis that claimed SVB in 2023. A financial crisis lasts a lot longer than more people realize, as Jim Rickards accurately points out.
So here is a scary idea – we might be entering a financial crisis that is on the level of 2008 – or a whole lot worse. While cryptos have been under pressure, they could be heading a lot lower.
Who Remembers 2008?
Anyone who was in the markets during 2007 remembers how long it took for things to fall apart. It all came crashing down in 2008, and the financial world was reset at the highest levels. The US CDO market was to blame – and the people who made it happen were bailed out.
Now, a much larger market could be on the chopping block…
If we are seeing a repricing of Western government debt – all bets are off. Anything could happen.
Here is a freaky scenario – Let’s suppose investors realize how fundamentally broken the Western financial system really is EN MASSE. Norinchukin didn’t make wild @$$ bets on emerging market equities – they are facing losses on good paper.
There is another small issue that is 100% true – Norinchukin is liquidating around 8% of its assets at a time when the home currency is nearing all time lows. So, with the local value of all its offshore holdings rising in JPY terms – it is still facing massive mark-to-market losses.
There are way more facts we could toss into this mix – but what we outlined above is enough to give you a flavor of the situation. It is complex, mostly hidden, and not at all good. In 2008 similar circumstances led to fire sale prices in any risk asset – at least at first.
Crypto: A Small Market Cap World
A trillion USD isn’t a huge amount of money. It seems like it should be – and that is part of the problem we face. Now, a trillion USD appears to be the US government’s annual budgetary shortfall – which may be why Norinchukin is dumping Western assets first.
Bitcoin is holding over $1 trillion in overall market cap – but in today’s world – that isn’t saying much. When we look at how the smaller tokens are valued, they simply don’t add up to much. Central Banks don’t care about how cryptos trade – so they could be sold hard and there would be no action from official actors.
Especially in a world where a BTC ETF can be shorted after being sold all day, crypto investors should be on guard in a marketplace like the one we have at the moment.
If you weren’t around in 2008 – let us give you a little guidance…
There are no rules to how low an asset price can go. BTC could go back to $10,000 if we see market-wide liquidations. In fact, with BTC ETFs all over the world, Bitcoin could become a favorite for hedge fund short selling if it keeps showing weakness.
For the moment, it looks like cryptos are being driven by a shadowy problem in the global financial markets. If cryptos are showing how messed up global liquidity is – we could be in for a bumpy ride!
