Complex Made Simple

Could the next recession come from Cryptocurrencies?

Ten years have passed since the last financial crisis, which was driven by mortgage-backed securities.

It’s been a wild, wacky road for the economy since it bottomed out during the most recent financial crisis.

For one, the recovery has been the slowest-growing in history, failing at seemingly every step to entirely win over investors.

These erratic-yet-connected indicators have caught the eye of Jim Paulsen, who serves as the Chief Investment Strategist at Leuthold Group and who’s keeping his eye on conditions that he thinks could spur the next economic recession, and what he sees right now scares him.

“Our odd, unconventional recovery could have a shocking result,” he told Business Insider by phone. “It wouldn’t be at all surprising if the next recession occurred from left field.”

He ultimately foresees the economic expansion being derailed by something that blindsides everyone.

Read: World Wi-Fi Day: Why better connection is key to economic growth

Cue the crypto craze

It’s not hard to see the parallels between today’s cryptocurrency craze and the stock market crash of 1987: both involved clueless regulators and unfettered markets.

No one knew what to expect, because only a handful of people on the planet understood the professional connections between derivative markets and traditional stocks.

The truth is that we don’t know how Bitcoin is valued, according to Forbes. It’s embedded in software that only some people understand.

For example, we know more about Microsoft than we do about the shadowy origins of Bitcoin and its miners.

While blockchain is a game-changing technology that could change everything from contracts to global banking, it’s still a black box to most investors, though it is perceived as a reliable future technology for any business.

Virtual currencies are the problematic issue here. While with both stocks and cryptos, you know that there is a finite number of shares and coins and derivatives such as Crypto futures, and prices are listed every minute by exchanges. The difference is that with stocks, the source behind trading is available to anyone, while with cryptos, it is not, but also nothing about a crypto’s financial standing is available.

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Price movements

Panic and loss of confidence have triggered market sell-offs in trade history. Think tulips, Louisiana swampland, Florida real estate and tech stocks. Markets are indirectly connected through herd psychology.

One massive sell-off could spill over into other investments. A crisis in complex credit-default swap derivatives fueled the 2008 stock/real estate meltdown and recession. Could Bitcoin tanking ignite a confidence crisis in common shares? Markets are rarely rational when everyone’s selling in fear, even in other non-related markets.

Paulsen can also be more direct with his economic concerns.

In a recent note to clients, the Leuthold CIO outlined six reasons why investors should beware of an unexpected economic shock before the end of the year.

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Regulation for ICOs is it too late?

The market for initial coin offerings is about to witness a two-part regulatory reckoning, according to Cboe President Chris Concannon.

However, the trading veteran thinks investors should lay awake at night worrying about the uncertainty hanging over the market for initial coin offerings (ICO), the popular crypto crowdfunding method.

Two waves of reckoning for ICOs

“The reckoning will come in two waves,” Concannon said in an interview with Business Insider. First, the Securities and Exchange Commission (SEC) will go after ICO market participants. Then, class-action lawsuits against the teams behind ICO projects will surge.

The market, which is known for its fair share of both fraud and big dreams, has allowed some tech startups to raise billions of dollars from a broad spectrum of investors. In total, more than $7 billion has been allocated via the fundraising method in 2018, according to data from Token Report.

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The 2nd wave

If the SEC deems ICOs as unregistered securities, then their holdings would be rendered valueless. This, according to Concannon, would trigger the second wave of reckoning.

The market has seen some class-action lawsuits. Business litigation firm Silver Miller in late 2017 filed a class-action suit against Monkey Capital, a crypto hedge fund. Silver Miller also has pending cases against crypto exchanges Kraken and Coinbase.

Law firm Polsinelli, which is advising clients to approach the ICO market cautiously, said it has “only likely begun to see the beginning of class action lawsuits filed relating to blockchain-related companies or companies that participated in ICOs.”

A recession is coming soon read more: JPMorgan: Next recession is on the horizon

Will the region see a recession as well?

The region is not trading crypto unlike the western and eastern parts of the world, and we can expect a crash to happen it will not spill over to the region. However, the risks of a recession in the region come in the forms of geopolitical factors, according to FocusEconomics, an economy data site.

“The MENA region’s economy is experiencing a recovery this year largely due to higher oil prices, healthy global growth, relatively loose financial conditions and bolder fiscal support in key countries such as Qatar, Saudi Arabia, and the UAE,” said Ricard Torne Codina, Lead Economist at FocusEconomics.

“This year, inflation will pick up on the back of faster economic growth in the region,” he added.  He also based his forecasts on the GCC’s implementation of a VAT in some countries and energy prices being higher.

FocusEconomics panelists forecast that regional inflation will average 5.1% in 2018, which is up by 0.1% from last month’s estimate and in 2019, that increase is expected to decline to 4.7%.