The coronavirus outbreak is causing steep turbulence in the global markets with commodities and stocks underperforming due to an expected slump in China’s projected growth. In an effort to counteract the decline in valuations, the Chinese central bank announced a liquidity injection of about $175 billion into the market. To wrap your head around how significant that liquidity injection is, it is equal to the current market cap of bitcoin.
We opined last month
about the potential monetary stimulus by China to support growth and drive consumption in a world of liquidity driven growth in asset valuations. To quickly recap, recessions after 1985, such as the Asian crisis, the post-dotcom hangover, or the real estate bubble leading up to 2007 are all explained more easily by looking at the capital markets and banking flows. All recessions since 1985 have followed a cycle of increasing liquidity, asset price run-ups and the inevitable implosion.
Liquidity injections help kickstart a faltering economy by putting more money in the hands of people and driving up consumption. That being said, liquidity injections more often than not lead to a surge in asset valuations as access to cheap credit engenders speculative behavior and fuels the rise in asset prices.
Despite the blanket ban on cryptocurrency trading in China, it remains one of the biggest markets for cryptocurrencies with vibrant p2p and OTC markets for dealing in cryptocurrencies. In that respect, the liquidity stimulus could bode well for BTC prices.
If anything the Corona virus dampened animal spirits traditionally associated with the Lunar New Year in Asia. Now that those fears have been mostly priced into the market, we expect BTC to rise again. We stick to our prediction from earlier this year of BTC hitting 20k at some point this year.
Indeed as we print this newsletter, BTC has had a nice run up to the 9700s. Many market observers believed that BTC would peak and start a downward reversal once OI (Open Interest) hits 1 billion, but this time momentum is still bullish, due to the macro factors mentioned above.