Many investors are assuming that this is a bearish cycle like the previous ones.. That is, the price goes up. The price goes down. But, later, the recovery will come in the predicted way. In fact, many in this space use graphs to make their predictions. This is done because it is often thought that history repeats itself. In other words, the past is like the future. So, it is believed that this bearish cycle has its days numbered. Suddenly, this 2022 is like 2018. 2023 will be like 2019. And 2024 will surely be like 2020. In other words, if you bought expensive in 2021, don’t worry, it’s only a matter of time. Why? Because history will repeat itself.
Of course, it is perfectly valid to rely on models to make forecasts. However, we must remember that models are not infallible. In other words, they give off false signals. Secondly, the models are based on probability theory. Which implies that they are not very accurate when it comes to predicting exceptional events.
Now, in the case of an asset as new and risky as Bitcoin, the unquestioning tone of confidence, when it comes to making predictions, by its most devoted promoters is more a sign of immaturity and fanaticism than serious analysis or of a flash of clairvoyance. What happens is that many bitcoiners speak from the heart. And they sell an illusion of certainty with the same conviction that a religious fanatic predicts the end of the world. Bitcoin, for many, has become a faith. Many have found a new identity in the movement. It is a social, political and ideological phenomenon that goes beyond a mere investment. In such worldviews, the cause will always triumph. History, sooner or later, will grant victory.
With such a bias, it is very difficult to make serious forecasts. How can we explain that 13 years of history is too little time to speak with such authority?
The term “Great Stagflation” is being used here in contrast to the term “Great Moderation.” The economist Nouriel Roubani writes on the subject in his latest article to tell us about a transition period. Here we are not talking about what did or did not happen in the last two halvings. When we talk about the “Great Moderation” we are talking about a period that goes from the mid-1980s to the crisis of 2007-2008. However, the most sensible thing is to extend this period until last year. Because the Great Moderation encompasses nearly 40 years of moderate growth, employment, and inflation. It is considered a stage of great stability and predictability in the economic and financial sphere. This allowed a considerable increase in indebtedness and an enormous tolerance for risk.
The 2007-2008 crisis broke this stability. However, the subsequent stage was highly successful due to liquidity injections by the authorities. In this case, inflation remained at moderate levels due to a globalized productive apparatus that was up to the task at the time. This came to an end in the post-pandemic era. The end of the Great Moderation and the beginning of a new, much more complex period is telling us that this bearish cycle is not like the previous ones in more than one aspect. Previous bull cycles have been driven by monetary stimulus motivated by deflationary pressures. The behavior of Bitcoin remains to be seen in a world overwhelmed by inflationary pressures and with more limited central banks when it comes to injecting liquidity.
The vulnerabilities of the global production and distribution chains are evident. The world is no longer the same. The faults have proven not to be as transient as once thought. Apparently, these are very deep structural faults. In other words, it takes a long time to solve them. The war in Ukraine has no foreseeable end. I mean, this itches and spreads. The “Covid-zero” policy in China has deepened supply problems. And bottlenecks are everywhere. Inflation, despite the economic slowdown, is not falling at the desired pace.
Everything seems to indicate that we are entering a period of stagflation and the markets have not yet adjusted their prices to the situation. Markets are still assuming this is just any bear cycle. You could say that we are still in the denial phase. The average investor continues to think with a “Great Moderation” mentality. In other words, it is thought that sooner or later the Federal Reserve will come to the rescue to save the day.
Of course, the talkers insist on blaming the government for everything. “Inflation is always and everywhere a monetary phenomenon.” That, of course, is not entirely true. It is an incomplete truth. The demand is decisive. But the supply is too. If everything depends on the money supply, then we would not have a problem. The solution would be to reduce the money supply and that’s it. However, that is true in fantasyland. Unfortunately, today’s world is much more complex.
The “soft landing” scenario in this case is not the most likely scenario. Why? Because the issue of supply is beyond the reach of central banks. The only thing they can do is reduce demand by raising the cost of credit and cutting back on their purchases. They cannot increase oil production, for example. They can’t decongest ports. And they can solve the conflict in Ukraine for us.
In many cases, optimism is confused with wishful thinking. Investing is forecasting. Because we always buy or sell based on an expectation. So, let’s think about the future for a moment. Let’s go item by item. How do we see demand next year? Bigger or smaller than now? How do we see revenue? How do we see growth? How do we have geopolitical tensions? How do we see liquidity? And the debt?
The Merge: bullish or bearish?
Let’s think for a moment about a person who decided to buy a property last year. You don’t have to be a genius to know that cheap credit was an important factor in making the decision. Now let’s think of a person who will be in a similar situation next year. very different contexts. On the one hand, inflation hits our pockets and deteriorates our savings. On the other hand, in times of crisis, income decreases. That makes us more conservative. Which implies that we risk less. Additionally, knowing that we have to pay more to get into debt, we think more than twice when buying anything. Crisis creates more crisis.
Of course it is a mistake to underestimate our situation. The pain caused by this paradigm shift could be “longer and uglier” than we think. My intention is not to generate alarm and pessimism. However, I consider it a necessity to download a lot of people from their cloud. The situation is serious. There are many naive investors who still think that making money in this context is a tangerine. They are very different times. We cannot continue thinking as before.
Disclaimer: The information and/or opinions expressed in this article do not necessarily represent the views or editorial line of Cointelegraph. The information set forth herein should not be taken as financial advice or investment recommendation. All investment and commercial movement involve risks and it is the responsibility of each person to do their due research before making an investment decision.
It may interest you:
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.