Opinion Can Bitcoin Serve as a Warning Sign for Liquidity Issues
Cryptocurrencies are struggling to maintain their upward momentum, despite having a strong fundamental outlook. The main issue for cryptos is the overall macro environment, which could potentially lead to the biggest liquidity crisis since 2008. It’s not something anyone wants to hear, but the reality is that any potential upside for crypto is likely limited at the moment, and the downside could be significant. The banking crisis that began last year remains unresolved and may be entering a critical phase.
In essence, cryptocurrencies, along with other risky assets globally, are facing a very uncertain future. The concern now is that global liquidity has become so strained after years of aggressive Central Bank policies that even safe assets like government bonds are at risk. As a result, cryptos could experience a substantial downward movement in the coming months. Brace yourselves, as this situation could turn quite ugly.
The wave of global liquidity has come to an end, and the potential for massive problems looms large. The memories of the 2008 financial crisis are still fresh, and the crypto market, with its relatively small market cap, is highly susceptible to these global liquidity issues.
Inflation continues to be a persistent problem, especially in a world where fiat currency is no longer tied to the gold standard. Central Banks are striving to maintain the value of their currency, which has led to elevated interest rates compared to recent history. Despite positive rhetoric from Central Bankers, rates in the USA and UK have remained unchanged, and the FED’s balance sheet is contracting, putting global liquidity under strain. Cryptos, as an asset class, are particularly sensitive to these liquidity fluctuations.
Japan recently saw a rate increase for the first time in 17 years, albeit a small one, but it has already caused stress in the financial system. All signs point to reduced liquidity in the markets, and cryptos are feeling the impact of this deteriorating market environment.
The recent Norinchukin bond liquidation is a significant event. Norinchukin, a Japanese investment bank, is facing substantial losses in its bond portfolio, resulting in the sale of tens of billions of US and EU bonds. It’s important to note that Norinchukin is Japan’s 5th largest bank with nearly $1 trillion in assets as of June 2024. This indicates the severity of the situation and raises concerns about the potential systemic issues within the Japanese banking system.
The parallels between the current crisis and the 2008 financial crisis are alarming. The lingering effects of the 2008 crisis and the potential for an even more severe crisis are causing anxiety. If there is a repricing of Western government debt, the repercussions could be severe, and the implications for the global financial system are uncertain.
The situation becomes even more complex when considering that Norinchukin is liquidating a significant portion of its assets at a time when the home currency is nearing all-time lows. This has resulted in massive mark-to-market losses. The complexity of these financial events is concerning and could lead to significant repercussions in the market, similar to the fire sale prices experienced in 2008.
In the current context, the trillion-dollar market cap of Bitcoin may not hold much weight. In a world where a trillion USD is equivalent to the US government’s annual budgetary shortfall, the significance of Bitcoin’s market cap diminishes. Given the current market conditions, crypto investors should be cautious, especially in a market where a BTC ETF can be shorted after being sold all day.
For those who did not experience the 2008 financial crisis, it’s important to understand that there are no limits to how low an asset price can go. Bitcoin, for example, could potentially drop back to $10,000 if market-wide liquidations occur. The shadowy problems in the global financial markets seem to be driving the current state of cryptos. If cryptos are indicating the extent of the global liquidity crisis, investors should prepare for a turbulent ride.
