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What will happen to Bitcoin and Ethereum if traditional markets break?

What will happen to Bitcoin and Ethereum if traditional markets break?

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Michael J. Burry, the financial wizard who was portrayed in the movie “The Big Short”, is known for predicting crises. For example, his mutual fund made billions from the 2008 housing crash, and Burry will liquidate nearly his entire portfolio in the second quarter of 2022.

Since no one seems to know if the traditional markets will bounce before they enter another recession, it might be a good time to consider investing in cryptocurrencies. Below are examples of how experienced investors sometimes miss incredible rallies.

In May 2017, Burry said that people should expect “global economic collapse” and World War III. In contrast, the S&P 500 gained 20% over the next 9 months. A couple of years later, the index peaked in December 2021 at a level more than 100% above Burry’s proposed short entry price.

In December 2020, Burry said Tesla’s stock price was “ridiculous” as he justified opening his short position. A 47% rally occurred 35 days after that note, and Tesla shares peaked 10 months later after a 105% overall gain on Tesla’s supposedly “ridiculous” price.

Indicators point to a major recession, but exactly when is unknown

Traders should not ignore the fact that the US dollar index has risen strongly against other major global currencies, reaching its highest level in 20 years. This shows that investors are desperately seeking protection from cash positions, exits from equity markets, foreign currencies and corporate debt.

In addition, the spread between the 2-year and 10-year US Treasury notes widened to a record high of -0.57% on September 22nd. Typically, when shorter-term government bonds have a higher yield than longer-term bonds — an inverted yield curve — it’s interpreted as heightened signs of a recession.

Adding to the concern was the Federal Reserve’s announcement on September 22 of an all-time high of $2.36 trillion in overnight repurchase agreements. In a “reverse repo,” market participants lend cash to the FED in exchange for U.S. Treasuries and securities guaranteed by the agency. An excessive amount of money on investors’ balance sheets indicates a lack of confidence in counterparty credit risk, which is a bearish indicator.

With three critical macroeconomic indicators set at levels not seen in over 2 decades, two important questions remain. First, what is the relationship of Bitcoin (BTC) and Ether (ETH) to traditional markets? More importantly, what impact should investors expect if the S&P 500 drops 20% and the housing market collapses?

Regardless of whether a person pays their bills with cryptocurrencies, energy prices, food and healthcare services are heavily dependent on the US dollar. International transactions of commodities are mostly priced in USD, including imports, exports and actual trade. So even if you pay for your expenses with Bitcoin, chances are somewhere along the way, that value will be converted to fiat money.

The cost of borrowing in USD affects several economies

The main takeaway from the lack of efficient cryptocurrency-only circulation is that everyone’s life depends on the strength of the US dollar and the cost of borrowing. Unless one lives in a cave, isolated in a self-sufficient country, or some communist island, when investors pile in and interest rates skyrocket, all markets are affected.

As for a potential housing market crash or another 20% crash in the stock market, the truth is that its impact on Bitcoin and Ether is impossible to predict. On the other hand, holders are under pressure to reduce their exposure and secure a cash position for a possible longer-than-estimated crypto winter. On the other hand, the number of investors looking for non-foreclosure assets or seeking protection against inflation may increase.

That’s why Michael J. Burry’s story becomes relevant right now, when every expert and market analyst is claiming a market crash in the near future or a possible housing price crash. Bitcoin and Ether are facing an immediate global recession for the first time, and in March 2020, when the panic selling triggered by the Covid-19 crisis, long-term holdouts were rewarded.

The views and opinions expressed herein are solely those of the author and do not necessarily reflect the views of Every investment and trading move involves risks, you should do your own research when making a decision.