We have broken supply chains. Strange government edicts and behavior. The weaponization of financial products and access.
There’s geopolitical conflict.
Oil over $100 a barrel and the gas pump looking for an arm and a leg.
Gold tagged new all-time highs, and Biden’s executive order on crypto was leaked early.
Everywhere you look, you can see the sources of uncertainty.
This is shaping up to be one of those years where a trader gets ten years of experience in a single year.
It’s been a while since we’ve had one of these periods.
March 2020 was close.
But this year is increasingly looking like a big one.
And here’s why it’s important to realize this. Uncertainty affects decision-making. It can create a sense of helplessness or inaction. But it doesn’t have to. Periods like this are golden opportunities.
And during times of turmoil, you get to see opportunities as they reveal themselves. You may have to unlearn some of what you think you know.
We are going to get some valuable insight into what crypto can and cannot do. And a vision of what role it will play in a rapidly changing world.
That’s why stepping back a bit and widening your view can be valuable in markets like these.
Market history has some clues
Market history has lots of examples of upheaval. You can go back to these events and see a picture of how those events unfolded and their results. It’s important to keep in mind the context of each event because while history doesn’t repeat, it does, as they say, rhyme.
For example, back in the GFC era, a series of unexpected events set things in motion under the surface. The money market ‘broke the buck” for the first time ever. In Canada, previously super safe commercial paper cratered, almost taking some financial firms with it.
At one point in the GFC, US treasuries and the dollar were bid while every commodity priced in dollars was sold. Everything, including gold, went down at one point. This was destructive for emerging markets where commodities were a primary source of revenue. And then there was all the debt priced in dollars that were being paid with declining local currencies.
It was a catastrophe.
The results of the GFC were ongoing market interventions by the US Federal Reserve, low interest rates, and regulatory changes.
The most significant event was the Federal Reserve becoming the only buyer of last resort. This evolution may become relevant in the year ahead as the discussion around CBDCs becomes louder. This is a topic we will explore in the near future.
The other event, which did not seem significant at the time, was the release of Bitcoin.
Did the arrival of Bitcoin foreshadow 2022?
When Bitcoin arrived in 2009, the market was looking its weakest. The financial system was so vulnerable that failure seemed imminent. But the system survived.
Nobody could foresee what Bitcoin could be other than maybe Satoshi. It took the exchange of bitcoin for pizza to demonstrate exchangeability in a way people could relate to and embrace.
From this one seed to more than ten thousand cryptocurrencies, altcoins and tokens, Bitcoin has spawned trillions in value. It has created a vision of what finance could be. It has ignited imagination and possibilities.
Whole new business streams have been developed. Crypto as a whole is a growing and evolving industry.
And here we are at our next big event 13 years later.
The world is waking up from two years of enforced hibernation.
Trillions in fiat have been gathered from the magic money tree and spent. Narratives of global agendas swirl. Conflict inside of nations and between them is rising. The destruction in lives and relationships is very real and raw.
Is this the moment that Satoshi envisioned when he (or they) created Bitcoin?
It may be.
In this moment, you will have to step back and look across the evolving world landscape. You will have to look at crypto as a part of a larger financial system.
You are going to have to be more detached and skeptical.
Instead of focusing exclusively on BTC, ETH, ADA, or UNI, you should be more aware of activity in the traditional financial sector. Things like gold, oil, the dollar index, and various other commodities will provide clues about evolving financial conditions.
You are going to see the execution of economic warfare and the results of different measures.
And you should be watching how the legacy markets and crypto markets respond to these measures.
Bitcoin demonstrates the inherent flexibility of crypto
Crypto is right in the thick of the evolving events.
We are seeing governments attempt to control capital flows with various restrictions. These steps demonstrate the effectiveness and weaknesses of the current regulatory environment.
But what is interesting about these steps is the realization of one of crypto’s unique advantages, it’s almost chameleon-like flexibility.
Some people are looking for a currency. In this instance, it’s not the price movement that matters, but rather the acceptance and free exchangeability.
Others are interested in BTC as a speculative asset. In this case, price directionality and security are important.
Some want asset protection. Traditionally this might be achieved through owning gold. Or in the case of Chinese metals traders, any number of metals like copper or nickel can provide this protection. Now BTC provides the ability to hold assets outside the traditional system for safety and protection. It’s the everyday person’s flexible trust fund-like asset.
Still, others might be looking for a payment system. In this case, the peer-to-peer nature of this global payment system provides a unique capability to anyone with BTC.
So Bitcoin provides a unique context-dependent value with different ways to use it. You can use it in any one of these options or all of them, depending on the situation.
This is a previously unknown level of flexibility and capability in an asset, currency, trust fund, or payment system. And this is just bitcoin.
Crypto has an entire ecosystem in development that will be adjusting and evolving based on what happens in the weeks and months ahead.
Trust less has never been more accurate
You are going to be subjected to all kinds of stories and narratives around various assets. Lots of these are floated by people already long attempting to create liquidity. That liquidity can be crucial if things get difficult.
But it doesn’t necessarily mean you want to be the liquidity provider. Timing is everything.
So be skeptical about everything you read and hear. Everything in the news has a purpose, and it’s not to inform you.
So step back and observe how various stories or narratives drive activity.
Ask yourself some key questions.
What are you expecting to happen based on a given news release, piece of information, or situation?
Is the reaction what you would expect?
Or is something not happening that should be happening?
Take note of this. You might be wrong in your expectation, or it might be a signal that something else is going on.
Now ask yourself what is happening that you wouldn’t expect to be happening under the circumstances?
The answers to these questions will give you some insight into how opportunities are developing.
Remember, you are not voting in the market based on your heart but rather taking strategic positions with your head.
Economic warfare and countermeasures
Now, as a trader, enthusiast, or hodler, you will see a lot of things happen in the markets more broadly. And by taking some time to look at how markets responded in the past, you can give yourself a baseline of expectations.
Oil is a big one right now. You can see the impact of policy decisions on investment and flows. And we can see what happens when policy, a lack of investment, and flow disruptions meet geopolitical events.
You are going to see some wild things in commodities as unexpected events meet financial limitations.
These disruptions are driven by economic sanctions and countermeasures.
One country invades another. The banks of the invading country are cut off from the international payment system. The two biggest payment systems cut off users from access from outside the invading country. The currency of the invading country crashes.
Then the invading country bans exports of key commodities. Of which one source of the sanctions is uniquely dependent on the oil, coal, and natural gas of the invading country. And probably fertilizer as well.
This sends price shockwaves across the world.
Think about what we are seeing. These are precedents that will shape actions and countermeasures in the future. And the full impact of these moves is yet to be fully understood.
Now crypto has been relatively quiet. It had one lift when Russians heard their banks were limiting withdrawals. It had another one on an early leak of Biden’s executive order on crypto. Both moves followed by retreats.
So far, the one notable observation is that something like bitcoin alone provides all of the key financial needs of the people whose banking has been disrupted. This suggests that crypto can be an effective countermeasure for everyday people in a time of extreme and likely temporary economic stress.
So crypto can be viewed as a safety valve.
Ask yourself these questions
It will be important to watch how various elements of crypto behave during this period. People will likely return to these responses in the future and may act on them.
For example, are crypto participants paying attention to outside forces?
If they are, how are they responding? Is liquidity drying up, or are things fluid? Are participants stepping back?
Is this action unique to a specific product or community or generally?
How have recent regulatory and policy moves affected perception? This is a very interesting thing to pay attention to. Some important precedents have been set.
Is liquidity in crypto assets increasing or decreasing, and which assets are holding up well, and which are not.
How are different parts of DeFi performing under conditions of stress in the regular market? Anything standing out? What’s unique or different about that project?
How are NFT prices evolving in this environment? Are they stable? Are they being bid as a safe haven asset? Or are they perceived as a risk asset and getting soft?
What does the chatter sound like in various crypto communities? What are they focused on, and why?
And what are they missing when you look across the action in the space?
What narratives have the strongest influence on the behaviour of what you are trading?
The reason I’ve suggested all of these questions is because questions broaden intermarket awareness. They also quiet the mind. They help you step outside moments of uncertainty and help you think more clearly.
And these questions are going to give you powerful insights into the evolving nature of crypto during this period of turmoil.
They will also provide clues around strengths and weaknesses in the space you may not have been aware of.
Surprises. These are the events that shape activity and big changes.
The last two years have been rich in surprises. In fact, there have been so many surprises it feels like we are in the movie Dark City.
The path in front of us looks uncertain. And that means that we are going to have to pay closer attention to the wider market. Because in those observations, we will start to see where crypto is going next and what role it will play.
We have seen the toxic effects of hidden leverage and extreme moves before. That combination almost blew up the financial system in 1998, courtesy of the Russian debt default and Long Term Capital Management. And again in the GFC.
There have already been a couple of these in the commodities sector this time. And there may be more. The legacy market has lots of hidden pockets of leverage. You won’t know where they are till you see them blow up.
And when world leaders start to see themselves as financial alchemists, the outcomes are unknowable.
So watch the crypto action closely. Keep an ear to the ground on the chatter. Watch the price movements relative to other assets. There are opportunities ahead.
And there is a vision developing of what role crypto will play in the months and years to come.
Uncertainty is difficult. But as a trader, it’s moments like these that are flush with information and opportunity.
But to be ready, you’ll have to be open, flexible and discerning.
Able to step back and ask the right questions.
And seize moments as they unfold before you.
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