WHAT DOES THE PETROL CRISIS TELL US ABOUT THE FUTURE OF CRYPTO?
The recent debacle on petrol forecourts may have been frustrating for many, but it was a great example of two of the most fundamental economic principles that apply universally. As such it makes an interesting metaphor for people in the cryptosphere.
The first principle is how supply and demand drives prices. Without doubt circumstances led to a lack of supply. In any commodity that is perceived as being essential, lack of supply normally has the knock-on effect of increasing demand through FOMO (fear of missing out), a.k.a. ‘panic buying’.
FOMO is the perfect presentation of the second fundamental economic principle – investor sentiment. In all probability car owners bought fuel they didn’t really need just to be sure they didn’t run out. Another example of this was the ‘Great Toilet Roll Scramble’ at the start of lockdown.
The result was a perfect storm (albeit in a teacup), with the inevitable result being the combination of short supply and investor sentiment causing an upward pressure on prices at the pump. Petrol that was previously 134p per litre soared to over 150p in places. As motorists run down their tanks and supply returning to normal, we should expect a downward price correction. However, if you owned a forecourt, Christmas came early.
What are the parallels here with crypto? Unlike petrol which will be replaced by new technologies before it runs out, or fiat currencies, which can be printed at will, cryptocurrencies have a finite supply. More to the point 97% of all Bitcoin will be in circulation within the next 10 years. Given the potential for Bitcoin and other ‘altcoins’ to establish a DeFi (decentralised finance) ecosystem that will enable cheap transactions across international boundaries, crypto is set to fuel a truly global economy.
Given a finite supply and escalating global utility, it seems only reasonable to expect demand to push prices higher. Eventually the market will settle on a common value worldwide but, in the meantime, we should expect prices to keep rising.
Just like petrol prices we should also continue to expect short-term volatility in crypto values as investor sentiment pulls and pushes it one way or another. Like every market, crypto has its ‘bulls’ and ‘bears’ who are happy to buy and sell on an opportunistic trading basis. Speculative day-traders with a FOMO gold-rush mentality also muddy the waters. A further complication is a plethora of yea-sayers and naysayers, right up to Sovereign Government level, whose conflicting views impact on investor sentiment.
Let’s be honest, most financial markets are something of a jungle. On a day trading basis, trying to ‘time the market’, crypto will never be a ‘safe’ place for novice investors. However, we continue to believe that those who adopt a long-term ‘time in the market’ strategy, investing little and often, will see crypto deliver a winning wealth creation strategy.