By Your Crypto Boss on The Capital
It is evident, that traditional markets have an increasing influence on the cryptocurrency market. The direct correlation with gold and the reverse with the stock market is increasing. In other words, when the stock market falls, gold and Bitcoin are growing.
Earlier I said that an important factor of Bitcoin growth in 2020 will be a possible collapse of the stock market. Therefore, in this article, I will consider how the most grandiose collapse of the stock market of all time, whether there was anything in common with the current situation and what the probability is now.
In fact, we are looking at the probability that Bitcoin will cost 100K or more in the next year and a half. At the end of the article, I will focus on this issue in detail.
To understand the future, it’s often necessary to look at the past.
The biggest stock market crash in the past — was the Great Depression of 1929–1933. In terms of scale, consequences, and duration, it still has no equal.
As a result of the great depression, industrial production in the U.S. fell by 46%, stock market capitalization fell by 4.5 times, real estate fell in price by almost 10 times. The crisis has spread to all developed countries and was one of the reasons why Hitler came to power in Germany.
Let’s take a short look at how it was, in association with our time and our situation.
In the early 20s, shares of leading American companies were cheap. In 1924–1925 the market grew continuously, in 1926 it corrected a bit, but ended the year at the same level from which it began.
In 1927, shares were growing almost without interruption.
In March 1928, the growth was particularly strong. Then in July of the same year, 1928 was the first significant fall. Then the market continued its growth.
In 1929, the market continued to grow, and by autumn, the market grew and fell and then collapsed.
LET’S COMPARE THIS PICTURE WITH THE CURRENT SITUATION
Let’s take the S&P 500 index, which most fully reflects the situation on the American stock market.
Since 2009, it has been growing steadily. From the minimum at the beginning of 2009, the S&P 500 grew more than 4 times. At the same time, the most significant correction was in 2018. Just like in July 1928, when there was the first significant fall before the crash of 1929.
Then the fall was recouped and the S&P 500 updated its absolute highs throughout 2019. One of the reasons for such growth of the American market in 1927–1928 was pumping it with money. Government securities were sold, the Federal Reserve provided these funds to the banks, banks either bought shares themselves on the stock exchange or issued loans to citizens.
Citizens, seeing a continuously growing market, carried these loans on the stock exchanges and bought shares, disperse the market even stronger. FOMO in its purest form, as at Bitcoin by 20K in 2017.
At the same time, the mechanism of margin trading also became widespread. Those who didn’t have time to buy shares in 1924–1926 hoped to catch up with the lost profit by leverage.
Banks issued loans for exchange trading, which were pledged by the shares themselves. When the shares began to fall, it caused a chain reaction, forced closure of positions, and the strongest market crash.
WHAT’S GOING ON NOW?
Throughout 2019, the FED filled the markets with liquidity. Or rather, the liquidity was intended for the economy but appeared on the stock market. This process has been especially intensified since September 2019, when hundreds of billions of dollars were provided to banks every month through REPO operations alone.
Under the conditions of low (and in many developed countries negative) interest rates, excess liquidity is being supplied to the stock market. Through lending in the first place: (85% of borrowers secured by securities- are brokers. Which, on their own, provide leverage to the clients).
In the financial system, there is an increasing leverage. This system works as long as the value of assets is growing. But it cannot grow forever, and when the buyers run out, the collapse begins.
The real sector situation before 1929 can be summarized as follows: the economic slowdown was filled with money. This allowed to smooth the picture for a while, but in the first half of 1929 the real sector — cargo transportation, construction, production — began to fall significantly.
WHAT IS HAPPENING NOW?
Retail sales are decreasing, business activity is decreasing, and the number of other indicators is decreasing. On the other hand, record figures have reached state debts.
This is against the background of the stock market, which is constantly updating its highs, has long ago moved away from the real economy (although it should reflect the situation in it), and is living its own life. There is a classic bubble with a predictable ending.
All these factors make a powerful collapse of the stock market in the near future with the most unpredictable consequences very likely.
It’s clear that Trump will try his best to keep the markets at maximums until the elections — after all, the collapse, which will affect most of the American families, will greatly reduce its chances of victory. That’s why he and China are making concessions now, and a direct attack from Iran has been ignored.
But the market is organized in such a way that when the buyers run out, it starts to fall. And the longer the growth was, the stronger this fall will be. When the growth is caused not by the objective economic reasons, but by the market factors (cheap money and FOMO crowd), it is inevitable not correction, but collapse. That is a 50–70% collapse within a short time. Further depends on the reaction of the Fed to this collapse and the general situation in the world.
In 1929–1933 the acute phase of the crisis went into a long recession. America was only able to achieve its 1929 figures in the early 1950s.
Now, clearly, everything will be much faster. But it will inevitably affect the real economy and extend to all developed countries.
Now let’s get back to the crypto market.
By 1933, when many banks collapsed and the stock market fell by 4.5 times, there was a sharp increase in demand for gold among the population. It was bought up for any money, hidden, taken out of the country.
And then President Roosevelt took an unprecedented step that didn’t fit the concept of democracy and the free market.
He issued Decree №6102 on the actual confiscation of gold in bullions and coins from the population and organizations. All individuals and entities in the United States (including foreign nationals and companies that hold gold in the United States), with few exceptions, were required to exchange gold for paper money at a price of $20.66 per troy ounce in any bank in the United States that was authorized to accept gold until May 1, 1933. Any contracts or securities denominated in gold were also declared illegal, and payments were required to be made in paper money at that exchange rate.
Therefore, the demand for gold was so large that it could be overcome only by such methods.
But there was no Bitcoin at that time. And now it is. And you can’t just confiscate it. Can you imagine the demand for it and where the price could go, considering the limited supply? If prices go up sharply, Bitcoin will be even smaller and the money will go to the top alto.
Taking into account the huge capitalization of the world stock market (as the collapse will affect not only the USA), I don’t even want to name the figures where the price of Bitcoin and the capitalization of the crypto market can go. At the moment, it will sound too unrealistic. But quite soon we will see it.
So, increase the amount of Bitcoin. In the conditions of a future crisis, it will be the most valuable asset with an inverse correlation to all other assets (except gold). But it’s much more valuable than the latter because of limited supply and privacy.
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