Do as Rio’s mayor and bottom-fish cryptocurrencies

In the equity markets, the term Rio spread is sometimes used. It is a humorous investment strategy that involves taking an extremely risky position in the market, for example by buying call options for all the capital you have. In addition, you maximize your loans and buy a single ticket to Rio de Janeiro in Brazil. If you get it right in your location, you stay in Rio and live luxury life for the rest of your life. If you make a mistake and thus lose all money and also have large debts, you will also stay in Rio for the rest of your life.

The mayor of Rio de Janeiro has suddenly given the Rio spread a new meaning. To speed up the transition to cryptocurrencies and protect the city's economy from the high inflation in the country, he offers a 10% tax deduction if you pay with Bitcoin. The income will, among other things, be used to invest 1% of the city's balance sheet in cryptocurrencies. If the game goes home and the value of a Bitcoin rises relative to the inflation-ravaged Brazilian currency Real, you quickly earn the tax rebate and the Mayor can stay in Rio. If Bitcoin goes the other way, neither he nor the city can afford any other options. Then he will probably also have to stop, and gradually lower the average price for Bitcoin purchases while keeping his fingers crossed that the crypto prices calculated in Real will soon turn up again.

In the last four months, the official inflation rate in Brazil has been over 10%. Even if the inflation rate has decreased somewhat in December from the 18-year high in November, it will take a lot for the gambit not to go home. Since El Salvador introduced Bitcoin as its official currency, many have expected similar steps from other countries with economic imbalances, weak currencies and high inflation, such as Venezuela and Argentina, and of course Brazil.

At the time of writing, Bitcoin stands at $ 43,400 and Ether at $ 3,390. That is about ten and fifteen percent higher than the bottom just one week ago. To me, it just looks like a dead cat bounce, ie a trap that is just reassuring enough to attract investors before the downturn continues. Despite the bounce, Bitcoin is 37 percent below the all time high, and Ether is about 30% below its highest level. Although most of the long-term positive drivers for both crypto currencies seem to remain, I do not think the downturn is over for this year. For politicians in Latin America who have to plan for several years or decades to steer their failed economies, a slump in a few years means much more than lower average prices, but for a more fast-paced private investor, it makes a difference.

I fear, or perhaps from a personal investment perspective rather wish, that both Bitcoin and Ether can fall to the top levels reached during the crypto house 2017 before prices turn up again. The reason for this is reduced monetary and fiscal stimuli, which can cause a significant risk-off period for equities and other risky assets. Just like in the spring of 2020 and in 2018, it should be the most valued and most risky assets that fall the most when risk aversion increases. In June 2021, Ether was down to $ 1,700, and in January 2018, Ether's highest price was $ 1,420. In an intense risk-off situation, it is somewhere I think the price could bottom around September-October this year (2022), ie about half the day's level. But if you get the chance to buy so cheap, at least I plan to buy ether or some related project with both hands. In 4 years' time, I would expect a much higher price than last autumn's maximum. There may even be talk of a flipping where Ether goes around Bitcoin at a market value of somewhere around 2-3 thousand billion USD each, ie almost 5-10 times the current value for Ether. Bitcoin is expected to show a similar curve, with a bottom around the old cycle peak of 20 thousand USD. In the subsequent upswing, Bitcoin could even pass this autumn's price peak of $ 69,000 and $ 1.4 trillion in market value. After that, however, there is a clear risk that Ether, which is the engine behind decentralized financial solutions, is running for the digital gold Bitcoin, which has not much more to offer than being a passive Store Of Value. Of course, there is no certainty at all that anything of this will happen.

Nevertheless, there is much to be gained from having a clear basic view of where Ether and Bitcoin and the rest of the cryptosphere with DeFi, NFTs, swaps and stakes, autonomous organizations and exchanges are headed. With an overall roadmap in mind, it is easier to navigate more short-term both absolute and relative price movements between Bitcoin, Ether, USD and, for example, gold or the stock index S&P 500. Some of the main features I stick to are the old peaks from 2017-2018, a halving from current levels relative to USD, as well as a future flippening in 2025.

The crypto market is developing extremely fast, and the relative attraction of different assets fluctuates rapidly, so it pays to be well-read and fast-paced and use safe and liquid, efficient, methods for its constant repositioning. But above all, it often pays out to have a long-term holding as a basis, so as not to miss just in case big permanent steps up are taken while considering the risk further price drops have on your holding. Such steps up (or down) can be driven by legislation, politics, economics, access to finance and the willingness to take risks in other markets. I am still positive about the cryptosphere in the long run, where I above all see the greatest risk-adjusted opportunities for Ether, but Bitcoin is not a sh ** coin either. But right now and 6-9 months ahead, both stocks, especially expensive technology companies, and cryptocurrencies could be shaken by a massive risk-off mood that lasts almost the rest of the year. A bit like 2001 and 2002 in case you remember that, in many intense bounces after a little slower but longer periods of decline. In that environment, it could be a good idea to start buying a little cautiously after a few weeks of fall, and quickly sell most of it after a few weeks of rally. This applies to both shares and cryptocurrencies.

Just make sure you do not accidentally push yourself away completely so you miss what could be another upturn starting after a sell-off.

@Mikael Syding