What will happen to Bitcoin and Ethereum if traditional markets break down?


Michael J. Burry, the financial wizard who was portrayed in the movie “The Big Short,” is known for predicting crises. For example, his investment fund made billions from the 2008 real estate crash, and Burry liquidated nearly his entire portfolio in Q2 2022.

Since no one seems to know if traditional markets will rebound before entering another recessionary environment, now might be a good time to consider investing in cryptocurrencies. Below are some examples of how experienced investors sometimes miss incredible rallies.

In May 2017, Burry said people should expect a “global financial meltdown” and World War III. Instead, the S&P 500 rose 20% over the next 9 months. A few years later, the index peaked in December 2021, more than 100% above Burry’s suggested short entry price.

In December 2020, Burry said Tesla’s stock price was “ridiculous” as part of his rationale for opening his short position. A 47% rally occurred within 35 days of that remark and Tesla shares peaked 10 months later after a 105% aggregate gain on Tesla’s supposedly “ridiculous” price.

Indicators point to a major recession, but it’s unclear when

Without mistake, traders should not overlook the fact that the US Dollar Index rallied strongly against other major global currencies to reach its highest level in 20 years. This shows that investors are desperately seeking refuge in cash, exiting stock markets, foreign currencies and corporate debt.

Additionally, the spread between 2-year and 10-year US Treasuries widened to a record high of -0.57% on September 22. Typically, when short-term government bonds have higher yields than long-term bonds – an inverted yield curve – it is interpreted as increased signs of a recession.

To add to concerns, on September 22, the US Federal Reserve announced an all-time high of $2.36 trillion in overnight reverse repurchase agreements. In a “reverse repurchase agreement,” market participants lend money to the Fed in exchange for US Treasury bills and agency-backed securities. Excess cash on investors’ balance sheets indicates a lack of confidence in counterparty credit risk, which is a bearish indicator.

Having exposed the three critical macroeconomic indicators reaching levels not seen for more than 2 decades, two important questions remain. First, what is the relationship between Bitcoin (BTC) and Ether (ETH) and traditional markets? More importantly, what impact should investors expect if the S&P 500 drops 20% and the housing market crashes?

Whether or not a person pays their bills using cryptocurrencies, prices for energy, food and health services are highly dependent on the US dollar. International commodity transactions are mostly denominated in USD, including imports, exports and real trade. So, even if one pays for his expenses using Bitcoin, there is a good chance that this value will be converted into fiat currency.

Cost of Borrowing in USD Impacts Several Economies

The main takeaway from the lack of efficient circular trading exclusively using cryptocurrencies is that everyone’s life depends on the strength of the US dollar and the cost of borrowing. Unless you live in a cave, isolated in a self-sufficient land or on a communist island, when investors hoard cash and interest rates soar, all markets are affected.

As for a possible housing market crash or another 20% stock market crash, the truth is that its impact on Bitcoin and Ether is impossible to predict. On the one hand, there is pressure from holders scrambling to reduce their exposure and secure a cash position for a possible longer-than-expected crypto winter. On the other hand, there could be an increase in the number of investors looking for non-confiscable assets or looking for inflation protection.

This is why the story of Michael J. Burry becomes relevant at this time when every pundit and market analyst claims a market crash in the near future or the potential fall in real estate prices. Bitcoin and Ether are facing an impending global recession for the first time, and judging by March 2020, when a panic selling triggered by the Covid-19 crisis, those who held out for the long haul were rewarded.

The views and opinions expressed herein are solely those of the author and do not necessarily reflect the views of Cointelegraph.com. Every investment and trading move involves risk, you should conduct your own research when making a decision.


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