An Observation on Crypto Cycles: Are You Ready for the Periodic Inflection Point? Part 2

We discuss the irreversible factors in global cycles and their drivers. We then discuss the risk aversion cycle and hedging, and how Economy after Entering the New Cycle”, we mentioned that “ prosperity and hope are mainstream factors that drive the world’s development, but they are also cyclical. The trend now is that the pendulum is moving towards conservative hedging and has not yet come to an end.

In the sentiment pendulum, hype and hedging are at extreme ends. Hope and dream drive the hype cycle to the extreme, while the hedging cycle is driven by the sense of security and the pursuit of certainty.

Risk Aversion, Pi Online

In the trend of deglobalization, more people need a global deflationary asset to act as hard currency. Compared with hopes and dreams, human beings’ need for security are more instinctive and urgent.

There is always ebb and flow, and the tides are ebbing. We need to be prepared.

Hedging

To discuss hedging, we need to understand the assets and liabilities first.

In an economy, one person’s liability is another person’s asset. With the economic development and the widening gap between the rich and the poor, some people are overburdened with debts and are unable to repay them. This results in bad debts, which translates to a higher overall risk for the economy.

As a result, external forces are needed to reduce this debt and average it out to make the economy more stable. However, the cost of averaging out is that some debt needs to be discharged, which will damage the rights and interests of creditors.

Bad Debts, Los Angeles Daily News

Direct debt reduction can damage the credit system itself. Hence, an appropriate way may be to use the method mentioned by Ray Dalio: “ debt monetization” — diluting some of the debt. To hedge is to avoid such passive “subtraction”. Frankly speaking, hedging is an effort made by the rich to avoid their assets being passively deducted.

Due to the fact that all countries are facing the problem of resource centralization, the monetary policies of all countries are pretty much the same. In that case, having a global deflationary asset to act as hard currency is the best way for the rich.

Bitcoin: the Alpha of Hedging Assets

1920–2010 Gold Price Fluctuations

Gold is the preferred safe-haven asset at present.

Many people have a misconception, thinking that gold should be “stable” and that bulls last long and bears are short. In fact, gold is the opposite of these two attributes. Not only does gold have high volatility, but the cyclical trend of gold fluctuation is also pretty obvious. The bull market lasts shortly and the bear is long. This is also in line with the fact that people’s mentality of risk aversion is always radical and relatively unsustainable.

We believe that hedging assets should have intrinsic certainty and high external liquidity (high acceptance).

High Intrinsic Certainty

The driving force for hedging comes from uncertainties in the market and the political environment. When this uncertainty is understood as the source of possible threats and destructions, the pursuit of certainty comes into focus

In times of prosperity, uncertainty is understood as an opportunity; but in hedging, certainty (the resources at hand) is more needed. Therefore, an asset with certainty will be the ideal target for the rich.

So how can we have this intrinsic certainty?

Clear measurement, a perfect confirmation rights process and predictable supply are indispensable. The calculation of gold is based on the physical properties of the metal itself, while Bitcoin uses distributed ledgers to make the measurement completely transparent, open and accurate. When counting gold, no one knows how much gold there is, which increases uncertainty, while Bitcoin has perfectly solved such an uncertainty.

An important event in 2019 is the new Bitcoin Network Hash Rate high (i.e. computing power). This greatly increases the stability of the Bitcoin network and makes the advantage of Bitcoin as a hedging asset more prominent.

New Bitcoin Network Hash Rate High, Cointelegraph

External Acceptance and Liquidity

The biggest change in Bitcoin in 2019 was its widespread recognition and acceptance. Although each country has different opinions and legal definitions on various kinds of tokens and digital currencies, there is a consensus that Bitcoin is an asset.

All the legal work in the United States is to promote access to Bitcoin and other digital currencies on the operational level. Since it is an asset, it should be taken seriously and properly allocated. At the liquidity level, the growth of Bitcoin derivatives and the introduction of legal exchanges, especially Bakkt, are in the testing process and will be launched soon.

The Bitcoin market as a whole is well developed with sufficient liquidity. All these signals point to a more deterministic future of the asset.

Conclusion

This is our recent observation and reflection on the whole market. Being in such a market, we are bound to experience cycles after cycles, which bring both risks and opportunities.

The more immediate question for everyone is “how should I deal with it?” Only those who keep fighting bravely can survive. Once the cycle starts, it won’t stop easily.

Are you ready?

Originally published at https://www.datadriveninvestor.com on October 10, 2019.

What’s Next?

The next article will be part of the “An Observation on Crypto Cycles” series.

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Translated by (via our WeChat Account): Transladom

Editor: Daphne Tan

Cryptocurrency Archives | Data Driven Investor


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