The upcoming global recession and its effect on the crypto assets

This is a republish of our latest letter to our investors, where I explain the crypto meltdown and where we head next. I encourage you to share this letter with anyone interested in the topic.

Dear investors,

I have decided to write this letter to help you get a better understanding of the current market situation, and more importantly, to help you protect your assets during this downturn. The latest developments in the global financial markets are truly unprecedented.

When the American central bank (FED) announces the injection of $1.5 trillion (!) into the system and the markets merely blip and continue with the decline, we can expect things to get a lot worse.

Our performance in 2020

Before I explain the origins of the current meltdown and its consequences, I wanted to inform you that our crypto investment strategies are performing exceptionally well during this downturn and that your assets are protected. Our conservative strategy Solidum Cautus is entirely out of the market since 8 March, and its current 2020 performance stands at +24.3% (compared to the crypto market loss of 17.1% in the same period).

Our more aggressive Bitcoin Momentum Strategy is opportunistically taking advantage of the decline in prices, and its 2020 performance currently stands at +17.5% (compared to Bitcoin’s decline of 27.7%). All returns are calculated in USD today at our NAV calculation time (9:00 GMT). Our strategies’ returns are net of expenses.

We will continue exercising extremely tight risk management with the primary objective to protect your assets. Should any opportunities arise to generate some gains, we will very cautiously try to capitalize on them. The current market situation is extremely challenging. One example: we successfully shorted Bitcoin yesterday, and while it was easy to enter the position, we had quite a hard time closing it due to the crazy volatility. Binance, for example, had several minutes outage on its futures platform, and they are one of the most robust crypto exchanges in the world. Utmost caution is necessary in this environment.

Now, let’s take a closer look at what exactly is going on in the markets and why and how we arrived at this point.

Debt and more debt

Many people believe that coronavirus is the cause for the market declines, while it actually just accelerated the market dynamics which were already in play. When the financial crisis of 2008 started to unfold, major central banks began injecting cash into the financial system to mitigate the risks and spur economic growth.

In the following ten years, the four largest central banks (FED, ECB, BOJ, and POBC) have injected more than $15 trillion through various programs. Together with an extended low (zero) interest rate environment, it helped increase the global debt levels from $170 trillion in 2007 to over $250 trillion at the end of 2019. Therefore, instead of deleveraging after the 2008 financial crisis, the world has accumulated even more debt.

The key phrase of the next crisis: corporate debt

The most problematic development is the near-threefold expansion of corporate bond markets in the last decade, as many large companies have been shifting from bank loans to bond financing. A common pattern is the increasing use of debt for dividends, share buybacks, and mergers and acquisitions.

Instead of using the funds for the growth of the businesses they manage, company executives used the debt to boost stock prices, which resulted in enormous bonuses for them and, at the same time, overloaded companies with debt.

The party went on for several years, but now it is undeniably coming to an end. Slower global growth and escalating trade disputes have already curbed expected sales growth while profit margins have declined amid rising wages and input costs.

At the time when many companies are highly indebted, and their revenue streams are starting to decrease, coronavirus enters the stage, which will dramatically reduce economic activities and additionally dry up the revenues. Companies struggling to generate cash flow will have difficulties meeting debt obligations, and a tightening of the credit market will cut off access to additional funding.

One in six US companies already does not earn enough to cover interest payments.

The result? Defaults, bankruptcies, layoffs, a decrease in investments, etc. In short: a downward spiral which will result in a global recession.

CEOs are jumping ship

American CEOs are departing companies at the fastest pace in modern history. In the fourth quarter of 2019 alone, 480 CEOs left their companies, and an additional 347 stepped down in the first two months of this year.

Thes numbers are higher than in 2008 and close to 2000 figures, just before the two prior major market downturns.

Additionally, there was substantial insider selling by company executives in recent months — another sign that they believe that the bull market is over. The insider selling intensified in past weeks and at the very top was Jeff Bezos, who sold $4.1 billion worth of Amazon shares in February.

The global recession and crypto assets

The current situation clarified several things.

Bitcoin is not the safe haven we all hoped it to be. In times of traditional markets meltdown, people apparently still prefer cash (and some gold) over everything else.

We expect that Bitcoin and other crypto assets will be highly correlated to the global stock markets in the coming weeks and months. Worsening of the coronavirus outbreak will force people to realize that it not “just the flu.” And when panic sets in, stocks and crypto assets will go even lower.

What (not) to do in the current situation

Now is the time to stay on the sidelines and wait for the best time to re-enter the market. I would strongly caution against “catching the falling knife,” “buying the dip,” “doubling down on positions,” and similar investment ideas you can find all over social media.

I would also advise against “HODL-ing” and “weathering it out.” It is one of the easiest ways to lose money, and it is precisely what many did in recent weeks as the crypto prices dropped 50% to 60%.

Even if the current price of an asset is down -95% from its all-time high (where many altcoins currently reside), it can still decrease to -97.5%, which means additional -50% from the current price.

Now is the time to be patient and wait, not to speculate.

Thoughts on the coronavirus and its impact on our workflow

As mentioned above, I believe that the situation with the coronavirus will get much worse. There is so much incorrect information on the internet that one can easily get misled. The reality is that much of Europe will most likely face Italy-like surge within weeks, and the same will happen in the US. Both will have dire consequences for the global economy.

While I don’t expect that the global population to get decimated due to a relatively low (albeit increasing) death rate, our health systems are not in a position to handle the inflow of infected people. Things will get very ugly.

There is only one effective measure to try to contain the spread of coronavirus as much as possible: stay at home and minimize interaction with other people (apart from your closest family members).

I am very grateful that we have an online business and that our workflow is unaffected by the coronavirus. We were already mostly working remote, apart from the monthly in-person team meetings, which are discontinued for now. Unfortunately, this is not the case for many businesses, so let’s all do what we can to end this crisis as soon as possible.

I hope that you and your families are safe and healthy and will remain so.

With best wishes,

Gregor Zupanc
CEO of Solidum Capital

DISCLAIMER: This article is for informational and discussion purposes only and does not constitute a marketing message, an investment survey, an investment recommendation, or investment advice. The article was prepared exclusively for a better understanding of market dynamics.