It looks like a new near-term catalyst for the crypto markets is emerging. Trade concerns with China and Mexico are wrecking stock markets and creating economic uncertainty. The Dow dropped more than 200 points this morning after President Trump announced new tariffs against Mexico last night. Earlier this week, the Dow dropped 221 points and the S&P 500 fell about 19 points. Both indexes are down for the month.
Crypto investors should pay attention to the U.S.-China trade war. The uncertainty surrounding trade issues – and the potential negative impact on the economy – is so serious that it’s likely to cause investors across the world to look for hedges against the traditional economy, like crypto and gold.
The Rare Earth Metals Gambit
The United States and China are engaged in a nasty trade war. And this week, China threatened to stop selling its supply of rare earth metals to the U.S.
Rare earth metals are mined from the Earth’s crust. China is home to more than a third of the world’s global reserves. And thanks to its prolific mining operations, China produced 70% of the world’s rare earth metals in 2018.
Rare earth metals are a critical component in the production of cars, smartphones and weapons systems. So China being the biggest supplier of these metals creates a problem for the U.S.
In fact, the U.S. Department of Defense predicted this would be a problem in a report last year…
As part of the increasingly global manufacturing and defense industrial base, imports of strategic and critical materials, such as rare earths, have increased, causing a trade-off between supply dependency and lower costs. Rare earths are critical elements used across many of the major weapons systems the U.S. relies on for national security, including lasers, radar, sonar, night vision systems, missile guidance, jet engines, and even alloys for armored vehicles. A 2016 study by the Department of Commerce’s Bureau of Industry and Security reported that 66% of respondents, the majority of whom are vendors to the Department of Defense, indicated they imported rare earth or related materials.
China’s domination of the rare earth element market (chart) illustrates the potentially dangerous interaction between Chinese economic aggression guided by its strategic industrial policies and vulnerabilities and gaps in America’s manufacturing and defense industrial base. China has strategically flooded the global market with rare earths at subsidized prices, driven out competitors, and deterred new market entrants. When China needs to flex its soft power muscles by embargoing rare earths, it does not hesitate, as Japan learned in a 2010 maritime dispute.
This isn’t an idle threat. When People’s Daily (the official newspaper of China’s Communist Party) uses the language “don’t say we didn’t warn you,” the government typically follows through on the threat.
President Trump, for his part, has been consistent in his approach to dealing with China. Trump continues to ratchet up the pressure on China, looking to create a more favorable trade environment for the U.S.
Earlier this month, the U.S. government “blacklisted” Huawei, the world’s largest telecommunications equipment manufacturer. The blacklisting makes it nearly impossible for Huawei to do business in the U.S. or with American companies.
Seeking Shelter in Crypto
The trade war between the U.S. and China looks like it’s going to get worse. And that means investors are going to be exploring opportunities to reduce their exposure to the traditional economy.
Crypto has set itself up nicely as a hedge against the current global economy. It’s one of the rare markets that doesn’t correlate with the stock market. That means crypto’s behavior isn’t dictated by the stock market. It can go up or down when stocks are going up. And it can go up or down when stocks are going down. It’s an emerging store of value.
And with the crypto markets taking off this year, it’s a particularly good time for investors to flee the traditional markets and invest in crypto. This should create additional buying pressure for bitcoin and select altcoins.
We believe our portfolio is constructed in such a way to take advantage of this new catalyst. It’s done extremely well this year so far. And as the 2019 bull market continues, we expect things to get even better.
Good investing,
Vin Narayanan
Senior Managing Editor, Crypto Asset Strategies