With a 1000 point drop in the Dow Jones just a day ago, I wanted to give my analysis of what it means for the market itself, the U.S. economy, and the crypto markets. I usually don’t talk much about the general economy but I think to understand how the stock market will impact crypto, it is important to do so. Also, I will be focusing mainly on the U.S. economy although most of the global economy is in a similar situation.
As you know the stock market was down considerably this past week. There are several reasons for this. One being that there hasn’t been a proper correction in nearly a decade. This is due to very low interest rates pumping money into the system and keeping it going (does that sound familiar to the Tether situation?). Next we have very risky and complex investment products based on volatility, usually measured by the CBOE volatility index (VIX). The complexity of these puts them outside the scope of this article to explain, but if you remember the housing crash and stock market crash of 2008, it was very similar. Back then, home loans were repacked and repackaged in different investment products until they reached a point that nobody even knew what was in them, their risk, and what they were worth. So now, instead of home loans, these volatility products are being packaged and repackaged, often with people betting against the index and on leverage. So the losses are significant when the market moves against those holding them. But this is just just the first segment to fall when the market starts dropping. Retail is in an apocalyptic state as store closings are at a record pace. Even technology companies like Apple, who are the darlings of Wall Street are suffering as the average consumer can no longer afford to buy a $1K phone that is as fragile as a robin’s egg and breaks within weeks. Apple made a lot of money tricking people into thinking they needed these pricey phones. But recently they have cut orders from their suppliers 50%, which means consumers are no longer able to foot the bill for this cycle of pointless and overtly conspicuous consumption.
So what does this situation mean for the market and the economy. First off, despite the fact the most Americans and the news use the stock market as an indicator of the current health of the economy – it’s not. It’s a trailing indicator, and what that means is when the stock market turns bad, the economy has already been bad for some time. The stock market lags the real economy. I know I don’t talk about the economy much here, but it is my opinion that the U.S. economy is in terrible shape. The GDP numbers are basically fake, and unemployment numbers are also worthless these days. Not only that, because of low interest rates, you have inflation costs for virtually everything going through the roof, especially food and housing costs. Real food costs are up as much as 10% a year, and housing has doubled in 5 years in some markets. Have wages gone up that much? No, not at all. So the current trend is totally unsustainable. If your costs are going up 10% and your wages stay the same, there is no way to get out of it and eventually poverty overtakes you. The fix for all this is raising interest rates, which were mentioned by the Fed recently, and this just added to the market problems, since everyone knows that higher interest rates will pretty much bring everything crashing down, not to mention what it will do to the national debt payments.
With all that being said, I am not predicting the market will crash tomorrow, or even next week. It could very well hold itself up for months or even a year as the stock market moves much slower than the crypto market. But the crash is coming. And when it does, it will be the last sign needed to show everyone the economy is in dire straits.
So how will this effect crypto? I think to understand how it will effect crypto, we have to break the public into generations. Those over 40 and those under 30. I believe for the mainstream types that are over 40, they will not flock to crypto no matter what it does, even if it’s doubling in value every year. Sure you will have some, but the majority will never get into the crypto market until crypto has reached such massive adoption that it will be simply a part of life. Basically, these people are not early adopters, and they are definitely not early adopters in a risky investment after just losing a bunch of money in the stock market. They have a little money and they aren’t about to go risk it. They want asset protection and are risk averse. They are also resistant to new technology for the most part. So overall, this is not the demographic to expect to flock to crypto.
Now we look at the group that is under 30. These people grew up during the 2008 crash and the housing crisis. They may have even seen their parents laid off work, or having to downsize the house. Or possibly even be forced to leave their house. And now once again, they will see another economic crash. So these younger people have NEVER seen the current economic system work. They have never seen any of these things we talk about, the stock market, banking, etc., do anybody any good. They have only seen it turn people even poorer.
Because of this, these younger people will be eager for new things, a new paradigm when it comes to money and building wealth. They don’t really care as much about risk, because in their mind, the current system always ends in a crash anyway, so why not take a shot at something new. Unlike the older generation who have seen the old system work, the older generation still holds out hope it will turn around, so they stick with it. But younger people will be willing to take the chance. And those are the ones that can fuel the crypto markets after a stock market and economic crash. It won’t be the upper class old money as some people predict. Instead it will be the younger new money that flows in.
Now I know many people in crypto believe that when the market crashes, all the big Wall Street types will dump their money into crypto. I can promise you this will not happen, and it would definitely not happen quickly. When the stock market crashes, they will be watching to see when to buy back into it, not just abandon it. The same way crypto people don’t sell all their BTC and go buy stocks when the crypto markets crash. Also, when the stock market does crash, crypto will come down as well, it just will. It might not crash, but it will come down.
Over time, crypto will attract the new money I talked about. There will not be some quick “flippening” as people like to say of stock market money going into crypto. But over time, after the crash there will be a slow inflow of new, younger money into crypto markets that will build a solid foundation for decades.
So finally, yes a stock market crash and economic crash will end up helping crypto, but not in the short term, it will take time for crypto to fully benefit.