The next financial crisis: Will Cryptocurrency skyrocket or freefall?

Cryptocurrencies may be a play thing for many, a new way to experiment with digital cash or perhaps to buy things online at the  moment, they are going to be embraced by governments, institutions and individuals, but have yet to be adopted by the masses.

As some experts predict an impending economic and financial crisis, crypto- currencies, as a store of value, could play a bigger role in international currency.

In general, during a crisis, traditional safe havens such as precious metals, US dollar, US Government bonds or real assets work as the preferred hedges. However, with crypto- currencies, people have new options. If the US dollar becomes highly inflationary, cryptocurrencies will be a popular alternative as they are not tied to any specific country.

However, the world of cryptocurrencies is wide and heterogeneous, and some of them can only play this role in the future.

The first chapter of this paper identifies the main reasons for a potential coming financial turmoil (excessive debt and money creation, excessive equity leverage combined with a weakening market liquidity and irrational exuberance 2.0).

The second chapter explores how traditional safe havens work and can work in such a context and the third one will examine whether cryptocurrencies can be a new efficient solution as a hedge.

What could trigger a financial crisis and make asset prices collapse soon?

Excessive debt and monetary expansion:


Public indebtedness is much larger today than in 2008, even though it has been stable for a few years (see chart 1). Without the large and accommodating monetary policies of major Central Banks purchasing huge amount of bonds and other assets that greatly swell their balance sheets (also known as Monetary base – see charts 2a/b/c/ showing the Monetary base of major CB and chart d/ for the total Monetary base), budgetary solvency of OECD countries would not reach the equilibrium.

Therefore, we can observe an obvious interaction between public debt policies and monetary policies. Accommodative monetary policies allow OECD countries to maintain public budget solvency and help avoid a public budget crisis. Thanks to the monetary policies of ‘great accommodation’, OECD countries continue their extensive budget policies (especially in the US where the Trump administration is doing something without precedent in the history of fiscal policy making and is willing to continue increasing public spending)!

This circular mechanism is like an endless vicious circle between public debt and monetary base expansion that will continue up until the day Treasury bonds investors lose confidence.

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Source: Yves Maillot, Veteran Fund Manager & SwissBorg Advisor.

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