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Crypto macro outlook and risks

Fawad Razaqzada Fawad Razaqzada 09/11/2021
Crypto macro outlook and risks Crypto macro outlook and risks
Crypto macro outlook and risks Fawad Razaqzada
Bitcoin has turned lower after its earlier advance to a fresh record high. Despite turning negative, BTC/USD remains in a healthy uptrend and the wider rally in cryptocurrencies suggests the sector’s combined market value, which has soared above $3 trillion, may expand even further. Bitcoin and Ether account for about half of the market cap, alone. Today’s biggest risers though have been Litecoin and Bitcoin Cash, which were up 17 and 9 percent each, respectively, at last check.


cryptoSource: ThinkMarkets and TradingView.com


What is behind the rally?

 
Crypto prices have been driven higher by both institutional demand and retail buying, as evidenced by soaring market capitalisation of cryptos, which has roughly quadrupled since the end of 2020. The crypto sector saw renewed strength after the launch of the first Bitcoin-linked exchange-traded fund in the US, paving the way for a new wave of market participants to gain exposure to Bitcoin.
 
Money has been poured into all sorts of coins – established ones such as Bitcoin and Ether, as well as meme coins such as Shiba. So, as well as growing expectations over widespread adoption and use of cryptos, there is undoubtedly a level of speculative buying that is causing prices to rally as traders take advantage of the momentum in the hope of making profit from even higher prices. This speculative nature of cryptos is what worries me, as there will eventually be some bagholders, especially in some meme coins.
 
But for some of the coins that have an actual purpose and solve real-world problems, the future looks exciting and that’s why people are throwing money at them. Indeed, the latest tech CEO to admit owning crypto is Tim Cook. The Apple boss said he has “been interested in it for a while" and "thinks it’s reasonable to own it as part of a diversified portfolio."
 

Crypto macro factors to take into account

 
While the crypto rally has been impressive, that’s not to say it will continue – not least because of profit-taking when the rally becomes a bit exhausted. There are also a few macro risks to take into account.
 

Regulation and tax hikes

 
Among some of the bearish macroeconomic developments for cryptocurrencies, investors should consider: (1) the threat of further regulatory crackdown and (2) the potential for reduced investing as consumers’ disposal incomes are likely to fall when governments around the world invariably raise taxes to pay for the costs of bailing out their economies during the pandemic.
 

Role of inflation and central bank policy

 
A side effect of the above could be lower levels of inflation, which is likely to be the case anyway as the impact of temporary factors and supply issues slowly subside. I don’t think the economic recovery is that strong to cause inflation to continue rising in 2022. I reckon oil prices will head back lower as supply increases from both the OPEC+ group and producers elsewhere, including the US. The potential return of Iranian oil supply could further weigh on crude prices. Lower oil prices should dampen inflationary pressures.
 
If we assume that at least part of the reason behind the crypto rally has been for inflation hedging purposes to prevent the erosion of wealth by holding fiat currencies, then this source of influence will no longer be there to support crypto prices.
 
However, if inflation turns out to be hotter and stickier than expected, then surely the major central banks will have to tighten their belts more aggressively in 2022. Rising rates are not good for risk assets in general, and this may also include crypto. So, the degree to which cryptos will be negatively impacted by rising inflation is, in my view, directly proportional to how central banks may act to rising prices.
 

Economic growth and employment

 
Apart from inflation, the level of economic growth and employment are both likely to play a big role in determining whether the crypto rally will continue in 2022 or reverse. When the economy is doing well and employment is high (although not too strong for central banks to be tightening aggressively), individuals and institutions are more likely to invest in financial markets, including crypto, than during an economic downturn. Therefore, it is worth watching these macro trends in the years months and years ahead if you are a long-term buy-and-hold type of investor in crypto – and indeed stocks.
 
Any opinions, news, research, analyses, prices or other information contained on this website is provided as general market commentary and does not constitute investment advice. ThinkMarkets will not accept liability for any loss or damage including, without limitation, to any loss of profit which may arise directly or indirectly from use of or reliance on such information.
Any opinions, news, research, analyses, prices or other information contained on this website is provided as general market commentary and does not constitute investment advice. ThinkMarkets will not accept liability for any loss or damage including, without limitation, to any loss of profit which may arise directly or indirectly from use of or reliance on such information.
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