Cryptocurrencies and the stock market. The choice at crossroads
In March 2018, U.S. stock markets rushed into the 10th (!!!) year of growth.
Bubble? Well, no. All is justified. The economy is developing rapidly. Its main indicator — the number of newly created jobs in nonagricultural sectors — does wonders almost every month getting ahead of all forecasts. At the same time, wage growth and consumer inflation are rather low. For this reason, the Federal Reserve System raises the refinancing rates very slowly since it does not see any threat of overheating the economy. Corporate reports confirm the macroeconomic statistics indicating a steady increase in company profits. $60 or $65 per barrel of WTI is equally beneficial to both producers and consumers and does not pose economic and inflationary risks.
It would seem that the search for alternative profits in this situation is a secondary task. It is much more important to play skillfully on minor market fluctuations, compare forecasts and actual macroeconomic data and corporate reports, and correctly interpret technical performance indicators.
But it is wrong. Short-term market goals often do not coincide with long-term strategic plans. And the picture is different for long-term investment perspectives.
The economy and stock markets have been growing for the 10th year in a row. This absolute record seems to be a harbinger of the forthcoming market reversal considering the cyclical nature of economic development:
А) Economic growth and the rise in employment and wages are gradually beginning to cause a so far slight increase in inflation. Accelerating, as all economic processes do in the growth phase, it will inevitably lead to an increase in refinancing rates, to a change in the balance between production and consumption, and to rebalancing security portfolios in the stock market. The period of cheap money is coming to an end, and monetary levers for cooling the economy gradually come into play.
B) Throughout 2009–2014, the USА and other countries used various quantitative easing, bond redemption, and other programs to give an impetus to economic growth. These programs were completed in the US in November 2014. And the Fed balance sheet increased from $0.9 trillion in 2009 to $4.48 trillion by the end of 2014.
The balance sheet started slowly decreasing now. There is a view that a decrease in the Fed balance sheet usually leads to a fall in the stock market. The direct relationship between them disappeared early in 2018 but today it returns given the decline in stock prices. The investors must bear in mind that further imminent reduction of the Fed’s balance sheet may result in a stock market bust.
- 2000–2018 Dow Jones chart
2. S&P 500 index, 2000–2018
3. Nasdaq 100 index
5) US 10 Year N-Note Futures
The economy and the stock market have been largely accelerated by low lending rates. But the credit impetus became the weakest since 2008–2009 at the turn of 2017–2018.
Boeing and Caterpillar — behemoths of the US heavy industry — and traditionally conservative Microsoft showed exponential growth in 2017, which would be an utopia to hope to continue.
So, we see the following picture in the spring of 2018: the record-setting 9 years of growth in the US stock market, the recent sharp increase in the stock prices of companies not related to production of highly liquid gadgets and new technologies, the horses of the era of cheap money, and expectations of inflation and of high refinancing rates.
Moreover, Trump’s economic policy and protectionist tariffs on Chinese goods surely will adversely affect the world trade balance and possibly the US bonds whose major holder is China again ready to retaliate against the United States.
Besides, in addition to the stock markets, bonds supported by low lending rates among other things also stand very high at present. The fall of bonds will definitely hit stock prices as has already happened in 2004 and 2006.
It’s no wonder that after the long autumn-winter rally, the US stock markets showed double highs and rushed down at the end of March 2018 for the second time in 1.5 months. In terms of a technical analysis, it is an obvious alarm signal for those who bet on stock growth.
Trade wars between the USA and China can cause serious fluctuations in major world currencies to be followed by currencies of developing countries including Russia.
The policies of institutions responsible for centralized money emission thus become unpredictable. We believe this to be yet another very timely reason for investors to pay attention to the source of return, alternative to US stocks, which is blockchain technology.
We are not talking about the profitability of cryptocurrency markets to avoid associations with speculations on cryptocurrency fluctuations with unpredictable results.
It has been suggested that cryptocurrency is the same bubble as the tulip mania in the Netherlands in the 16th century. But we also know other bubbles such as the high tech Nasdaq index in the second half of the 1990’s or mortgage bonds in 2000–2007. Both bubbles caused recessions, the second one being the greatest since the recession and Great Depression in 1930. The bubbles have burst … Nevertheless, Nasdaq today is above the peaks of 2000 and 2007, and mortgage lending and securitization of loans are alive and kicking.
In other words, inflated expectations and models of consumption and stock-exchange gambling based on debt overburden and margin trading collapse but new technologies continue their journey and increase their potential.
The idea of blockchain technology associated with decentralized issuance and smart contracts that ensure investor rights better than legal agreements is becoming the basis for the digital economy of tomorrow.
Even today ICO is becoming a powerful tool for raising funds and introducing high technology in various sectors of the economy.
It is amazing in this regard how opportune is the ICO project of RusGas. Clearly, its masterminds took into account not only the above-mentioned macroeconomic risks of traditional investments but also a number of internal Russian factors:
- The ICO funds will be invested in the development of the gas industry that is badly in need of new research and resources for developing smaller fields that are not interesting to Gazprom and other giants.
- The very idea of decentralized issuance provided the cryptocurrency is secured with energy resources or their processing products is very promising in the era of uncontrolled printing of fiat currency by central banks
- The ICO will take place exactly at the time when it becomes clear that, having missed the computer and Internet revolutions, Russia intends to take the leading position in the world of blockchain technologies. The draft Federal Law On Digital Financial Assets, which introduces the concept of cryptocurrencies and tokens, was submitted to the State Duma on March 20, 2018. Both will be considered property. Cryptocurrency is defined as a digital asset that is created and entered in the registry in accordance with its algorithm and the token is a digital financial asset to be issued to attract resources, its status only being taken into account in the blockchain.
The media that gives attention to cryptocurrencies and their legal assessment are unanimous in their opinion: the bill will become law very soon. It is a response to the country’s needs and to the lack of investment in local projects.
RusGas does not expect instant returns like some other projects in education or information sharing.
Here it is a question of future investments in the equities of gas producing and gas processing companies and in high tech developments.
But it is these features that promise long life to the project despite potential risks.
Comparisons of the forthcoming ICO with similar still few projects in the field of energy suggest that the amount of funds raised will greatly exceed the Hard Cap target and will reach $25–30 million.
