Several economists, asset managers, and market movers have been giving warnings of a possible recession. One of them is Dan Morehead, Pantera Capital’s founder and managing partner. He boldly predicted that the S&P 500 would fall 23%. For context, the index’s market cap is almost $36 trillion. If his forecast comes true, that is about $9 trillion that is about to be wiped out. However, there is hope for crypto holders. Morehead believes that blockchain is not tied up to interest rates and Bitcoin has the potential to double in value each year.
Looking at Macro Economic Factors
Dan Morehead believes that the persistent high interest rates are detrimental to the stock market. The high interest rate is one of the tools being used by the Fed to cool down an overheating economy and lower inflation.
We have to remember that high interest rates make borrowing expensive. This means that institutions and investors would have less money to expand businesses. This slowdown in economic activity will set off a chain reaction. Less economic activity would also mean fewer employment opportunities, which would also mean consumers will have lesser spending power.
Pantera’s top executive also said that if the interest paid for a 10-year treasury reaches 5%, this could mean a 23% decline for the S&P 500. Treasuries are interest-bearing IOUs issued by the government. The S&P 500 is an index of the top publicly traded companies in the US. It is considered to be the barometer of the US economy’s health.
How Are Bitcoin and Crypto Affected?
Pantera Capital’s founder said that equities are overvalued, bonds are dangerous, and real estate is coming from an all-time high. He believes that it is better to be in commodities and blockchain assets at the moment.
“Blockchain is a trillion-dollar asset class. Most institutions have essentially zero exposure right now. I believe they should dial it up to a couple percent.”
Dan Morehead, Pantera Capital
Back in school. we were taught that energy can neither be created nor destroyed. Can we apply that to the market? It is like comparing apples to oranges, however, isn’t it intriguing to think where does all the money go when assets lose value?
When money flies away from an asset class, investors would look for an instrument that will give good returns. This is the reason why during times of economic turmoil, tangible assets and commodities like gold rise in value. So money would just flow from one asset to another. A cash inflow to the crypto space would raise its market cap, which would also increase the value of certain tokens.
Are We Forgetting the Correlation Between Bitcoin and the S&P 500?
Well, we have to address the elephant in the room. Indeed, Bitcoin is closely correlated with the movement of the S&P 500. However, the correlation is not 100%. There are times when they diverge from each other. Their perceived correlation is more likely because they were affected by the same factors, like geopolitical events and general market sentiment. A perceived weakness in stocks can cause money to flow to crypto assets like Bitcoin.
High interest rates could cause the S&P 500 to crash, but wouldn’t it also affect crypto? High rates mean less money to invest in a risky asset like crypto. However, investors may see it as a chance to diversify their portfolio and use it as a hedge. Crypto, being a younger asset class when compared to others, still has a lot of room to grow.
Bitcoin has also outperformed all known asset classes since its creation. Its returns surpassed the S&P 500 and gold.
Can Bitcoin and Crypto Save and Protect Against Economic Turmoil?
Dan Morehead has made a good case for crypto assets. His opinion is something we should all consider. Aside from managing a multi-billion-dollar hedge fund specializing in crypto assets, he has also served as a hedge fund manager and financial adviser for several institutions. He has also accurately predicted the prevailing interest rates two years ago.
Let us also consider that the Fed hasn’t given any assurance that they are done with raising interest rates. It is possible that another one will be implemented within the year. Another hike might drag the S&P 500 down. If this happens, then investors will flee to other assets.
The question is if investors will flee to the crypto space. If yes, then this could potentially push crypto prices to the moon. However, at the moment these are just speculations based on available data. Yes, Bitcoin has outperformed all asset classes, but there is no assurance that the trend will continue. Also, Morehead did mention that aside from Bitcoin, commodities are also good instruments to consider.
Honestly, there is no definite answer. But we have been given a warning of an impending collapse. It might not happen, but you don’t want to be that person who didn’t bring an umbrella, just because the possibility of rain is just 50%.
The information provided in this article is for informational purposes only and should not be considered financial advice. The article does not offer sufficient information to make investment decisions, nor does it constitute an offer, recommendation, or solicitation to buy or sell any financial instrument.
