by Chad Steinglass

Every Trade Has A Buyer & A Seller

It takes two to tango, as the saying goes. Every trade, in every financial market, in every asset class, follows this rule: every trade has a buyer and a seller. This is not exactly a profound revelation. What traders may not think about, however, is that there is a reason we call it trading, rather than purchasing and selling. We are conditioned to think about the value of all assets in a base currency. This is USD for many parts of the world, and so we define trades as having a direction with respect to it. A buyer trades away their USD and receives something else. A seller trades away something and receives USD.

“Risk Off” Trading

During times of fear and uncertainty in the market, when investors are worried about the future rather than excited about it, what we refer to as “risk off” trading occurs. Investors want to protect their capital and reduce the risk in their portfolios. They do this by trading away risky assets and receiving less risky assets. Often we think of this as selling stocks or crypto, but it could just as easily be thought of as buying dollars and paying for those dollars with stocks and crypto. This second way to look at trading is important for the comprehension of money flows at a global level.

The ‘Safe Havens’ During High Inflation

For the past few months, we have been in a relatively unique market environment. While there has been significant economic growth to support a strong equity market these last few quarters, we are also facing the highest inflation we have seen in a generation with the prospect of that economic growth beginning to taper off. The imminent shift towards tight monetary policy combined with the prospect of slowing growth definitely fits into the category of uncertainty where investors shift to “risk off”, trading risky assets for less risky ones. The assets that all investors flock to when they want to own the least risky things in the world are Treasuries and US Dollars, and in times of fear we expect significant flows into these safe havens.

Treasuries & USD

But Treasuries and USD may encounter an issue. With the Fed slamming the brakes on asset purchases (in this sense, asset purchases refer to Treasuries) this can potentially raise short term interest rates aggressively, which does not necessarily make owning Treasuries seem flattering.This, in addition to inflation hitting 7% annualized over the last few months, holding onto USD seems even more questionable. What the investors who sell portions of their investments for cash out of concern for the market risk might not realize, is that they are also simultaneously buying up large amounts of an asset that currently is looking at 7% annual depreciation. In the present, this response is warranted, people don’t prefer to sit with all their money in a depreciating asset.

From Asset To Asset, Value Flows

This has all led us to a choppy see-saw of a market, where investors who are justifiably risk averse trade away risky assets like stocks and crypto to receive dollars and Treasuries. When each initial scare passes, individuals realize that inherent issues remain in dollars and treasuries despite their reputation of safety, and so they trade these away as well. The result? The value keeps sloshing back and forth between asset classes, and we go for a ride on a rollercoaster. While this has been the case in equities since the November Fed meeting and the hard shift from chairman Powell who named inflation as enemy number one in no uncertain terms, crypto has been in a slide rather than an up and down chop.

Recently it looks like that trend might have changed, and for the first time in almost 3 months when investors have looked at their portfolios and decided that they need to get rid of their cash and Treasuries, they may have directed some of that movement into crypto and not just back into equities. If this continues, we may finally see crypto emerge as an alternative asset that benefits from this unique environment of economic growth concerns paired with inflation and rising rates. We know that every asset sale is implicitly a purchase of a different asset, and if investors don’t want to own cash or bonds, and are worried about stocks, those money flows have to move somewhere!

The opinions expressed in the CrossTower Classroom are those of the author(s) and not necessarily that of CrossTower. We appreciate diverse perspectives of our employees and we thank them for having a voice.

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CrossTower Inc. provides this content for general information purposes, to better inform you on your digital asset investment journey. We do not provide investment recommendations or provide tax advice. Please consult your investment professional or tax advisor if you require assistance in these areas.

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