Michael J. Burry, the financial magician featured in the movie “The Big Short”, is known for predicting crises. For example, his investment fund lost billions in the 2008 real estate crash, and Burry liquidated almost all of his portfolio in the second quarter of 2022.
Since no one seems to know if the traditional markets will recover before entering a new recessionary environment, now may be a good time to consider investing in cryptocurrencies. Below are some examples of how experienced investors sometimes miss incredible rallies.
In May 2017, Burry said that people should expect “global financial times”, and a Third World War. Instead, the S&P 500 rose 20% over the next nine months. A few years later, the index peaked in December 2021, more than 100% above the short entry price suggested by Burry.
In December 2020, Burry said Tesla’s stock price was “king” to open his short position. A 47% rally occurred within 35 days of this statement and Tesla shares peaked 10 months later after a total gain of 105% from Tesla’s “ridiculous” price.
Indicators point to a major recession, but the exact timing is unknown
Not to be mistaken, traders should not ignore the fact that the US dollar index has come strongly against other major world currencies, reaching the highest level in 20 years. This shows that investors are desperately seeking refuge in cash positions, pulling out of equity markets, foreign currencies and corporate debt.
Additionally, the spread between 2-year and 10-year US Treasury bonds widened to a record low of -0.57% on 22 September. Typically, when short-term government bonds have higher yields than long-term bonds, an inverted yield curve is interpreted as increasing signs of a recession.
Adding to the concerns, on September 22, the US Federal Reserve reported a record high of $2.36 trillion in overnight reverse repurchase agreements. In “reverse buyouts,” market participants lend money to the Fed in exchange for US Treasury bills, and agency-backed securities. Excess liquidity in investors’ balance sheets indicates a lack of confidence in counterparty credit risk, which is a bearish indicator.
Having revealed the three key macroeconomic indicators that have reached levels not seen in more than two decades, two important questions remain. First, what is the relationship between bitcoin (BTC) and ether (ETH) and traditional markets? More importantly, what impact should investors expect if the S&P 500 falls 20% and the housing market collapses?
Whether one pays their bills using cryptocurrencies or not, the prices of energy, food and health services are highly dependent on the US dollar. International commodity transactions, including imports, exports and actual trade, are mostly conducted in USD. Therefore, even if one pays for his expenses in bitcoins, there is a good chance that somewhere, this value will be converted into fiat currency.
Some economies are affected by the cost of the loan in USD
The main lesson to be learned from the lack of effective circular trading using cryptocurrencies exclusively is that everyone’s life depends on the strength and borrowing cost of the US dollar. Unless you live in a cave, isolated in an autocratic country or a communist island, when investors raise cash and interest rates, every market is affected.
As for a possible crash in the housing market or another 20% drop in stock markets, the truth is that its impact on bitcoin and ether is impossible to predict. On the one hand, there is pressure from holders scrambling to reduce their exposure, and secure a cash position for a crypto winter that could be longer than expected. On the other hand, there could be an influx of investors seeking non-fundable assets, or seeking protection from inflation.
That’s why Michael J. Burry’s story makes sense right now, when all the pundits and market analysts are warning of a market crash in the near future, or a potential drop in real estate prices. Bitcoin and Ether are facing a global recession for the first time, and judging from March 2020, when the Covid-19 crisis triggered panic selling, those who held their ground for the long term have been rewarded.
The views and opinions expressed herein are solely those of the author and do not necessarily reflect those of Cointelegraph.com. All investment and business transactions involve risk. You should do your own research before making a decision.