The financial effects of the energy crunch and the implications for BTC

As usual, September closed with a minus sign for stock markets, confirming the historical series that since 1945 has seen the only month of the 12, followed by February, to mark a negative average. October started off roaring on Wall Street, but more on the back of particular situations, such as Merck, which jumped 8.5% on the wave of the antivirus drug, rather than as a collective movement.

Perhaps it is still inappropriate to speak of a correction, but all stocks listed on the NYSE are 2.4% below their 50-day moving average, with 14% of stocks down at least 20% and 49% of stocks down more than 10%. That's according to Bespoke's calculations.

There is no shortage of reasons for investor nervousness, from the economic slowdown that is being felt above all in China but is also beginning to send some signals in the USA, to inflation that, above all in Europe but also in America, is showing itself to be a little less temporary than indicated by the Fed, up to the torment of the federal debt ceiling, with the danger of shutdown averted for now, but with the spectre still in the background, although completely improbable, of a technical default of the superpower.

SHORT-TERM TURBULENCE

A technical default is defined as a temporary inability to honor debt commitments. There is only one historical precedent, which dates back to 1979 during the Carter era, when the US Treasury failed for a few weeks to pay the coupon on 3-month bonds, causing yields to skyrocket.

Up to this point, however, we are in the field of short-term turbulence, destined to return, which has always represented an excellent opportunity for entry at discounted prices.

But in recent times another factor has been added, decidedly threatening, which goes under the heading of 'energy crunch', and which has both cyclical and structural aspects.

The credit crunch, i.e. the credit bottleneck that saw the world's major banks distrust each other to the point of closing the spigot of loans even on overnight maturities, was the black beast of the great post-Lehman crisis.

THE PANDEMIC HAS HIT THE GLOBAL ENERGY STRUCTURE

Today's energy crunch is the result of the very violent, but very brief, recession that pandemically impacted the global economy in the spring of 2020, and the equally violent rebound that followed starting in the summer-autumn of last year and continuing through most of 2021.

The global energy production and distribution chain is a very complex, structured, and even delicate mechanism involving trillions of dollars that cannot be turned off and on like you do with the lights in your living room at home. Between February and April of last year, the global production machine was suddenly 'switched off', with consequences never seen before on the global energy market, such as oil futures prices ending up with a minus sign in front of them, even if only on the commodity market boards and not in the real world.

And then it was just as abruptly 'turned back on', just as producers were organizing for a world that seemed to no longer need energy.

IT'S NOT ENOUGH TO BE A CHAMPION OF RENEWABLES

The accumulated stocks gave some time to restart, but in the end, production and distribution bottlenecks, especially in the electricity supply chain, made themselves heavily felt.

So far we are at the 'conjunctural' aspect, it will take some time but things will get better. But there is a structural aspect that the entry and exit of the pandemic has brought out dramatically, linked to the sacrosanct fight against climate change.

The poorest countries are those that contribute the least to greenhouse gas emissions, but they are also those most desperately in need of electricity, without which virtually no activity is possible in the developed world. In sub-Saharan Africa, more than half the population does not have access to electricity.

The energy crunch in Britain, with the army distributing gasoline to stranded motorists, shows that being a champion of renewables is not enough.

LACK OF INNOVATION BOOST FROM DIGITAL REVOLUTION

The British are at the global forefront of renewables, from which they derive 40% of their electricity, including 24% from wind. But in August, the wind stopped blowing in the North Sea and the share dropped to 2%.

Added to that was the failure of an undersea power line with mainland Europe and a lack of drivers for traditionally Eastern European gasoline and diesel tankers due to Brexit.

Result, a 1970s-style oil crisis energy crunch. Solar and wind are certainly vital for the green transition, but they are not enough on their own and are not particularly advanced technologies. Clean energy has so far lacked the innovative drive that led to the digital revolution,

with cloud, 5G, artificial intelligence, Internet of Things, and so on. It would take something similar to what enabled the transition from the horse to the automobile at the beginning of the last century. Hydrogen? Next-generation 'safe' nuclear? Or something we don't know we don't know yet.

BOTTOM LINE

Certainly the energy crunch, even when we emerge from the post-pandemic bottleneck, will continue to pose a potential threat to both the economic recovery of the developed world and the growth of the developing world. As always in history, the key is innovation and technology. We need to get away from the widespread mentality, even in the environmental world, that the green transition is a price to pay to save the planet and not a still potential, but colossal, opportunity for growth. And of business.

WHAT EFFECT FOR CRYPTOCURRENCIES

The main reason for China's BAN on cryptocurrencies, or at least what the Chinese government claims, is the large amount of energy required to mine them. The first immediate effect is the higher cost incurred by miners due to the increased cost of energy, unless they have self-powered generators from renewable sources (a truly infinitesimal niche).

This would lead to a reduction in the profit margin generated by rewards which, as we have seen after the Chinese BAN in June and the drop in hashrate, have increased significantly.

A reduction in miners' profits will result in losses being incurred, as has normally occurred in the past, but that has always been offset by a subsequent increase in price (in fact, it is a push towards price increases).

In summary, miners will be forced to sustain losses in the short term and then make profits in the bull market phase. So there will be an incentive to HOLD in the short term and to form an important support for prices.

This situation is not economically sustainable in the short term, so if energy prices do not fall, miners will make losses. It must be said that this hypothesis does not seem plausible, the rise in energy prices should be temporary because there are no different conditions than pre-pandemic conditions, rather there has been a compression of the economy followed by a restart that, by force of things, cannot be homogeneous in all sectors.

This does not mean that prices will return to pre-pandemic levels, but that the peaks (or rather the trends) that we are observing in these days are temporary, while the dynamics triggered will last in the medium to long term (see what happened at the end of the 70s).

What do you think, I await your comments in order to take inspiration and deepen the theme.

Thanks for reading

CREDITS

The photo "Nuclear powerplant in Belgium" by @Fredpaulussen (fredography.be) is released free to use under the Unsplash License.

Posted Using LeoFinance ^Beta