The Long-Term, Contrarian, Macro Case for Cryptocurrencies
The months-long cryptocurrency bear market has made some investors disillusioned and hopeless, as their crypto assets remain underwater. But I believe my thesis shows there are strong macroeconomic reasons to remain bullish on the crypto asset class over the long run. I will first evaluate the usual reasons people give for being bullish on crypto, namely low current ownership rates and the dearth of big money in the sector, and I will conclude with an additional reason that’s rarely cited.
If people across the world were asked if they have heard of Bitcoin (BTC) or Ethereum (ETH), a majority would probably still answer “no.” Replace BTC and ETH with smaller altcoins and familiarity with ownership, and “yes” answers become even rarer. Although equity ownership isn’t all that pervasive in the U.S. (~54%), even fewer Americans own crypto. As crypto continues to become more familiar and legitimate, more retail money from average people will push up demand and prices, especially as digital assets are added to ETFs and mutual funds.
Institutional money also has yet to fully enter the crypto sector. In the first decade, most owners and users have been private citizens, technology enthusiasts, and retail investors. But that is starting to change. More crypto hedge funds cropped up last year. George Soros and Goldman Sachs (GS) are preparing to trade crypto. Family offices and trading desks are increasingly interested in crypto investments. As the crypto asset class matures and becomes more regulated and legitimate, enormous institutional money inflows will likely rush in for the sake of portfolio diversification and the novelty factor.
While the previous sentiments are valid, perhaps the greatest argument for being long on crypto is the US’s macroeconomic environment.
First, the US Federal Reserve began a policy of interest rate increases in December 2015. It hiked the federal funds rate again in 2016, 3 times in 2017, and in March 2018. Conventional wisdom, as taught in college economics courses, is that US rate hikes decrease inflation and strengthen the dollar. The explanation is that rising interest rates decrease the incentive to borrow, and spur domestic and foreign demand for savings and investment, resulting in a stronger dollar and disinflationary or deflationary pressure. However, the conventional view fails empirically, as the dollar has fallen against a broad basket of currencies and assets since late 2015.
The Post-Keynesian school of thought known as Modern Monetary Theory can help explain why the dollar has tumbled, gold and silver have risen, and cryptocurrencies have exploded since the 2015 rate hike. The conventional view has its reasoning wrong. Since the Fed is a price setter, its rate hikes increase general prices.Higher interest rates cause the costs of operating businesses — inventory and capital — to rise. Prices of goods and services rise to cover costs, so inflation increases. Higher rates also mean the federal government pays more interest on Treasury bonds, injecting more money into the economy, an inflationary change. Inflation weakens currencies, so the dollar falls. Various markets confirm that the yen, euro, gold, commodities and crypto have all appreciated against the dollar.
Because the Fed is committed to rate hikes until 2021 at least, a fair forecast is that inflation will continue to rise, the dollar will keep falling, and crypto will continue growing. I believe the evidence shows that the US government is keen on an inflationary environment; therefore, crypto will shine in time.
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