September 27, 2024
Trouble in the East Could Fuel Crypto
Dear Subscriber,
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| By Juan Villaverde |
When we talk about market moves, especially in crypto, much of the conversation tends to focus on Western countries.
After all, the developed world has historically driven the global financial markets.
But that's not the full story anymore. Especially when it comes to crypto.
These days, emerging nations are more synonymous with crypto innovation, as my colleague Jurica Dujmovic wrote recently. It provides a lifeline amid sharply devalued currencies, untamed inflation and other financial barriers.
Still, crypto is mostly used for trading and speculation around the world, rather than as a form of money.
The use of crypto is on the rise to get around restrictive government policy.
And perhaps no country has been more restrictive than China. It banned all crypto transactions in 2021. Mining is also forbidden.
And this, in part, is where the West was lost. Why?
As I’ve mentioned before, the single largest driver for crypto prices is global liquidity.
While the U.S. Federal Reserve is undoubtedly the most significant player in that regard, the second-largest driver of liquidity is not a Western power at all.
It’s China.
The People’s Bank of China is the world’s second-largest central bank. And it has a massive influence on crypto prices.
Right now, the monetary policies of the Fed and the PBoC are moving in opposite directions.
The Fed is trying to walk a fine line to balance inflation while keeping an eye on deteriorating economic indicators. You’ll recall I discussed this last week.
China, on the other hand, faces a very different problem: deflation.
It faces the slow-motion collapse of a real estate bubble, which was once valued at a staggering $50 trillion. Now, prices have fallen to levels not seen since 2016.
Imagine if your home’s value was trading at prices from eight years ago. Now imagine that 60% of household wealth in your country is tied up in real estate.
For comparison, that figure is only 23% in the United States.
In other words, a housing market collapse would impact China far more deeply than it impacted the U.S. during the 2008 financial crisis.
To make matters worse, many housing projects in China — which are already fully paid for — are sitting unfinished. This is a problem so large that it's difficult to see how any amount of monetary stimulus could truly stop the bleeding.
But the PBoC is certainly trying.
Just this week, China slashed its benchmark policy rate, surprising the markets with a larger-than-expected cut. The seven-day reverse repo rate is likely headed to zero soon.
Additionally, it injected around 600 billion yuan, about $85 billion, into the economy.
This injection won’t be enough to reverse the capital outflow from Chinese real estate. But it will fuel risk assets, particularly those favored by Chinese investors looking to get their money out of the country.
That would mostly be U.S. dollars, gold and Bitcoin (BTC, “A”).
Will this trigger an immediate surge in crypto prices?
Probably not.
But over time, this ample liquidity will boost the markets. Especially considering the PBoC has signaled it is prepared to do even more.
This combination of a deflationary Chinese economy and aggressive monetary stimulus is precisely the kind of environment in which crypto thrives.
While many are crediting the recent rally to the Fed’s rate cuts — and they are certainly a factor — the real driving force is liquidity injections from the People’s Bank of China.
If this continues, it won’t be long before we see the markets make a serious move toward a breakout.
And since my Crypto Timing Model has signaled a key low is likely in the coming months, any additional liquidity injections from central banks like the PBoC will only add fuel to this fire.
We’re not quite there yet. But things should heat up as we get into Q4.
Savvy investors should prepare their portfolios now.
Best,
Juan Villaverde
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