The Global Market Meltdown Reestablishes The Case for Cryptocurrency as Global Macro Hedge

Global markets crashed and burned Monday as risks from coronavirus, and other uncertainties fueled panic. The Dow Jones Industrial Average cratered over a 1,000 points for a 3.56% loss. The S&P 500 Index closed 111 points down, losing 3.35%.

The NASDAQ Composite fared worst, with a 355 point decline, or 3.71% of its market capitalization at the start of the day. Further, oil prices tumbled, with Brent crude down 4.1% and U.S. crude futures down 4%. As of press time, the above US indexes are down another 1%.

Stock Valuations Have Been Overheated for Months

Many analysts are pointing to coronavirus as the catalyst, but the stock market has been overbought for weeks. Maybe it’s been overvalued for months, depending on how bullish/bearish equities you are.

Even CNBC’s Jim Cramer and his off-the-wall, caffeine-fueled perma-bull outlook on U.S. stocks admitted as far back as last July that “we do have some outrageous valuations” in tech stocks.

Since he made those remarks, investors have poured over a trillion dollars into NASDAQ stocks. And the five biggest stocks in the S&P 500 by market capitalization are all tech stocks: Apple, Microsoft, Amazon, Google, and Facebook.

They also make up a staggering 18% of the S&P 500’s market cap. But the last time market cap stratification in the broad stock market benchmark was this steep, was at the height of the Dot Com bubble in 2000.

Coronavirus Is Merely A Catalyst for A Correction

As the spread of coronavirus gathered pace in January, many analysts argued it would be an excuse for investors to run away from overvalued stocks. The fever on Wall Street is the real illness markets are worried about.

The dangers of coronavirus are merely the catalyst for investors to realize valuations are too risky. Among those analysts making this point was “gold bug” Peter Schiff, Bleakley Advisory’s chief investment officer Peter Boockvar, and Renaissance Macro Research chairman Jeff deGraaf.

Equities markets and oil prices overheated as central banks primed the liquidity pumps. The Federal Reserve refuses to admit the money it’s furiously pumping into overnight money markets is economic stimulus.

Fed Chair Jerome Powell says it’s a technical adjustment to overnight lending rates. But the $78 billion a month expansion of the dollar supply is more money than the Fed pumped during QE3. Meanwhile, the global interest rate environment is stuck at record lows.

Cryptocurrency Is A Perfect Global Macro Hedge

The unique value proposition of many cryptocurrency blockchains like Bitcoin, Ethereum, and Litecoin, is they have a fixed supply. Creating them isn’t easy and arbitrary for creating central bank currencies. It’s difficult and orderly, mediated by clever software architecture and sophisticated economic design.

Cryptocurrency is not like the part of the economy that devalues its holders’ assets through inflation. And thereby fuels speculative bubbles that end in catastrophic busts. That’s why cryptocurrency has achieved the status of a safe haven asset like gold.

In early Jan 2020, Nasdaq reported the findings of SFOX, a volume cryptocurrency dealer. SFOX examined the 2019 price movements of the S&P 500 Index, spot gold, and Bitcoin.

They found that bitcoin is largely uncorrelated with either:

Combined with the fact that BTC is proving to be largely uncorrelated with both the S&P 500 and gold (average 30-day correlation values of -0.037 and 0.149, respectively, in the last 6 months), these data about Bitcoin’s high returns and low volatility made BTC a compelling tool for portfolio management in 2019.

While they also found bitcoin’s price movements began to pull away from altcoins last year. Or put differently, altcoins have begun to find their orbits instead of rising and falling as bitcoin. The geopolitical profile of bitcoin and other cryptocurrencies suits it well as a safe haven. Like gold, their supply cannot be manipulated.

Further, they are bearer instruments. If it’s in your pocket or safe, it’s your gold. If you have the private keys, it’s your cryptocurrency. Expect to see more capital flee to cryptocurrency.

Disclaimer: This article is the opinion of the author, and does not represent professional financial or investing advice.

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