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

Michael J. Burry, the financial wizard portrayed in the movie “The Big Short,” is known for predicting crises. For example, his investment fund made billions from the 2008 housing crash, and Burry liquidated almost his entire portfolio during the 2nd quarter of 2022.

Given that no one seems to know whether traditional markets will bounce before entering a further recessionary environment, it may 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 3. Instead, the S&P 500 rose 20% over the following 9 months. A couple of years later, the index peaked in December 2021, at a level that was more than 100% above Burry’s suggested short entry price.

In December 2020, Burry said Tesla’s share price was “ridiculous” as part of his rationale for opening his short position. A 47% rally occurred in the 35 days following that comment, and Tesla stock peaked 10 months later after a total gain of 105% from Tesla’s allegedly “ridiculous” price.

Indicators point to a major recession, but exactly when is still unknown

Without fail, traders should not dismiss the fact that the US dollar index has risen sharply against other major global currencies to reach its highest level in 20 years. This shows that investors are desperately seeking shelter in cash positions, exciting stock markets, foreign exchange and corporate debt.

Also, the gap between US Treasury 2-year and 10-year bonds widened to a record high of -0.57% on September 22nd. Usually when short-term government bonds have a higher yield than long-term bonds – an inverted yield. curve – it is interpreted as reinforced signs of a recession.

Adding to the concerns, the US Federal Reserve on September 22 reported a record $2.36 trillion in overnight reverse repurchase agreements. In a “reverse repo”, market participants lend cash to the FED in exchange for US Treasuries and agency-backed securities. Excessive cash on investors’ balance sheets indicates a lack of confidence in counterparty credit risk, which is a bearish indicator.

After laying out the three critical macroeconomic indicators that have reached levels not seen in over two decades, two important questions remain. First, how do Bitcoin (BTC) and Ether (ETH) compare to traditional markets? More importantly, what effect should investors expect if the S&P 500 falls 20% and the housing market crashes?

Regardless of whether a person pays their bills using cryptocurrencies, energy prices, food and healthcare are heavily dependent on the US dollar. International commodity transactions are mostly priced in USD, including imports, exports and the trade itself. So even if one pays one’s expenses with Bitcoin, the odds are somewhere along the way, this value will be converted to fiat money.

The costs of borrowing USD affect several economies

The most important factor from the lack of an efficient circular trade that exclusively uses 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 country, or on a communist island, when investors hoard cash and interest rates skyrocket, all markets are affected.

As for a possible collapse in the housing market or another 20% crash in the stock markets, the truth is that the impact on Bitcoin and Ether is impossible to predict. On the one hand, there is pressure from holders trying to reduce exposure and secure a cash position for a possible longer-than-expected crypto winter. On the other hand, there may be an increase in investors looking for non-confiscatable assets or seeking protection against inflation.

That is why Michael J. Burry’s story becomes relevant right now when every pundit and market analyst is claiming a near future market collapse or potential crash in housing prices. Bitcoin and Ether are facing an imminent global recession for the first time, and after March 2020, when a panic sale was triggered by the Covid-19 crisis, those who took the long view 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 trade involves risk, you should do your own research when making a decision.