Michael J. Burry, the finance guru who was portrayed in the movie “The Big Short,” is known for predicting crises. For example, his hedge fund made billions from the 2008 housing crash, and Burry liquidated nearly his entire investment portfolio during the second quarter of 2022.
Since no one seems to know if traditional markets will rebound before entering a new recessionary environment, it might be a good time to consider investing in cryptocurrencies. Here are some examples of how experienced investors sometimes miss out on incredible rallies.
In May 2017, Burry said that people should expect a “global financial collapse” and World War III. Instead, the S&P 500 appreciated 20% in the following 9 months. A couple of years later, the index peaked in December 2021, at a level that was more than 100% above Burry’s suggested short entry price.
In December 2020, Burry called Tesla’s stock price “ridiculous” as part of his justification for opening his short position. In the 35 days following that comment there was a 47% rally and Tesla shares reached their highest 10 months later after a total gain of 105% from Tesla’s supposedly “ridiculous” price.
Indicators point to a major recession, but exactly when is unknown
Unerringly, traders should not underestimate the fact that the US Dollar Index has risen sharply against other major world currencies to reach its highest level in 20 years. This shows that investors are desperately seeking refuge in cash positions, getting out of stock markets, currencies and corporate debt.
Additionally, the spread between 2-year and 10-year US Treasuries widened to a record -0.57% on September 22. Normally, when shorter-dated government bonds outperform long-dated bonds – an inverted yield curve – it is interpreted as a major recession signal.
Adding to the concern, on September 22 the US Federal Reserve reported an all-time high of $2.36 trillion in overnight reverse repurchase agreements. In a “reverse repo,” market participants lend cash to the Fed in exchange for US Treasuries and agency-backed securities. Excess cash on investors’ balance sheets indicates a lack of confidence in the credit risk of counterparties, which is a bearish indicator.
After exposing the three critical macroeconomic indicators that have reached levels not seen in more than 2 decades, two important questions remain. First of all, what is the relationship of Bitcoin (BTC) and Ether (ETH) with traditional markets? And more importantly, what impact should investors expect if the S&P 500 falls 20% and the housing market crashes?
Regardless of whether a person pays their bills using cryptocurrencies, the prices of energy, food, and health services are highly dependent on the US dollar. International commodity transactions are mostly priced in dollars, including imports, exports and trade itself. So even if one pays their expenses using Bitcoin, chances are that at some point this value will be converted into fiat money.
The cost of the loan in dollars affects multiple economies
The main consequence of the lack of effective circular commerce exclusively using cryptocurrencies is that everyone’s life depends on the strength of the dollar and the cost of borrowing. Unless you live in a cave, isolated on self-sufficient land, or on some communist island, when investors hoard cash and interest rates soar, all markets are affected.
As for an eventual collapse of the real estate market or a further 20% crash in the stock markets, the truth is that its impact on Bitcoin and Ether is impossible to predict. On the one hand, there is pressure from holders rushing to reduce their exposure and secure a cash position for an eventual longer-than-expected bear market. On the other hand, there could be an increase in investors looking for non-forfeitable assets or seeking protection against inflation.
For this reason, the story of Michael J. Burry becomes relevant at a time when all the experts and market analysts affirm a future collapse of the market or the possible collapse of housing prices. Bitcoin and Ether are facing a looming global recession for the first time, and judging from March 2020, when a panic sell-off triggered by the Covid-19 crisis, those who held out for the long haul were rewarded.
The views and opinions expressed here are solely those of the author and do not necessarily reflect the views of Cointelegraph.com. Every investment and trading move involves risk, you should do your own research when making a decision.
Investments in crypto assets are not regulated. They may not be suitable for retail investors and the full amount invested may be lost. The services or products offered are not aimed at or accessible to investors in Spain.