There are two rather large events taking in the macro-economic environment right now; Evergrande and the US Debt Ceiling. Both of these events stand to bring volatility into all markets, including the cryptocurrency markets. In recent days I’ve been doing more research into these events to try and understand the political side of things.
My aim is to determine whether or not the respective governments (China / US) are going to let Evergrande fail, and the debt ceiling not be raised. These are two totally different events in their own right, and one is quite a bit more serious than the other.
The question that has been on my mind recently is, “How does this affect my portfolio and its trajectory?”
Let’s dig in.
Extra important for me to offer the disclaimer that I am not recommending you follow me on my trades (or lack of trades). Do your own research, take your own action.
Why is Evergrange in the news?
I was pleased to see bitcoin rise back up to $52k a couple of weeks ago. Then a couple of international events drove the price back down to $40k. One of those events was Evergrande. I came across this story after scrolling through Twitter, but I went looking in the first place because I woke up to bitcoin falling 10% in a short period of time. I knew something happened, I just didn’t know what. Turns out it was just another failing company that was “too big to fail”.
Evergrande is not too big to fail
I want to see more massive companies fail. I really do, if only to prove a point. However, I am far too jaded to believe that a company as large as Evergrande will not be bailed out by someone or something. If I had to bet money on whether or not they get bailed out, I’d say they will be bailed out by the Chinese government, based purely on historical precedent. China doesn't always bail out its companies but it has been known to in the past.
That means I’m not too worried about how this whole Evergrande debacle affects my portfolio. I think the news is more dangerous than the actual reality or possibility of Evergrande defaulting on their debt.
Double-clicking on that last point… The NEWS has a much greater capacity to change perceptions than the actual reality or possibility of something happening. The China Bitcoin mining ban caused many new investors to lose faith and dump their coins. The reality is that the ban didn’t really do much to the structure of bitcoin. Blocks continued to be minted on schedule, and the world moved on. So while I am not worried about the outcome of Evergrande, I am worried about the narrative that mainstream media ends up spinning.
To Recap
I’m not worried about the outcome of Evergrande, because I think it’s rather straightforward.
I am worried about the narrative that the media spins. Since I cannot predict what the narrative will be, I will refrain from taking action on my portfolio.
The US Debt Ceiling
For me, this is a no-brainer. I don’t think there is any way that the folks in Washington will not raise the debt ceiling. There is simply too much at stake. The precedent set in the last 50 years is to simply keep on raising the debt ceiling. That’s exactly what I believe will happen.
Ultimately I think that’ll be bullish, not just for bitcoin, but for all markets. Raising the debt ceiling is a signal to traders, investors, and the retail buyer of stocks that the music hasn’t stopped yet. I think it’s likely we will continue down this path of Keynesian expansionary monetary policy for another decade before a total collapse is on the table.
The Implications of a Collapse
Among the conversations taking place in Washington, is the far-reaching implications of what a credit default would look like in 2021. Because the USD is the current global reserve currency, it means that the implications are not confined to America.
A default on government debt would send economic shockwaves to every country that holds USD on their central bank’s balance sheet (That’s every country). That being said, the United States has defaulted on its debt before.
1779: Continental Currency Default
1862: Greenback Default
1934: Liberty Bond Default
1979: Accidental Default
I think we’re in a time where everything is too tightly coupled together. Never before has there been such an intermingling of currencies, agreements, debts, and contracts between nations and superpowers. A full-blown default in today’s day and age would likely result in a substantial decrease in America’s credibility and the USD’s status as the global reserve currency. It would be the perfect opportunity for another country to vie for the status of being the most trustworthy and reliable currency in the world.
How does this impact Canada, specifically?
As a Canadian, I feel a certain obligation to answer this specific question for my Canadian readers. Every country including Canada holds USD in their reserve in order to back their own currency. Not only do we hold raw USD, we hold United States debt in the form of bonds.
Bonds essentially provide a steady stream of income for the holder of the bond, as long as the debtor (the United States) actually has money to pay the interest. If the United States defaults on its debt, then the bond becomes worthless. This could be a big economic hit to us as we are likely partially reliant on the income we receive from the payments on the US bonds.
Am I Worried?
Not at all. I think the outcome is clear, the debt ceiling will be raised. I hope I don’t later have to eat my words. Again though, it is the perception of the events that I think will matter more than the most likely outcome. How people perceive these events unfolding, and their own implications and conclusions that they draw will inevitably affect some amount of people’s decisions.
People may part with some of their portfolios in anticipation of needing more cash, or they may stock up on bitcoin in anticipation of an all-out crash. Bottom line: Expect Volatility.
What if this is bigger than anyone has anticipated?
What if I am wrong about all of this? Well then, all bets are off. I think if the United States were to default on their debt, it would be an outright catastrophe the likes of which the world has never seen. Every country either holding USD or United States bonds would be affected in massive ways.
International trade would no doubt be stunted, further crippling already diminished supply chains. When trading stops, so does everything else. If oil were to stop being traded, then we would eventually see food stop being traded and at that point we may as well be in the apocalypse.
If the United States did end up defaulting on their debt, other superpower countries like Russia or China would compete at the UN for the status of having their currency be the new global reserve. Until the new global reserve currency is decided, countries would largely need to trade within their borders and be much more self-sustainable.
As for myself … I would just continue to stock up on bitcoin. The value proposition of bitcoin would be better than ever if the United States were to default.
What I am Considering Doing
When big events like this take place, I always have a thought that crosses my mind. That thought is that I think I can profit from knowing what the market will do. My track record isn’t the best for managing my trades in periods of high volatility though. So needless to say, I am not going to trade this event.
The only trades that I am still considering making in the near future are at the end of this bull run. I must admit, it keeps on looking further and further away with all the recent price action. Although, if you’ve been in the bitcoin space for any more than 2 years, you know that bitcoin can pop up 10-30% in the blink of an eye and go on an absolute rip. The opposite is true as well, the right piece of news can really destroy your week/month.
Regards,
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