28 September 2021: With the economic outlook in many countries beginning to falter and stocks sinking again, cryptocurrencies will inevitably take their fair share of pain in the coming deflationary drawdown. Similar to that of the late 1990s Dotcom bubble crash, many altcoins, which have seen their valuations skyrocket by the billions, will ultimately disappear at the end of the bullmarket cycle. This article will explain which types of projects to avoid and what to watch for as global markets continue to experience volatility.
Global Economic Problems Continue to Arise
In our last weekly market assessment, we outlined the growing issues within the Chinese and American economies. The Evergrande crisis, talks of American Federal Reserve tapering, massive supply chains issues, and the drying up of government stimulus has led to the the inevitable slowdown of economic recovery. The recovery itself should be considered more of a "kicking the can down the road" approach to the Covid-19 pandemic.
In ultimate destructive fashion, many major economic powers across the world decided to attempt unprecedented monetary policy to essentially print their way out of a Covid-driven recession.
Printing Out of a Covid Recession
Really what this has done was create artificial economic growth that could only be sustained through the continuous minting of fresh government stimulus as no real value had actually be added to the world economy. In fact, a tremendous amount of value has been lost due to major materials shortages, loss of workers, setbacks due to climate change, and many other factors. So, instead of the world economy falling into a deep recession, it was kept afloat by money printing.
This money printing has directly pumped the valuations of global stock markets, housing sectors, and cryptocurrencies alike. A side effect of this fresh money in the economy is the now obviously confirmed inflation. Inflation has been exploding in nearly every economic sector imaginable, pushing prices higher and higher for both traditional consumer goods and investments like cryptocurrencies.
At this point, governments and central banks have two options left on the table - either continue printing money - signficantly increasing the debt, and pushing inflation even higher, risking hyperinflationary forces, or raise interest rates and stop the money printing altogether.
What happens if they decide to choose the latter? A deflationary crash of all sectors that have been artificially inflated from this monetary policy.
Global Market Weakness Hurting Cryptocurrencies
The party was bound to come to an end at some point. With China now on the edge of a possible full economic debt crisis, the ball has begun to roll down the hill. The United States has all but ended the pandemic-related stimulus outside of family-based checks for those with children. Additionally, with the government at a standstill over raising the debt ceiling, no future aid is coming anytime soon. Inflationary pressures have backed the Federal Reserve into a corner, and the stock markets know it. Take a look at the S&P 500 chart below:
The US500 fell another 2% today led by the weakening, highly indebted tech sector. Investors have been reassessing their risk outlook and are acting accordingly to ensure their exposure is more limited for possible coming economic setbacks. This has most definitevely included a reduction in the demand for tech stocks which rely on low interest rates to fund their growth in a way to sustain current monetary growth metrics. Cryptocurrencies are not escaping this trend either. Bitcoin, Ethereum, and other altcoins have also faltered in the past several days. Take a look at the Bitcoin (top) and Ethereum (bottom) charts below:
Bitcoin Price Chart - Top
Ethereum Market Cap
Obviously, all the panic alarms should not be going off quite yet. However, in terms of the cryptocurrency market, a ton of more or less useless projects (shitcoins) have seen their valuations explode since the onset of the global pandemic. The most notorious of these is Dogecoin (DOGE). Currently the 10th largest cryptocurrency in the space right now, Dogecoin has blown up from a tiny percentage of a penny to its present value of $0.26 and a $26 billion USD valuation. That is madness when you consider the fact that the coin has basically no utility and no development.
There are countless examples of this found throughout the cryptocurrency space of projects with shaky development and insanely high valuations. Nearly 100 projects have valuations of at least $1 billion USD or more. That number will undoubtedly shrink in a deflationary event. This is where comparisons to the Dotcom bubble can be drawn.
The Dotcom Bubble Comparison
During that period, Dotcom web startups, regardless of actual utility, business structure, or revenue, were watching their valuations absolutely explode as investors continued to pour money into the new and exciting space. Sound familiar? In the event of a deflationary market crash, a large number of projects will see their valuations plummet and many more projects will more than likely disappear from the space altogether, just like during the Dotcom bubble burst.
What to take away from this comparison is really quite simple - do not follow the hype of exciting new coins that are popping to insane valuations based on nothing other than Twitter moonboys saying the price should triple. There are significantly less projects in the space right now that deserve wholehearted funding then most people currently believe. Among these are the obvious ones: Bitcoin, Ethereum, Chainlink, The Graph, Algorand, Litecoin, and some of the other Ethereum competitors. Outside of the big projects, if the projects you are choosing to invest in don't have any real world utility, investment support, or CONVINCING ongoing development, invest in them with a grain of salt.
Nothing is guaranteed to have longevity. Within this blog we have covered some of the projects we ultimately feel have very strong ongoing development and current or future utility. We will never reccommend investing in something like Dogecoin, the Shib coins, or any of the memecoins. Small cap projects, even those with sound utility, should be treated as riskier assets in the event of a deflationary event (this includes the likes of Ampleforth even though it is one of our favorites).
Summary
The goal of RekTimes is to remain as neutral as possible within the market to ensure we are bringing the best, bias-free assessment. Currently, the probability of a deflationary event is growing due to the global economic implications being seen right now in many different areas, especially in regards to the growing debt crisis and inflation. Does this mean the bullmarket is over? Absolutely not. However, we do reccommend moving forward with a larger portion of monetary capital in cash or trustworthy stablecoins and diversifying as much as possible.
Don't just use the Bitcoin maxis and moonboys on Twitter and Reddit to determine the future of the market. Do your own due diligence, consider the external economic factors, and take no shame in securing well-earned profits when you feel you should.
If you enjoyed this article, check out our other content, send a tip/donation, and follow our social media through CoinTr.ee! Be sure to follow this page to be notified of our weekly postings.
Support our content through CoinTr.ee
