Month: May 2021

Digital currencies have been experiencing extreme price volatility and a massive retracement from their record highs amidst growing concerns for tighter regulations from China and United States.

The global cryptocurrency market’s total value stood above 2.5 trillion dollars at the end of April, before falling below 1.5 trillion dollars following last week’s capitulation.

After setting its all-time high price of 65,000 dollars on April 14, Bitcoin is currently trading just above 35,000 dollars level. Over the past ten days, Bitcoin’s value has fallen more than 50%, and this is the trend currently prevailing all over the digital market.

Similarly, Ethereum, the world’s second largest coin dropped to as low as 2,000 dollars, while popular Dogecoin also witnessed major pressure, breaking below 25 cents at one point.

The sell-off started in mid-May, when Elon Musk halted the purchase of Tesla vehicles with Bitcoin as a form of payment, amid environmental concerns.

Hence, the U.S. Treasury Department said that it would require all cryptocurrency transfer worth 10,000 dollars or more to be reported to the Internal Revenue Service.

However, it was China’s decision to crack down on Bitcoin mining and to ban cryptocurrency transactions that caused the bloodbath in the market, with the price of Bitcoin sliding as much as 30% before recovering.

As Bitcoin crashed, so did shares in crypto-exposed tech companies, with the price of Tesla breaking below 600 dollars, while the shares of crypto exchange Coinbase, have lost more than 40% since its listing on the Nasdaq.

I don’t claim to be an expert on the crypto space and don’t really understand it. Yes, blockchain might prove useful, but I fail to understand why a crypto asset should be worth billions because of the usefulness of blockchain. Second, I disagree that cryptos are a hedge against inflation. I also disagree with the notion that cryptos will replace currencies, or that they are an alternative to Central Banks. 

However irrespective of what one believes, what is important for investors at the moment is that the regulatory cloud we have mentioned in the past is just beginning. And the regulatory assault on the crypto space is coming from multiple sides.  

SEC chairman Garry Gensler in a recent House committee hearing, made it clear that there is no investor protection regime for the crypto space at the moment, implying the need for regulation. He also mentioned regulating exchanges and that he was concerned about price manipulation. Coinbase, for example, is registered in most states as a money transmitter, not as an exchange.  

Meanwhile in China, where banks have been banned from getting involved in crypto for several years now, is also preparing more regulatory scrutiny. As a result, two miners said they will cease operations in China citing “regulatory risks”. 

Finally, the Biden administration’s tax enforcement plan released Thursday calls for transactions of more than $10,000 to be reported to the IRS. This might lead to many investors liquidating their holdings before any such plan becomes law.  

We don’t really have a crypto strategy and as a general rule of thumb don’t get involved in the space. However irrespective of the different opinions about cryptos, investors who venture in the space need to be aware of the regulatory risks. These might include, but not limited to, tax liability risks, regulatory scrutiny of exchanges, clarity in the ownership structure of many cryptos, and investor protection regulations.  

Please note that the appeal of the crypto space has been that it was a non-regulated and decentralized investment. However, if regulators enforce the same regulatory scrutiny on the crypto space as in other investments, that could alter the appeal of the space, and the value of cryptos as perceived by participants in the space.   

Inflation has been the main concern in the forex market as the soaring consumer and commodities prices have renewed talks of policy tightening by Central banks.

The US dollar continues underperforming across the board, as the Federal Reserve downplays the rising inflation as “transitory”, reiterating its accommodative monetary policy until the US economy hits its targets for maximum employment.

Euro has climbed back above 1,22 level for the first time since February, as the successful vaccination program, and the relaxation of lockdown measures have improved the outlook for European economies.

The British pound maintains its latest breakout above 1,41 to the dollar, posting fresh yearly highs driven by the gradual lifting of coronavirus restrictions in Britain, and the improvement in the employment market.  

The Canadian dollar has been the best performing G10 currency against the dollar in 2021 so far, lifted by the higher crude oil prices and as the Bank of Canada was the first central bank to taper asset purchases.

As the global recovery is gaining momentum, the growth-related Australian and New Zealand have been outperforming across the board, as the prices of copper and iron ore hit multi-year highs.

In the cryptocurrency market, Bitcoin broke below 40,000 dollars while rival digital currency Ether also dropped below 3,000 dollars after China banned its financial institutions from providing services related to cryptocurrency transactions.

Inflation scares have been around for years. In fact, there has never been a moment over the past 20 years or so that market pundits have not reminded us about the dangers of inflation, as a result of Central Bank policies.  

The word on the street over the past several weeks has been that inflation is roaring back. As a result, the market will correct because of higher interest rates ahead (they say). In fact, as Bloomberg reported, inflation expectations are at 16-year highs.  

So, let us talk about inflation. Yes, inflation this year and perhaps next year will be elevated, but from the very subdued levels of 2020 (the Covid year). Also, the last time inflation was above 4% was towards the end of the previous financial crisis. As a rule of thumb, inflation tends to spike when exiting a recession.  

However insofar as interest rates are concerned, it took the Fed many years to feel comfortable raising rates, and even then, at an anaemic rate of 2.5% in 2019. But raising rates back then almost threw the US economy into recession, that forced the Fed to take everything and introduce extraordinary accommodation actions. This even before COVID. 

Yes, bond yields have moved up a bit over the past several months, but this is more of a reflex reaction of markets. I don’t think it’s a sign of long-term inflation returning, or that yields will be spiking a lot higher, thus prompting investors to sell equities and move to treasuries.  

The Fed will not make the same mistake in made in 2019, raising rates for the sake of raising them, that almost threw the US economy in recession. Also, the fact that the Fed continues to purchase assets, will deter yields from moving much higher.  

And yes, real rates will continue to be negative, perhaps for years. However, this is also not a reason for Central Banks to raise rates and threw economies into recession. The extraordinary accommodation Central Banks are providing will be with us for a very long time to come.  

The bottom line is that I would not worry much about inflation. As the Fed and ECB have said, inflation will be transitory. Longer term, demographics and technology are still deflationary forces, and will most likely overtake inflationary forces. So, while markets might correct as inflation ticks up a bit, chances are a correction will be another dip buying opportunity.