The Federal Reserve appears determined to regain control of inflation. after stage bubble From the economy, mechanically comes a period of recession where all bad investments are filtered out by the market. The reaction is immediate: The Nasdaq is down 30% since January and the cryptocurrency is in a meltdown. Are we witnessing the bursting of a new Internet bubble?
The Fed changes strategy
face uncontrolled inflation, and not particularly popular, especially in a pre-election context, the Federal Reserve is changing course. Even if the response is still too timid to neutralize inflationary gangrene, the Fed has raised interest rates 50 basis points. This is the biggest increase yet 22 years of printing money.
Markets expect inflation to go away on its own. It probably won’t happen, and sooner or later the Fed will have to raise rates dramatically if it wants to keep them. legitimacy. Jerome Powell could be the central bank governor who killed inflation. Recently, I acknowledge that the Fed needs to act aggressively and thatThere won’t be anysoft landing “.
“ A soft landing simply means a return to the 2% inflation rate while maintaining the strength of the labor market. It is very difficult to get there now »Jerome Powell explains.
The astonishing thing is that for the past 30 years, the Fed has tended to cut interest rates when the stock market has been in a recession. So investors got used to these bailouts with freshly printed money, and the stock price was skyrocketing. Nothing seemed to stop this stock market euphoria. Not even a pandemic. So it looks like we’re changing the model: The Federal Reserve is preparing to raise interest rates quickly as stock markets falter.
Unlike the crisis of 2008 and the crisis of ” dot com »characterized by Demand Shocks That Didn’t Accelerate Inflation, the current situation is very inflationary. Of course, cash injections immediately become more problematic. The Federal Reserve currently has other concerns than a decline in the value of shareholder portfolios.
Financing crisis in technology and cryptocurrency
When real interest rates rise, investors can earn low-risk and rewarding returns. just buy government bonds . In fact, organizations make adjustments in the allocation of their assets. The most risky investments, such as Venture capital, or crypto, was required in a zero rate world.They are much less attractive with rate of 8% .
Web 3.0 bubble, Backed by venture capital funds like Andreessen Horowitz in 2021, It can explode, due to lack of liquidity. Thousands of crypto startups have received funding through Buzzing phrases NFT or blockchain. Without a plan of action (because the token is not one), these experiences will soon be overtaken by reality. The collapse of the underground reservoirs, which was expected, marks the end of ” Ponzinomics and accelerate the clean-up of the ecosystem.
The Fed Wakes Up And Disables Technology
Technology stocks for large companies like Zoom, Shopify, DocuSign or Queen Piece It has been crumbling since the end of last year. This massacre is not surprising: When prices go up, the discount rate goes up and valuations go down.Consumers also have less money and thus businesses save Less sales.
Medium-sized technology companies , which is valued in the tens of billions and has no resilience from Apple or Microsoft, has been hit the hardest by the financial winter. Many of these companies have lost From 50% to 75% of its value in recent months. any comparison with chetcoins It would be a coincidence.
When rates rise, the illusion of prosperity dissipates.Billions of dollars pumped in since 2008 have encouraged an increase in stock market valuations. Therefore, investors expected significant sales growth. These predictions suddenly became more pessimistic to the point of dispensing with the collapsed companies that seemed untouchable Netflixwhere dead .
If large publicly listed companies falter, startups will suffer, too, as venture capital funds rely in part on stock market valuations to value startups. Thus, returning to reality at the monetary level will lead to Funding crises for thousands of startups, especially during advanced funding rounds.
The Fed and the Internet bubble
Economic cycles often run the same way: After a period of excess cash used to speed up the recovery comes the bursting of bubbles. Zero rates lead to over-risking and exposure to increasingly expensive assets, Under the artificial impression that there are no risks.
In 1999, the Nasdaq was on the rise and online startups were on ample credit. At the time, it was enough to talk about “.com” addresses to raise money (in 2021 from the NFT). Investment, debt and consumption were exploding in the American economy. Between September 1999 and March 2000, the NASDAQ Index boomed by 83%, in just 6 months!
During 1999, the Federal Reserve injected enough liquidity to lower interest rates before starting Raise the rate after a year. The economy was sliding into recession in early 2001 and in September 2002 the Nasdaq hit a 5-year low, with a decline of 77% compared to the 2000 peak.
All the essential ingredients on the table: Technological revolution, increase in money supply, change in financial evaluation measures. Technology evaluations were based onA very decade-long bull market And it turns around.
As in 2000 and unlike in 2008, technology companies seem to be the best It is most affected by reflection.
It’s not just the big tech companies that are going through this financial winter. Cryptocurrencies are certainly not immune to this. Even the most capitalized cryptocurrencies like BTC or ETH are closely correlated with the public stock markets. NFTs have also largely declined after record levels in 2021. The example of Jack Dorsey’s token tweet that initially sold for nearly $3 million and lost 90% of its value is very informative.
We are officially at Big Bear Market. The difference compared to previous courses is that The Federal Reserve will put much less money into the machine. Thus, the crypto market will restructure promising projects. It can be counted on the fingers of one hand. This downward cycle is likely to lead to the emergence of a new implementation of the blockchain. In a few years, it will stimulate new institutional adoption, such as ICOs, DeFi, and then NFTs.
Encryption is a file New technology Who needs a massive purge in chetcoinsTo extract the most valuable projects. Let’s not forget that recessions led to a rally Amazon, Google, Salesforces, Stripe, Airbnb, or even Paypal.
Coinbase going bankrupt?
Coinbase recently released its financial results for the first quarter of 2022: They are especially bad. Coinbase activity drops sharply and the company registers A net loss of $430 billion.The decline in transactions with . is likely to continueAlcohol market.Technology-focused difficulties constitute a Existential Risks on Coinbase .
To make matters worse, the company said in its report that customer assets “They can be treated as assets subject to bankruptcy proceedings and customers can be treated as generally unsecured creditors.”“.
Not your keys, not your coins. If Coinbase goes bankrupt, customers will likely not get all their investment back. First, the company will pay its creditors and then the customers. And then, remember February 2014 where the exchange Mount Gox declared bankruptcy, with nearly 850,000 bitcoins lostAnd thousands of ruined customers.
It would be a good idea to consider moving your money to file hardware walletdue to disruptions that burden technology. Coinbase Bankruptcy Risk Should Not Be Underestimated .
Bitcoin: Experiment with Fire
Inflation not only erodes confidence in currencies, but in all financial assets. So it is natural that Investors are staying away from stocks and bonds. In the 1970s, the asset classes that benefited the most Gold and real estate.Could Bitcoin Be This New Asset Class Knowing It Gold is no longer an effective hedge against inflation ?
Let’s be honest, despite Bitcoin’s intrinsic qualities, The king of cryptocurrency has not shown its ability to withstand inflation . The lack of education is arguably the main reason, as all it takes is enough people to believe that Bitcoin is a way to hedge against inflation thanks to its absolute scarcity to actually become one.
Bitcoin is increasingly associated with technology stocks: 0.82 with Nasdaq And 0.59 with S&P 500 . A year ago there was a negative correlation between Bitcoin and both stock indices. So it’s possible that the tech bubble bursting could drive away Bitcoin, like “of technical stocks with no profits»towards the abyss. The stagflation we are entering isAn acid test to see if bitcoin contains a substance and if it can really compete with millennial gold.
Or perhaps the brilliant generation of entrepreneurs who will suffer from Federal Reserve policy recognize the inflationary risk and accept BTC…The arrival of billionaires on the protocol would be the best way for Bitcoin to finally turn the article around.
The arrival of stagflation in the West marks the end of a cycle that could last several years. Tech and cryptocurrency companies are seeing their valuations drop and will increasingly be seen as a normal business. Inflation is certainly the most unpredictable macroeconomic factor. His return will dramatically restructure the technology industry. Like the air of the year 2000.
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Bitcoin changes everything! Coming from a financial background, I am passionate about everything related to this technology. Every day I try to enrich my knowledge of this revolution that will allow humanity to advance in its liberation.