Eventually counterparty risk is going to matter and matter much, just like it did when Lehman collapsed. Only this time, sovereign balance sheets will be at risk also. Bailouts will be much more difficult to successfully orchestrate, and so contagion is likely to spread rapidly. As a result, the Fed (and other central banks) will be forced to either print insane amounts of new money even in the face of already high inflation, induced by supply shocks, or else to stand by and watch it all burn in a deflationary collapse where effectively all counterparties, even most sovereigns, default.
And when that day comes, and whether the outcome is hyperinflation or a severe deflationary collapse, the entire world is going to realize that there’s only one way to avoid much of the carnage: Crypto.
Key blockchain assets cannot be arbitrarily inflated and are natively digital, meaning that they don’t depend upon any counterparty for their issuance, existence, usefulness, accessibility or transferability. When these assets are held in our own secure digital wallets, those assets (unlike essentially every other asset in our financial system) are not somebody else’s liability.
For now crypto is trading as a “risk on” asset with high correlation to equities. This is, IMO, mainly because Wall Street entered the game some years ago. Wall Street, wrongly, views crypto as a speculative new technology (similar to Internet stocks in the mid to late 90s) and so is using the same sophisticated trading algorithms it uses to trade equities to trade crypto under that false assumption. Therefore, in the short term, prices are being set by these traders, and those prices are highly correlated to other “speculative” assets (like equities). But once counterparty risk becomes paramount, and it eventually will, the winds will shift.
Everyone will realize all at once that, properly stored, crypto is one of the very few major asset classes in the world that has little to no counterparty risk and that can’t be arbitrarily inflated or “capital controlled”. On that day major digital assets, like bitcoin, will essentially go “no offer”, and prices will moon. We’ll easily see $10,000 candle days, and maybe even a $100,000 candle day or three.
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I should emphasize that it’s possible that crypto prices might collapse just prior to mooning.
Because of Wall Street’s misguided trading algorithms. Or because most crypto today is bought via centralized exchanges, some of which operate on a fractional reserve. When those exchanges (which are counterparties and have other counterparties) get in trouble, they, like most everyone else at that time, may be forced to rapidly sell in a desperate bid to raise liquidity.
Even if that happens, I would expect crypto prices on DeFi platforms/exchanges to hold their own in comparison. When the prices of key crypto assets on DeFi platforms begin to suddenly and materially diverge from those on centralized exchanges, that may be a sign that large green candles are soon on the way. People who panic sell as they see the prices on centralized exchanges initially collapse will likely very shortly thereafter regret it.
When will all this happen?
Dunno. But the world’s financial system is right now (due to leverage and central bank hubris) more fragile than it has ever been. Eventually something will break, counterparty risk will be all that matters, and the race to the exit will be on.
And in that world where banks, brokerages, money market funds and even sovereigns can’t be trusted to remain solvent, there will be only one exit ramp of consequence: Crypto. The traffic backup from everyone trying to access that exit all at once will be insane, but those who are able to get through and successfully exit in time will be the influencers of the new world who will rebuild everything after the collapse.
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