This Market Crash is a Fire Sale, Not an Ice Age – Here’s Why

This Market Crash is a Fire Sale, Not an Ice Age – Here’s Why
Image credit: Timon Studler on Unsplash
27 January 2022

In case you missed it, we’re in the midst of the biggest market crash in recent memory. With USD 1.4 trillion being wiped out from the crypto market and USD 85 billion being lost by the five richest tech tycoons last week due to stock market turmoil, the bears have been rejoicing in their masses. 

Crypto sceptics are fearing the worst: a crypto ice age where prices will remain stagnant at their low points and fail to recover for over a year. 

Troublingly, the anxiety isn’t entirely baseless either. Fears of the US Federal Reserve hiking interest rates to combat surging inflation, and tech staples such as Netflix releasing troubling earnings numbers have cast a dark shadow over the markets.

Investors big and small have thus been shedding their assets, which in turn reinforces the bearish thesis that the downturn is serious this time.

However, what if we told you that this crash won’t make you poorer, but in fact, could make you wealthier? Bear with us as we address these bearish concerns. Spoiler alert: there’s barely any worth worrying about.

“It’s Different This Time Because Of The Fed”

How many times have we heard “it’s different this time” when the market crashes? Worries leading to market crashes always stem from heightened uncertainty about venturing into uncharted economic territory. 

The 2008 market crash was a result of the “unprecedented” collapse of oversubscribed mortgages, the 2020 market crash was caused by an “unprecedented” virus that paralysed the entire world, and now 2022’s crash is attributed to the Fed tackling “unprecedented” levels of inflation.

Yes, it’s different this time. Just like every other time.

But how severe is the Fed situation? Well, inflation has surged to a 40 year high of 7%, and the Fed is seriously considering raising interest rates to combat it. “If we see inflation persisting at high levels longer than expected, if we have to raise interest rates more over time, we will”, Fed Chair Jerome Powell said earlier this month.

For the markets, this is incredibly worrying because in a nutshell: when interest rates rise, the market goes down. If the Fed raises interest rates to the proposed heightened levels to combat inflation, the market is expected to plummet.

Tech and growth companies are particularly vulnerable as higher interest rates result in higher costs to raise funds. Knowing that growth will ultimately be stunted, those invested in such companies are quick to pull their investments. Consequently, the sector is historically the worst hit with the sharpest declines amid rising interest rates.

However, we’ve known inflation has been high since the end of last year, and we’ve known about the Fed’s plans to increase interest rates this year. Interest rate fears are already being priced in. Yes, the market may see more volatility as we approach the first proposed hike in March, but it will inevitably stabilise once the market has a clearer understanding of the frequency and intensity of these hikes.

On Wednesday 26 January 2021, the Fed said it is likely to raise interest rates in March whilst reaffirming plans to end bond purchases at the same time. Powell said in a news conference that the “committee is of a mind to raise the federal funds rate at the March meeting assuming that the conditions are appropriate for doing so.” 

Although Powell declined to say how many rate increases should be expected this year, he said that the economic expansion would be different with “higher inflation, higher growth, a much stronger economy.”

More interestingly, there’s a case to be made that Powell won’t actually go through with the rate hike. US debt has been surging over the past 40 years but none more so than in recent years. Because US debt is so high, the US government is the major borrower of its own money. Increasing the interest rate results in increasing the rate the US government charges itself. 

US total public debt has risen since 1965 but has surged exponentially since 2020

As Kelly Evans from CNBC explained, “If the Fed wanted to jack up rates to 5% right now to fight inflation, it would presumably have to raise the rate it’s paying on those trillions of reserves by roughly the same amount, which could cost it $210 billion. The only small problem with this is that the Fed doesn’t have that much money sitting around. Its net income last year was only around $90 billion”.

The US simply cannot financially afford to raise rates. Raising interest rates won’t benefit the market, the average joe, or even the US government. 

Furthermore, with giant companies such as Netflix releasing weak earnings, Jerome would arguably unlikely be willing to punish an already weak market.

Game Over For Bitcoin?

Bitcoin is a representation of the entire financial system, and its recent plummet signals to the market that fear is real. The leading cryptocurrency has dropped 25% in value so far this year, and recently reached half the value of its all-time highs.

Fear in the crypto market is at its most intense. The Crypto Fear and Greed Index uses five to six measurements to assess the current sentiment of the market and then rates that level of emotion on a scale of 1 to 100: 1 is extreme fear and 100 is extreme greed. At the time of writing, the index is at 12, or “extreme fear” territory. 

Again, the crypto fear is not entirely baseless. Sharing many of the macroeconomic concerns as the stock market, the crypto market’s notorious volatility has left it vulnerable to extreme swings. The speed at which bitcoin has fallen over the past few months is nothing short of terrifying.

So is it game over for bitcoin? Of course not.

Image credit: Icons8 Team

To the disdain of crypto hipsters, mainstream cryptocurrency bitcoin has been, is, and will be the market leader. Although it won’t see returns as large as memecoins, it also won’t fall as far as its competitors. 

For centuries, gold has been an inflation hedge. In the new age we’re living in, bitcoin is digital gold. As countries with unstable governments turn to bitcoin, and as institutions look for alternative sources of financial independence away from governments, bitcoin is increasingly becoming the solution.

Even if we take the worst case scenario that the metaverse is a fad and cryptos of network protocol layers such as Ethereum, Avalanche and Polkadot fall to zero, bitcoin has the ability to survive. Scalability is highly contested between a number of blockchains. These network protocols will compete with each other, perhaps driving each other out of the market, whilst bitcoin sits back and watches the chaos unfold. 

This is the worst case scenario (which we don’t actually believe will happen). In the best case scenario, cryptocurrencies will bounce back as we venture into Web 3.0, and bitcoin will lead the way.

Ethereum Excitement

Having just thrown shade at Ethereum and network protocols, we’ll now discuss why ETH is worth picking up during this crash. Nothing has fundamentally changed in the crypto market, or even the stock market. If anything, the landscape of the crypto market is encouraging. With the approach of Web 3.0 seemingly upon us, we’re seeing mainstream companies positioning themselves to welcome in the new technology. 

Meta, Google, Nike, Microsoft and any tech company worth its salt is preparing to adapt to the metaverse and Web 3.0. This is fantastic news for crypto adoption, especially Ethereum.

Positioning itself as a key player in Web 3.0, Ethereum’s highly anticipated 2.0 update is expected later this year. Assuming that the metaverse succeeds and Ethereum 2.0 launches smoothly – both fairly reasonable assumptions at this point – Ethereum has nowhere to go but upwards.

In The Short Term, We’re All Dead

The key strategy investors must deploy during this crash is long term thinking. Whilst crypto traders are notoriously synonymous with day traders, appreciating the fundamentals of your favourite cryptocurrency requires long-term thinking.

Long-term thinking is crucial now more than ever. With Web 3.0 around the corner and crypto blockchains preparing for it, believers should be stocking up on cryptocurrencies in anticipation of the digital revolution. 

As mentioned, nothing has fundamentally changed in terms of the Web 3.0 rollout, and no Fed hike will prevent it. If Fed woes have depressed prices, and Web 3.0’s potential remains unaffected, the crypto market is ultimately experiencing a fire sale.

That said, it’s unclear where the bottom is. But it doesn’t matter. Even the best investor won’t be fortunate enough to buy at rock bottom and sell at the ceiling. Timing the market to perfection is impossible, so don’t bother trying it. Just remember that picking up bitcoin and/or ethereum at their current prices will handsomely pay off in the coming years.

Cohan Chew
Cohan Chew

Having co-founded Europe’s biggest East Asian culture website (WeAreResonate.com), Cohan has since ventured into East/West equities. His writing background includes Seeking Alpha, The Motley Fool, Capital A, Time Out Singapore, The Huffington Post, Gigwise and Redstar Qingdao.

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