The Effect of the China Conundrum on Crypto

By Juan Villaverde

Entering 2023, it was doom and gloom everywhere. Bears weren't just roaming. They set up camp and started barbecues. And, naturally, every "financial psychic" pegged this year for another downturn. 

But when everyone zigs, I zag. So, I looked on the bright side. 

Our Crypto Timing Model also donned some rose-tinted glasses, forecasting rainbows for 2023, at least for the first half. As such, I stuck to my sunny outlook despite a few quakes in the U.S. banking system in March. 

Looking back, the universe sort of agreed with me for the better part of 2023. But now, there’s a dragon in the room. 

And no, I'm not losing sleep over whether Federal Reserve Chair Jerome Powell is in a rate-hiking mood or if U.S. unemployment charts are clambering upward. 

The real drama is China. If the U.S. sneezes and the world catches a cold, what happens when China starts coughing? 

Currently, China is caught in a deflationary whirlwind. Even though some experts are calling this a China problem, they would be gravely mistaken as the effects will ripple through the global economy.

You see, real estate — which is basically China's favorite piggy bank — saw prices take a nosedive. To understand the severity of this, think of the 2008 Great Financial Crisis, but on a steady diet of steroids. 

Indeed, since 2007, China has been playing Jenga with escalating debt, primarily in real estate. Throw in a global pandemic and strict lockdowns, and suddenly, that Jenga tower isn't looking so stable. 

So, this isn’t just a housing hiccup. This has the potential to make millions feel the pinch. 

Global reverberations? Oh, they’re coming. 

Chinese companies owe about $5 trillion overseas, mostly in the mysterious "Eurodollar" market. It's like the domestic U.S. dollar system but based largely overseas … and highly opaque. 

Spoiler alert: The Fed can't swoop in to save the day here. 

And China’s not too keen on rescue missions either, fearing a nosedive in currency value if it moves to bail out the housing sector. 

So, while Powell plays with interest rates like a kid with a new toy, China's pot keeps simmering. 

Since the bulk of the crypto market resides in Asia, guess what’s at risk if China's credit system takes a tumble? 

It looks like our Crypto Timing Model’s prediction of a less-than-sparkling second half of 2023 seems right on cue. While a crypto bear market is improbable, China’s real estate blues might just dull the glitter as 2023 bows out. 

But hey, don’t forget about the after-party. Brace yourself for a potentially bullish start to 2024. 

After all, it’s going to take a lot of fresh new money to keep China afloat. Keep an ear out for the familiar hum of the money printer. 

By Alex Benfield

Alex Benfield’s Notable News, Notes and Tweets

• Just a few months ago, most analysts had expected the Fed to pivot and start cutting rates before the end of this year. Now, J. Powell is planning to hike at least one more time. Oh, how things change.
   
• Will Clemente made note of one of the lesser-known benefits of a major Bitcoin (BTC, “B+”) ETF. He also touched on the technical analysis aspect of Bitcoin’s latest correction, showing that there may have been more than one reason for the fall.
   
• The complaints about Securities and Exchange Commission Chair Gary Gensler aren’t just coming from people within the crypto industry. In fact, The Wall Street Journal Editorial Board ripped into his unfair and arbitrary decisions regarding Bitcoin ETFs .
   
• Before you think it’s an SEC-wide problem regarding its attitude toward Bitcoin and cryptocurrencies in general, here’s former SEC Chair Jay Clayton saying that the approval of a spot Bitcoin ETF is inevitable. Additionally, he believes BTC is not a security.

What’s Next

Wrapping up the year, we can't ignore the sobering thud from the SEC's recent decisions.

Just as investors had their hopes pinned on spot Bitcoin ETF applications, the SEC opted for delay over decisiveness. This move, accompanied by a Fed with an unexpectedly hawkish stance, adds to the prevailing uncertainties that have marked much of the latter part of 2023. 

It feels as though we're waiting for a series of dominoes to fall, and we're not quite sure how far-reaching the cascading effect might be.

Nevertheless, it's essential to maintain perspective. After all, the crypto market has weathered storms before and emerged more resilient. 

While China’s looming credit concerns and the ongoing antics of financial regulators might cast a shadow over the end of 2023, they also set the stage for potential rebounds and future money printing. 

For the savvy investor, tumultuous times are often opportunities in disguise. As we transition into 2024, anticipate a market teetering on the edge of significant shifts. 

Our advice? Stay informed, stay agile and remember that after the darkest night, dawn always breaks.

Best,

Juan