Macro and Crypto
I do not have a crystal ball, of course. Nonetheless, it looks like we won’t have the “simple fundamental trend” in both the macroeconomics and in the crypto industry for quite some time in the future.
On the surface, the macroeconomic situation we have gotten ourselves into is reminiscent of that of the 1970s when the oil embargo caused severe inflation and led to the Fed’s overreaction and then to prolonged “stagflation” (recession + inflation). Similarly, in 2023, the Fed can’t stop prices from rising in most consumer categories without destroying the demand side, which forces many companies out of business and reduces bottom-lines for the rest of them.
Winners are larger companies which, as a result of lesser competition, continue pushing prices higher to compensate for shrinking revenues. This is exacerbated by the geopolitical rift, which curbs market size for many staple exporting industries (machinery, electronics, transportation, travel, hospitality, entertainment, luxury, etc.). What makes it different today is that corporations have gotten much larger, which means that they can define markets pricing for a longer time, and the geopolitics can’t be fast-fixed (that, of course, is a matter of debate).
On the other hand, as a consequence of preceding decades of continuing economic expansion and sectoral diversification, many consumers have several parallel sources of revenues and can keep afloat much longer. That is not what the Fed wants, which aims to cool the economy by increasing the unemployment rate and forcing employees to accept lower wages.
As a result, we have a prolonged political fight on our hands. On the one side, there are the rigid monetary authorities that want to fulfill their “dual mandate” (maximum employment and stable prices) by following the economic orthodoxy and raising the interbank rate higher and higher. On the other, there are national and local politicians that want to be reelected at all costs and are growing increasingly uneasy with the pressure the Fed puts on their constituencies. Which way that fight turns defines when the hike stops and when, expectedly, Fed policy will be reverted back from QT to QE.
Still, that leaves two other macro-factors to address — the geopolitics and corporate control over pricing. I doubt that it might be settled as “easy” as the first one. Not to mention, of course, that the list of negative macro-factors (affecting prices on the upside) might be extended. For example, the worsening demographic situation (an increasing proportion of the total population of pensioners puts constant pressure on governments’ budgets around the world) or the growing natural resources deficiency (a higher cost of extraction combined with lesser accessibility) or the galloping military expenditures, etc.
In my opinion, the way out of the current geopolitical, economic, and business gridlocks can be found (at least locally) in increased productivity by further stimulating technological innovations and massively lifting regulatory red-tapes across all major industries (primarily in finance, manufacturing, and construction). However, that is not likely to happen until the current, inefficient, not-tech-savvy generation of politicians continues to desperately grip to their powers. Given the pharmaceutical and anti-aging industry advancements, this transition can take optimistically the next five to possibly ten or even more years.
Meanwhile, my expectation is that different sides will be jousting and alternatively prevailing over each other, causing prolonged uncertainty in all spheres of our lives and a jigsaw on markets.
Now, let’s return to the “alternative finance” industry, which includes crypto-currencies, DeFi, and Web 3.0/NFTs. Allegedly, there are three local micro-trends that I would like to point out: diffusion (the penetration of crypto into other industries such as sports and entertainment), fragmentation (the attempt by several dominant and competing platforms, notably BTC and ETH, to monopolize users), and regulatory strengthening (which can lead to severe restrictions and sanctions).
Diffusion will increase mass adoption. Fragmentation will lead to monopolization, as well as the creation of several national platforms (including those integrated with CBDCs), which will increase entry barriers. Regulatory strengthening will slow down the industry’s formation and create a “shadow DeFi”.
Overall, I believe that the “honeymoon” phase for both the general public and governments with cryptocurrencies is over, and it will be replaced with much more pragmatic, restrictive, and exploitative approaches. The majority of the political class views cryptocurrencies (as well as decentralization alternatives to current paternalistic, often autocratic, or even outright tyrannical power structures) as a direct personal threat. However, they lack the energy, political cohesion, knowledge, technological means, and, most importantly, time and money to fully suppress it.
In addition, since 10 to 30 percent of most countries’ populations already own or actively use cryptocurrencies, and corporations are pushing for “using the good, blockchain side of it,” our industry is here to stay, one way or another. However, given that regulators around the world will do everything in their power to prevent cryptocurrencies from spreading and competing with local fiat systems (both paper and digital), the next “moon-run” will not be as all-encompassing as the previous two and will likely be limited to a few platforms that manage to survive the coming repressions.