2nd Crypto Crash of 2021

Friday marked one of the bigger corrections in the crypto market and everyone is trying to understand why?  There are many theories including larger easy to blame reasons like:

• Omicron’s recent discovery and fear of unknown impact
• The Fed’s potential clamping down of our runaway growth (i.e., inflation & jobs)
• Speculation over cashing in on the gains this year for the holidays

Specific causes included:

• a downturn in crypto derivatives trading as a result of higher costs (i.e., if the Fed raises interest rates)

“NYDIG estimates that $1.1 billion of leveraged bitcoin positions and $2.5 billion of crypto leveraged positions (including bitcoin) have been liquidated in the past 24 hours, representing the largest such notional liquidation since Sept. 7.”

• The CBOE Volatility Index (VIX) hit its highest levels since January (’21)

“It is rare for the VIX to have such big spikes and usually the market goes on to have positive returns over one to six month periods, as the panic and forced selling from OmniFed subsides—as we saw last January,” Reyes added.”  Source

• The MACD may be confirmed tomorrow

“Fairlead’s Stockton says that if the downturn persists, after bitcoin broke through an area of support at around $53,000, it would qualify as a more troubling technical breakdown of the uptrend in the asset’s price.

“ Momentum has weakened to the extent that there is a pending weekly MACD ‘sell’ signal that would be solidified upon a confirmed breakdown tomorrow, she wrote, referring to the Moving Average Convergence/Divergence, used by technical analysts as a gauge of momentum in an asset.”  Same Source

• China’s continued crackdown on Crypto

The source is over 2 weeks ago when the market appeared to first start softening, but it’s a consistent theme that’s been reported.

• And even crazier include Elon Musk’s tweets based on personal matters

Larger Financial Market Implications

The cryptocurrency market did crash earlier this year, but this time, we may see both the virtual market match that of the traditional one which could match the housing crisis impact we saw more than a decade ago.

In a elucidating conversation with my good friend here in LA, the picture for where the economy is heading became clearer.  While I can never claim to be as prescient as successful investors like Ray Dalio or Warren Buffet, I’ve been focusing more on all the factors that may help us understand where the value of the many currency options we have today.

In the 2008-09 housing crash, the main cause post mortem was our income  not being able to sustain the massive amounts of mortgages that people had accumulated over the previous decade.  The adjustable and many forms of risky debt had no way of being paid back over the long term.  Today, we have many regulations that were implemented to ideally prevent another crash from happening.  However, as with most disasters, we usually can’t see them coming.

One of the main topics we discussed were to see if the debt is increasing like it was back in the first decade of this millennium.  We turn to the Fed to learn it has.

Household Debt and Credit Developments as of Q3 2021

*Change from Q2 2021 to Q3 2021
** Change from Q3 2020 to Q3 2021

At the same time, my friend mentioned that the increase in debt could be the result of people moving from renting to ownership.  So, looking at what the Census says, it does look like ownership definitely increased from 2016 to 2020, BUT here in 2021, we see a massive decline in ownership:

Also, earlier in the report, one stark change in the types of ownership was “owner occupied” homes dramatically decreasing from 2021 compared to 2020:

So, this points to not renters changing to home owners, but investors possibly piling on mortgage debt possibly to obtain additional rental income (like we saw in the housing crisis).  The good news for the short term, however, is that defaults are not occurring like they were starting in 2005.

Flow into Serious Delinquency (90 days or more delinquent)

Source

However, some say it might increase despite the improvements in 2021.

“TransUnion Senior Vice President and Mortgage Business Leader John Mellman said he expects a rise in delinquencies in 2021 due to expiring forbearance plans.

“Refis continue to be a major driver of the increase in activity,” he said. “While reported delinquencies are currently low, we expect to see a rise in delinquency levels at the end of the first quarter and into the second quarter.”

While Mellman wasn’t correct about this year, maybe his predictions are just a little too early.  Also, if we look at the Fed’s rosier picture above with “serious delinquency” rates, it should be pointed out that 2020 was the worst on record for average consumer debt levels:

Source: Experian

And quite shocking is that consumer debt is at the same levels as it was during the housing crisis:

2008 Housing Crisis Debt Levels

Source

At the height, the total amount of debt was $14 trillion.  In 2020, the level was $14.88 trillion.

So, if debt levels are the same (or possibly higher), how are people able to pay these debts?  The next question becomes is “Income higher/lower/the same as they were in the 2 periods?”

Real Median Household Income during the Housing Crisis

At best, income was $62,865/per capita (2007) and at the lowest, $60,200 (2009).

Real Median Household Income 2020

Here in 2021, the latest numbers are $67,560/per capita (2020) with the Federal Reserve Bank of St. Louis’s FRED tool trending lower for this year.

Source

Income may have increased as much as 12.2% between the 2 periods (2020 vs. 2009) or as low as 7.4% (2020 vs. 2007).

Maybe we have more money today?  However, how about this little thing we’re all feeling: inflation?

Inflation in 2021

Inflation is definitely higher than it was during the housing crisis and it doesn’t seem to be decreasing with this report published by the Brookings Institution just 3 weeks ago.

Core Goods Inflation is markedly higher:

Two of our most important needs: food & energy are spiking.

So much so, it’s:

The Highest Core Goods Inflation Rate in 30 Years

While our income may be higher, it may be wiped out by the increased costs of much needed goods which appear to only be rising.

Debt to Income Ratios in 2020

One last data point that might make sense of this are what were at the crux of the pain points during the crisis: debt vs. income.  The good news is that the latest data highlights it’s not as bad (yet) as it was in 2008:

Debt vs. GDP

Source

The Fed also monitors this as “household debt.”  Taking a snapshot of a handful of states including the biggest one (California) in the latest quarter (Q1 2021):

vs. the height of the housing crisis (2008):

Source

For more visual clarification, the Fed color codes it:

With today’s situation looking less scary:

But our country looked healthy as well during the dot com bubble:

While it’s impossible to predict, the current economic situation looks quite concerning.  I’ve been thinking the market would crash for 4 years+ now keeping a bit of reserve funds just in case.  However, I haven’t put this much effort into all the indicators.

Frankly, there are other factors (that I might be overlooking), but with all these issues currently at play, it is definitely creating additional considerations with future crypto valuations.

Life is a zero sum game.  To raise the prices of all the cryptocurrencies, you need to pull from the traditional sources of value: i.e., the almighty dollar, gold or other forms of stored value.  We haven’t seen the latter markets tank as much as the crypto markets have risen.  Just as the housing market imploded, there’s a chance we may see values get pulled from one market or the other.

Who will win?