With inflation's end nowhere near in sight, the Federal Reserve this week announced more "tough times" ahead - indicating that they're likely to do more interest hikes for the rest of 2022. Inflation rates in the US right now sits around %8-10 - but since CPI reports exclude food and energy prices by design, the "real" inflation rate is likely a lot higher. Most people see the prices of food and gas rising in their own lives and are probably feeling more than what the "official" numbers say, at least.
A lot have been said about what this means for the economy as a whole, but if you're a crypto investor the things to recognize are:
- This is the first time in history that the Federal Reserve has increased interest rates during a recession - normally you lower rates as the economy dips to give it a boost, but the Feds have no room to do that since the rate was already at 0 for most of the last decade. The problem is much more severe than it is typically reported, especially in the wake of the COVID lockdown procedures that we have yet to experience the full effects of, yet. Some are predicting a market correction as high as 50-60% in stocks, 30-40% in real-estate. We don't know if it's going to go that high but there's no reason to think that it's going to improve, at this point. ("Brace for impact", as many have been warning for a while - it's finally coming.)
- Increases in interest rates generally means borrowing is more expensive, which is likely going to slow down startup investments in the Web3 space, too. Crypto projects, VC/VC firms, and "thought leaders" in the space as we know now are likely to disappear in the next few years as access to cheap money dries out.
- Crypto projects that have been heavily reliant on marketing to keep their prices up will likely tank with the fiat markets, because of its increased overlap with the mainstream economy. Even Bitcoin, Ethereum, Dogecoin, etc. may be in trouble since their notoriety may turn sour when the fiat markets tumbles further. (Being well-known is not an asset in this case, in other words.)
- Currently the most popular crypto coins have no means of reacting to inflation rates (except for Ethereum, which will begin its staking services after the "merge" in September, in theory), so they may struggle to justify convincing people to HODL while the banks start to offer higher interest rates for savings accounts overall. Staking coins like Tezos [XTZ], Algorand (ALGO), Cosmos(ATOM), are in better position to take advantage of these trends since they are, at least for now, outperforming the banks by a very large margin.
- When the economy as a whole starts to get unstable the common wisdom is that money will flow into the USD. We don't know if that will happen this time - especially with the USD's credit rating outlooks having deemed "negative" by international agencies since 2013. We know that generally speaking, interest in crypto assets tends to increase in countries where its fiat currencies are less stable - but that often requires a breaking point in which the population loses faith in the banking system as a whole. Are we at that point, yet?
- For crypto prices to stay stable, all it needs is about 1% of existing fiat money to maintain its current price. (The general economy is about a 100x bigger than the crypto economy as a whole right now.) But it's allocation, per coin, is not likely to stay even. Crypto will bottom out with the fiat economies, but only a select few coins are likely to make a comeback during the recovery process.
Many crypto investors are banking (literally) on the general public losing faith in the fiat system as the market dips further, which will make crypto investments look more appealing. The most obvious "utility" for crypto right now is staking rewards - which are objectively outperforming the banks right now, but the bear market will also be a period for altcoins working on providing real value to its users to come out ahead. It's going to be a wild ride either way - good luck, folks. 🤞
Only people causing inflation is the millionaires that made money during COVID for three years. My neighborhood they still building houses still building shopping centers. I think we getting faked out.
@bossladybusinessbranding, the housing market has started to show some signs of slowdown - but the numbers tend to take a while to get updated since real-estate moves slow. 2023 is where it's going to play out, imo. (And a lot of numbers are being hidden for political reasons right now - so after Nov, we're going to start to see reality creep in more than usual.)
DYOR, but I'd be preparing for something big to happen this and next year, imo. It's going to be a big shift for most.
kakola
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But I don't want to sell
PropNotes
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> This is the first time in history that the Federal Reserve has increased interest rates during a recession -
Weren't rates raised in the 80's as a result of stagflation & commodity price increases?
RyanTanaka
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@wolneyyy, you could argue that point as well, but kind of the big thing is that back then they still had room to lower rates since it wasn't at near-0 back then. We've never been in a situation before where there's literally nowhere to go. (Can't go below 0, after all - they were starting to raise rates bit by bit around 2016 or so but after COVID it went right back down to 0 due to an "emergency". That's what has largely fueled the pumps of the last few years.)
But you have to ask yourself - is this sustainable? Was it ever was?
PropNotes
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@RyanTanaka, oh no, I don't think so. I think general credit risk across the globe will be in a long term downtrend BUT we are well below that and should have some mean reversion, been juicing for way too long.
issue is that if the US raises too aggressively the globe plunges back into the dark ages as most are printing even more aggressively.
Looking forward to a return to hard assets/currencies which is the clear appeal behind BTC