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SUNDAY THOUGHTS - Should I Ever Sell My Crypto Holdings?
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Should I Ever Sell My Crypto Holdings?
This week was very bullish, and hope in the space evolved again. Furthermore, everybody hopes to make big profits in the upcoming bull market. Who does not dream of waking up one morning and seeing that prices have risen again and that you got rich overnight? Most of us already have plans for what we would do with the profit, and indeed many wait for the day when they deposit all their assets into the Kraken or Coinbase account and then sell them. Afterward, many would treat themselves to take a trip to an exotic place or buy a luxurious car, and then, just in time for the price dump, reinvest with the remaining capital in Bitcoin, Ethereum, and Co.
A thought with that many could get used to, also my own, one and a half years ago.
However, now I think differently! Why? Because I believe that the world will change dramatically in the next two to three years.
Because I am convinced of one thing: Our economy and the current financial system are on the verge of total collapse. In today's SUNDAY THOUGHTS episode, you can find out what I base this thesis on and why I am currently thinking about whether the time will ever come when I will sell my cryptocurrencies.
The interest rate is the death sentence for the banks
Of course, I am probably not telling you anything new when I tell you that the interest rates you get on your bank account are currently very low. The reason for this is that after the crash in 2007, the governments of the world wanted to revive the economy, for which the central banks cut interest rates and printed cheap money.
The problem: While interest rates fell, the inflation rate rose. For some time now, the inflation rate has been higher than the current interest rate. In plain language, this means that keeping money in the bank is a lousy business because your money is just useless on your account. After all, it loses so much value due to inflation that the interest rate can no longer compensate for this drop in value! So, why should you deposit money in the bank at all? As if that was not enough, the inflation rate is probably even higher than we think. In my home country, Germany, the Federal Office publishes the current inflation figures every year. Thereby a "fictitious shopping cart" is created, in which all goods of an average citizen are summarized. Then the prices of the previous year are compared with the prices of the last year, and then it is calculated whether the inflation became bigger or smaller.
You can think of it in principle like a fictitious purchase, which you make only once a year, only to find out that prices have increased again. Because this is what has been happening for decades: Inflation is rising. However, the worst thing is that inflation is probably even higher because many other essential "products" are partly left out of this fictitious shopping cart: Rents, for example. Living in big cities is becoming more expensive, yet this aspect is omitted for whatever reason. Therefore, inflation is probably even higher than expected.
As you can see, the central financial system has its back to the wall; the situation could not be worse, but then the Corona pandemic arose! The situation was already awful before, and only through a low-interest rate policy, the economy could survive. The Corona crisis was the next setback for the economy, and it remains exciting to see how it can recover from it this time. However, this time it is impossible to do this by lowering interest rates again, as the ECB's key interest rate is already 0%. The Corona crisis is not over; the long-term consequences are yet to come!
Fake market conditions
Everyone has this one friend who tells you how little he is interested in economics and finance and therefore invests in ETFs. Proudly he tells you how he receives a 5% return every year! Afterward, this friend shows you a nice graph on his smartphone with a red arrow pointing upwards and says: "Hey look, even in World War II, the economy has always gone up! If you had put $100 in a fictitious ETF in the 1920s, you would have a million Dollars now!” (I have not calculated this precisely, but such crazy mind games have been reported to me quite often). Of course, this investment is not reprehensible, but it is always a mystery to me that these people do not even get the idea to question the numbers behind these statistics.
Let us stay with the example of $100 in the 1920s. As little as $100 may seem like today, it was an enormous amount of money for the average person. The average income at that time was about $1407 per year. Teachers earned just under $980 per year back then! (Source: https://usa.usembassy.de/etexts/his/e_prices1.htm)
Today, the average American income is $33,000, so more than 23 times as much. Nevertheless, back then, people needed the same goods and services to live as people do today: Water, food, medical care, and a place to sleep. The price of a hot dog in New York in 1920 was just a few cents; today, you cannot get a hot dog for less than $2.50, although it is still a sausage between a bun.
However, on the graph, it looks like the population is getting richer and richer, but that is relative. These people often do not understand that you have to look at the price relation from a different perspective.
Another example: The economic growth since the crash of 2007! Because this amounted to an incredible 45%! However, the problem is that private banks' dependency on central banks increased by 500%. So, money was printed to support some companies and institutions. Logically, the numbers increased, but not because of actual economic performance, but because those balance sheets were artificially inflated with printed money.
In plain language: The excellent statistics of ETFs are nothing more than nice statistics. The real values behind them look entirely different!
A big crash is imminent, which will deprive many people of their savings!
Every one of us learned in school: If you make a mistake on a task, it is no problem. However, you must learn from the mistake and avoid it in the future. Pretty logical, right? According to this logic, almost every private bank would be an unteachable student who is only promoted to the next grade because his parents go golfing with the principal every weekend. As stupid as this example may sound, the fact is that the banks are following the same practices as they did before 2007. The private banks are still putting together packages containing risky loans to be sold to their customers or other banks. Now, even more so than before, because private banks are barely doing business with lending money. Fun fact: Those practises were one of the main reasons for the crash in 2007.
How can this be still legal? Governments do not want to let banks fail because it would wipe out the savings and retirement provisions of millions of people. The banks are too big to fail.
Nevertheless, the business of banks is crumbling, and they are repeating the mistakes of the past.
What could possibly go wrong?
The next real estate bubble
As already mentioned, rents are rising in major cities of the world. As a landlord, this is great, and it is also relatively easy to get a loan from the bank for a house purchase. However, it becomes unpleasant when the entire market situation, catalyzed by the Corona pandemic, collapses, companies go bankrupt, and with it dozens of jobs. In short: Rents would have to adjust to the salaries and assets of potential tenants in the long term, as there are fewer and fewer people who could still afford to rent an ordinary apartment in a large city. Even today, rents in cities like Hong Kong, Tokyo, London, New York, or Vancouver are already extremely high. But when potential tenants' supply is significantly smaller or almost non-existent, property prices will also be influenced. Also, and accelerated by the Corona Pandemic, home offices will become more common because this will save companies a lot of money. The skyscrapers of this world, such as those in New York or Tokyo, will find it more challenging to fill them. Of course, the real estate business will always be there because people always need a home. However, it may be that this exorbitant buying frenzy and the constant price increase of real estate will decrease. In short: The market will probably become a little quieter and more complicated, but some in this sector will not survive.
The bubble in which astronomical prices were paid for a one-bedroom apartment in New York seems to be bursting.
Many countries are heading for hyperinflation
It has already happened in Venezuela: Hyperinflation. However, more countries have already been affected by strong inflation or will be. Zimbabwe experienced hyperinflation in 2018, Turkey, Argentina and Brazil are also experiencing significant monetary devaluation, and the US-Dollar, the world's anchor currency, is being reprinted en masse every day. This could result in a Cantillon-Effect, which occurs when too much money is printed. The current actions of the central banks could, therefore, lead to massive problems.
The economic situation in summary
In summary, the Corona Pandemic revealed many grievances in the economy and financial system that were deliberately ignored. The consequences of the 2007 financial crash have still not been fully processed; now, the Corona Pandemic's economic consequences are on top of it!
The central banks' last emergency action, i.e., lowering interest rates and printing money to support faltering companies, has been completely exhausted!
In general, more and more countries have to prepare for the coming hyperinflation. Countries like Venezuela or Zimbabwe were the first to be hit; many more are likely to follow.
The whole market situation is distorted because people look more at graphs than real economic growth and performance.
As a result, investments such as ETFs could vanish into thin air if the shares' prices are broken down again to their actual value.
The real estate sector will probably have to take some deep hits, but in the age of money devaluation as "material assets," they have a strategic advantage. Nevertheless: Caution is also advisable in this sector!
All in all, the current financial system has its back to the wall, and I personally see hardly any possibilities for these institutions to save themselves. Of course, some banks will survive, especially banks that dealt with cryptocurrencies early on. However, this is only a fraction. The savings of millions of people are at stake, and the Corona crisis has accelerated this system's collapse.
Crypto Currencies as a Rescue
Cryptocurrencies could be the salvation to secure assets since any institutions cannot control this market. Bitcoin could attain a still more considerable value as a "digital resource" than we can imagine at all. This assumption is confirmed above all when large companies or institutions buy Bitcoin on a colossal scale. Microstrategy, for example, did this recently. Moreover, those companies probably view Bitcoin less as an object of speculation if they invest in Bitcoin deposits. They recognize the value behind it, and more and more companies do so, but also average people. The statistics also show this. In Nigeria, for example, there is currently political unrest. Due to corruption, but also inflation, many Nigerians have the problem of securing their assets.
On the other hand, the ruling government can quickly freeze political opponents' bank accounts to prevent them from exercising their political and social power. Therefore, Bitcoin means freedom for many people in Nigeria because no one can stop Bitcoin transactions. For this reason, Bitcoin is one of the top search queries on Google in Nigeria, and the country has long been considered the Tech-Mecca of Africa.
If Bitcoin does not correlate with the stock market anymore, I think we have entered a new era. The era of digital gold, in which Bitcoin means ultimate freedom.
How we will deal with new money
I firmly believe that the next money will be digital; paper money has reached the end of its time and will probably only exist for a few more years, which is not too bad since it is only paper.
Nevertheless, there will be a big difference between using centralized cryptocurrencies, like an E-Dollar, and decentralized cryptocurrencies, such as Bitcoin.
Whoever uses decentralized cryptocurrencies will be able to gain ultimate freedom because no one can prevent transactions or freeze accounts.
Furthermore, I believe that Bitcoin and many other cryptocurrencies will have even greater value than we can imagine today.
A small thought experiment: PayPal announced that cryptocurrencies will be tradeable on their platform in the future. The FinTech company has just over 300 million users, while Bitcoin's total amount is reduced to 21 million. This fact alone shows what a privilege it could be to own one or even half a Bitcoin.
If we now assume that our entire financial system is collapsing, people are panicking and looking for an alternative to their money, Bitcoin is seen as a safe harbor. Then the time has come when millions and billions of people will try to get their hands on even a little bit of Bitcoin. On top of that, you can earn an annual return on Bitcoin through various protocols and liquidity pools. Bitcoin could thus be the best and fairest store of value with which, unlike gold, one could also generate a passive income.
The price of a Bitcoin could become more expensive than we can even imagine.
When should I sell my crypto-assets?
That cannot be said from today's perspective; it must be made dependent on the situation. Nevertheless, I was thinking about this a lot this week. If we assume that today's financial system is collapsing and more people are entering the market, Bitcoin could reach prices far from our imagination. However, let us say (just for fun) that one Bitcoin will be worth $10 million in the next bullrun. From today's view, that would be naturally fantastic; however, it could be that we overlook a crucial aspect.
If inflation continues to advance and the demand for a reliable store of value increases, it could be that all those who are today holders of crypto-currencies could consider themselves lucky to own any at all. Because these assets have gained unprecedented possibilities due to their decentralized nature, easy transportation, and storage ability.
We are currently living in undoubtedly challenging and exciting times, in which changes are imminent. Recently I started thinking about what could change. Now I can very well imagine that the old financial system's demise is almost sealed; for many people, this will be a bitter awakening. If now more and more people understand the real value behind cryptocurrencies, it could be that humankind will decide on this new alternative. And then it makes no sense or the hodling could have been entirely in vain if you exchange your assets again into the bad and old money. Bitcoin could then be worth $10 million, but what if nobody wants to have Dollars anymore?
As I said before, if or when you sell your investments is completely your own decision that depends on the situation.
However, perhaps we should realize that cryptocurrencies, especially Bitcoin and Ether, are the beginning of a new era.
Everyone who holds the money of tomorrow, without selling these assets, could have a perfect starting position to enter the next decade.
Author: Juri Maibaum, Co-Founder of DEFI WORLD
All information presented above is for educational purposes only and should not be taken as investment advice.