Market Lab Report / Dr. K's Crypto-Corner
by Dr. Chris Kacher
In Centralized Finance We Distrust
Growing distrust in central banks and centralized finance was the driving force behind the creation of bitcoin after the financial collapse of 2008. The situation has become even more dire since then. The meteoric rise in the price of bitcoin is testament to this. The more people that buy and hold bitcoin, the more freedom people have.
El Salvador Clashes with IMF
El Salvador recently reported that they will make bitcoin legal tender. In consequence, the IMF which provides loans and grants to countries, essentially the Federal Reserve Bank for the world, is going after El Salvador by giving them a warning about making bitcoin legal tender. On the surface, the IMF says El Salvador's decision raises a number of macroeconomic, financial and legal issues that require very careful analysis since they claim crypto assets can pose significant risks, therefore effective regulatory measures are very important when dealing with them. In reality, the IMF is running scared of eventually being made redundant.
If the IMF does not get its way, they can then decide to curtail relief packages sent to El Salvador and any other country that chooses this path. In reality, the IMF and World Bank are concerned countries could break free of the need for their existence as other countries pile on such as Argentina, Brazil, Mexico, Columbia, Paraguay, and Panama while bitcoin's value continues to exponentially rise over time despite two 94% corrections and multiple corrections between 80-90% since 2010. Even India is now doing a 180 by considering bitcoin as a currency within their financial system.
Connected to this, the IMF and World Bank are pushing the ESG initiative. ESG stands for Environmental, Social, and Governance. ESG focuses on environmental concerns such as global warming. Many banks and institutions are supportive of ESG including Blackrock, Merrill Lynch, JP Morgan, and Bank of America because it indirectly gives them more control over the flow of money.
ESG scores are kept on individuals which can affect one's credit rating which then impacts the odds of an individual getting a loan or a mortgage. The ESG score of an individual or company may drop if bitcoin is bought. Companies with low ESG scores can also be penalized with higher interest rates on loans due to lower credit ratings. Various research papers have studied the effect of environmental, social, and governance (ESG) performance on credit ratings.
It comes as no surprise that Bank of America does not allow their customers to buy bitcoin while Merrill Lynch's Edge, the firm's digital investment service, adds ESG scores to its client dashboard. Billionaire Chamath Palihapitiya who believes in climate change said ESG is a fraud as it does little to contribute to reducing emissions, but instead could enable major companies to borrow at negative rates of interest if their ESG rating is sufficiently high. Ultimately, ESG scores could be used to try to curtail the buying of bitcoin.
Nevertheless, Shark Tank's Kevin O'Leary expects a flood of institutional money into Bitcoin when ESG standards are met. While this makes sense, it could take a number of weeks or months to reach this point, an eternity when it comes to the breakneck speeds of the cryptospace, so in the meantime, the various headwinds Bitcoin faces could pressure its price, so it could trade sideways, retest lows, or even break below recent lows around $30,000. This would be the time to look for undercut-and-rally entry points as its robust, sustained fundamental tailwinds remain as strong as ever.
The world has seen how governments controlled the freedoms of individuals across most countries when COVID hit. What would stop governments from using ESG as a form of control against Bitcoin? Most recently, the Basel Committee on Banking Supervision released a report that cited risks including market and credit risk, fraud, hacking, money laundering and terrorist financing.
Nevertheless, Bitcoin’s on- and off-chain metrics are strongly bullish along with a number of major technical indicators signalling deeply oversold or critical bottoms, many of which I have cited in prior reports. Nevertheless, I have always advised selling on price/volume action, depending on one's time frame, fundamentals be damned. Metrics help light the way. With bitcoin, I use technicals over longer time frames to avoid getting whipsawed.
In the year 2000, stock fundamentals looked as good as could be, but Mar-2000 was a clear sell signal. I had no idea the big dot-com bull was over until later in 2000, and found myself making nearly no trades over the next three years while the worst bear market in the history of the NASDAQ unfolded.
On the other hand, when it comes to buying, I have also always said I buy based on BOTH technicals and fundamentals and, when it comes to crypto, also making use of on- and off-chain metrics to gauge the size of your exposure to cryptocurrencies.