Yesterday, I tried to make the case for investors keeping their expectations in check. After an amazing performance in April, it is only reasonable to expect crypto markets to take a pause. Just for fun, let’s pretend that my cautious attitude turns out to be completely wrong. In other words, what are some of the things that could surprise us in the crypto world that could driving prices significantly higher? Here are a few possibilities.
Stock Market Jitters Intensify
The stock market has been a complete dud this year. Yes, the tech heavy Nasdaq is up a smidgen. Interestingly enough, investors don’t seem to mind all that much. After peaking at 36.65 on Groundhog Day, the VIX is now hovering around the 16 level. For all its flaws, the VIX is one of the better measures of investor anxiety. So, for the moment investors are calm, but that could change.
So if investor fears rise and they begin searching for a place to hide, crypto could well benefit. Here is what is going on at this moment that could scare stock investors. Inflation is exceeding Fed targets of 2%. The all items index rose 2.4% for the 12 months ending March, the largest 12-month increase since the period ending March 2017 and higher than the 1.6% average annual rate over the past ten years.
Here is the key point. In four of the last eight months, the Consumer Price Index has averaged a 5.1% increase – that is way more than the Fed has in mind. More of this kind of action will send the Fed into prevention mode, raising interest rates.
This is the question on everyone’s mind. How much can interest rate increase before investors get nervous and stock prices fall? If you look closely at stock averages in 2018, it has already begun.
Cryptocurrencies represent a non correlated asset class, meaning what happens to bitcoin, Ethereum, Ripple and others is independent of other asset classes like stocks, bonds and real estate.
Bond Market Bombs Could Explode
Bonds may be great for retirement planning but otherwise, they are a total bore. Their redeeming merit rests in the message told by the shape of the yield curve. Without getting into lots of academic nonsense, the steeper the yield curve, the more confidence bond investors have about the future.
Right now the yield curve is as flat as it has been in quite a while. Bond investors have their eyes on inflation. There is no consensus on what the cost of living will be ten years from now. This adds risk to bonds.
If the need to control higher inflation forces the Fed to raise rates, that could put the kibosh on bonds. The Federal Reserve is currently in the process of unloading trillions of bonds purchased during the years of Quantitative Easing. So skeptics will argue that raising interest rates would be self destructive.
This is a valid point but the Fed’s dilemma creates uncertainty and that spells investor anxiety. Cryptocurrencies could spell anxiety relief.
Hyperbole Returns To Draw Headlines
As predictable as spring tulips, wildly optimistic forecasts for crypto are back with us. Not in my most fun fantasy did I expect this to happen so soon. Here is a headline from today’s Cointelegraph.com:
Reddit Co-Founder Says Ethereum Price Will Reach $15,000 This Year
According to Alexis Ohanian, “At the end of the year, bitcoin will be at $20,000 and Ethereum will be at $15,000. Great, now people can call me out if I’m wrong.” He said that he’s bullish on ETH because “people are actually building on it.”
It Could Happen
So, even though keeping expectations in check is the best idea after April, a surprise on the upside isn’t ridiculous. If this sounds like a hedge on my bet, you are probably right. My only defense is the either way, the buzz is back in cryptocurrencies and that is altogether good.
Featured image courtesy of Shutterstock.