https://miro.medium.com/max/400/0*Yzcy1ZKAkFechLlP
(Any views expressed in the below are the personal views of the author and should not form the basis for making investment decisions, nor be construed as a recommendation or advice to engage in investment transactions.)
The price of anything is the most powerful signal of the collective will of humanity. As a society we utilise forms of money as an abstraction of the energy it costs to produce the things that sustain us. The price tells us what amount of energy balances supply and demand for a given good or service. When society distorts pricing signals, supply and demand becomes imbalanced, resulting in wasted energy. Waste enough energy, and civilisation falls; hopefully to be replaced with a new social structure that is properly organised to conserve energy in a better way. With all of the exciting current and future developments of crypto, we must not lose sight of the most important ingredient to the current excitement … The BOOLMARKET.
Yes, the technology has to work and does … sometimes. But if we are moving towards a tokenised world, the price of the token that represents a particular piece of crypto technology or community is the easiest way for a layperson to understand whether it is successful or not. However, the PRICE = SUCCESS identity is easily perverted if the unit of account is attached to a money printing central bank / government.
How are we to tell the real energy value of a thing if the quantum of the yardstick increases every year? Or worse, if the yardstick is just a piece of political theater based on the whims of fallible humans who care only for their survival in office. While many crypto natives benchmark their wealth in Bitcoin (and increasingly, Ether) terms, the vast majority of humanity values their net worth on some derivative fiat currency linked to the US dollar.
The spectacular rise of all things crypto since the washout in March 2020 will make some think that superior technology is winning. The tech is so amazing and transformative that the gains in adoption will not only increase but accelerate. Along with this success, the prices of many assets will continue to rise exponentially. You think to yourself, “this shit is so LIT, I only look at charts on a log scale.”
But the easiest way to generate buzz and click-baity news articles and draw eyeballs to a particular project is the token price. The purchase of an NFT piece of artwork for $69 million at a Christie’s auction earlier this year set the stage for the explosion of interest in the technology-enabled art form. The talent and technology were ever present, but it took a splashy purchase to train the world’s attention upon all things NFTs.
Any token price is a combination of technology and monetary conditions. The difficult part is determining the percentage weighting of each factor. As we close out 2021, the two major economies of the world, America and China, stand at the precipice of a market maelstrom. In America, the Federal Reserve is feeling intense political pressure to deal with inflation now. In China, Beijing must decide whether it actually wants to reform its economy, or continue printing money to support the current growth model. The decisions these two economies make in the next quarter will determine the extent to which the monetary landscape supports the further price appreciation of the crypto complex.
The technological improvements offered by crypto have become irrelevant at this point because current expectations are so high. Many TradFi research analysts previously pooh-poohed various aspects of the crypto market, but now gush with praise for crypto and laud it as a transformative advancement. Many politicians around the world are recognising the inevitable coming shift in how corporate, government, and individual actors interact due to crypto. The bright future is baked in, and only disappointment awaits. That does not mean I’m bearish on the good crypto will accomplish in short order, but it does mean adding users at the anticipated rate will not generate outsized returns.
There are three types of crypto allocators, and each one will alter their portfolio according to their Q1 2022 outlook.
The monetary policy decisions of the US and China affect cohorts 1 and 3. The second cohort could create independent value to nullify a poor monetary environment, but that will occur only once there are larger self-contained economies such as open Metaverses and a plethora of DAOs. These forms of crypto organisations are in their infancy, and so cannot completely steralise conditions that favour cash and bonds over financial assets.
This may sound repetitive, but this iterative process of advancement and decline all fits within the circular nature of human society. Our collective actions follow a predictable wave-like progression. It’s as if human society exists purely inside a rave. A known set of baselines are augmented with melodic progressions that lead us from the intro, into the breakdown, followed by the drop, which causes nirvana, and then death and rebirth into a new track. After completing this circo loco millions of times, we hope the general trajectory is progress, but stagnation and decay cannot be dismissed as impossibilities.
I Can Handle It
The Evergrande saga and the ongoing decline of the Chinese property market in general is completely self-inflicted. Starting with the market reforms of Deng Xiaoping in the late 1970’s and early 1980’s, Beijing decided it would urbanise quickly. That drive to move hundreds of millions of poor peasants from their rural homelands to soon-to-be prosperous megalopolises, such as Beijing, Shanghai, Shenzhen, and Guangzhou ( the four wealthiest, Tier 1 cities), went into overdrive once America dropped its opposition to China joining the World Trade Organisation (WTO) in 2001.
The major private property developers purchased land from local governments, and built the housing necessary for this massive human migration from farm to city. At a certain point, instead of providing much needed new shelter for the people, property development became a tool of rampant speculation. Because the capital account was (and still is) closed in China (i.e., comrades can’t invest their savings abroad) and the domestic stock market was underdeveloped, people gravitated towards protecting their wealth via property ownership.
Andrew Collier produces excellent bottoms-up data on the economy in China. The below charts illustrate the degree to which the wealthy in China account for the majority of financial assets and, importantly, are heavily invested in property.