2019: The Year When Crypto-Assets Boom?

Financial markets obey a simple gravitational law where what goes up fast usually plunges back to Earth, often at nearly five times the speed. But ... they frequently bounce back. For contrarian investors, understanding these dynamics may prove crucial to making money out of crypto-currency assets in 2019.

In the past, we have been sceptical of the investment merits of crypto-currencies, such as Bitcoin, XRP and Ethereum, largely because their supply elasticities are not clearly bounded and many lack a clear general usefulness outside of their specific block-chain contexts. Yet, these doubts were not the only factors or even the main factor that derailed the crypto-currency bubble this year. Its demise, which has seen average crypto-asset prices down by over 80% from their peaks, was led the collapse of Global Liquidity, itself the result of widespread quantitative tightening by the World’s Central Banks. Like most investments, crypto-assets are liquidity-sensitive and rise and fall with the swings in the Global Liquidity Cycle, as the chart below shows. The chart plots the movements between the growth in CrossBorder Capital’s Global Liquidity Index (GLI) and the Coinbase Crypto-currency Index. Accepting the small sample-size, crypto-assets still look highly sensitive with a multiplier of somewhere between 50-100x per unit change in the GLI index.

Notwithstanding, our earlier concerns about the asset class, we have to acknowledge that any boost to Global Liquidity over coming months could trigger a huge rally in crypto-currency prices. This would parallel a similar (albeit smaller-sized) pick-up in gold bullion prices, another liquidity-sensitive asset class. Recognising that marginal changes in demand can be important, a second factor that could support a rally in alternative currencies is the on-going attempt by Russia, China and others to progressively demote the US dollar as the World’s monetary standard. We regard the widespread use of the US dollar in commodity and oil markets as an important source of support to help maintain its value. Therefore, the success of Shanghai’s new Petro-Yuan crude oil contract, which has already grabbed over 15% of spot trading in less than a year, and the November spate of oil supply deals between Saudi Aramco and Chinese companies, could ultimately lead towards dual currency pricing (i.e. USD and RMB) of crude oil. This would be a significant competitive step backwards for the US dollar, and one likely to encourage investors to further diversify currency holdings away from the greenback. Gold is an obvious choice, but crypto-assets could be another?

Yet, for us, it is all about liquidity! Thus, the overriding question is whether or not Global Liquidity will rebound through 2019? Certainly at current GLI index readings of 18.5 (‘normal’ range 0-100), World liquidity is very tight, or equivalent to two standard deviations below par. Global Liquidity has lately been falling at its fastest rate since the 2007/08 Global Financial Crisis. Indeed, we suspect that policy-makers have made an error and over-tightened policy because of their inexperience with QE (quantitative easing). Already asset prices evidence this: recent months have seen yield curves flatten, commodity prices skid and Emerging Market share prices and currencies plunge. Now Wall Street is succumbing. Fed Chairman Powell is consequently hinting at more flexibility, and China’s People’s Bank has already started to inject more funds into markets. All-in-all, we figure that Global Liquidity will rebound strongly through 2019. This will encourage investors to plough back into risk assets. And, it may even trigger renewed a speculation in crypto-assets?

Coinbase Crypto-Currency Index and Global Liquidity Index (GLI), 2016-18 (Monthly, YoY% Change)