The macroeconomic risks and capital markets

Disclosure: The views and opinions expressed here are solely those of the author and do not necessarily represent the views and opinions of crypto.news editorial.

Just as macroeconomic conditions and geopolitical news affect stocks and other investments, these factors also affect the short- and long-term prices of cryptocurrencies, according to Joe McCann, founder and CEO of crypto and web3 investment firm Asymmetric. There is always risk and opportunity when such impacts occur.

Macro environmental factors (interest rates, inflation, GDP, debt, unemployment, government policies, international conflicts, etc.) often trigger a volatile environment filled with fear. These issues highlight the need to have a diversified investment portfolio. Investors can benefit from opportunities arising from price instability even in difficult periods.

Current macroeconomic concerns

Macroeconomic factors continue to influence investors’ activities. Investors’ stability and profitability depend on their ability to quickly recognize and respond to changes in the macro environment.

The current stagnant economic growth has had enormous impacts on the economies of industrialized countries and low-income nations. Current international economic growth stands at 3.1% in 2024, the same as 3.1% in 2023 but slightly above the pre-pandemic growth rate of 3.0%.

Persistently high interest rates, increasing conflicts around the world, slowing international trade and increasing climate disasters are contributing to the current stagnant global growth. The outlook varies between countries; There is slow economic growth in many developed economies, especially China and Europe, and a slight growth in the USA. Stock markets are currently in decline, including in the US and China, due to the current high inflation levels on the international scene.

China’s fiscal stimulus plan

China plans to roll out a fiscal stimulus package to help stimulate its fast-growing economy. The federal government aims to assist county governments in resolving debt problems, provide financial support to low-income individuals, assist the struggling real estate market, and supplement the capitalization of state-run banks, including participating in other fiscal measures.

The Chinese Ministry of Finance will make a press release on Saturday, October 12, regarding fiscal policies aimed at stimulating the economy.

I ran a poll and got almost 7,000 votes in an hour before the poll was blocked by Weibo. We can see that the size of the fiscal stimulus is now everyone’s measure… pic.twitter.com/qjzMR68XBr

— Hao HONG 洪灝, CFA (@HAOHONG_CFA) October 11, 2024

All these measures are steps that investors had previously requested the government to take. The requests come as China’s economy is weakening, struggling to fight inflation and instill user confidence amid a downturn in the real estate market.

But investors in China are worried about whether the fiscal stimulus plan can immediately boost economic growth to combat economic decline and unemployment rates. Some investors think that lowering interest rates or injecting capital into the economy will not solve the fundamental problems.

Such uncertainties seem to be influencing investors to direct their funds into alternative assets such as virtual currencies rather than Chinese stocks, which are witnessing price declines. The Bitcoin (BTC) price has traded above $65,000 levels again in the two weeks following China’s fiscal stimulus announcement, highlighting sentiment that investors will invest in virtual currencies rather than Chinese stocks.

Investing in times of challenging macroeconomic conditions

Macro-environmental factors can greatly affect investors’ investment portfolios. Various capital assets (such as stocks, bonds, real estate, commodities, and cryptocurrencies) respond differently to macroeconomic conditions; therefore, understanding such responses is important for efficient and effective portfolio management.

Developing a diversified investment portfolio is difficult due to low bond yields, narrow gains in stocks, high correlations between assets, and greater macro risk.

Cryptocurrencies can be valuable for developing a productive, diversified investment portfolio. In the past, crypto assets such as Bitcoin and altcoins have provided enormous profits (for high risks) and low corrections to traditional capital assets such as stocks, bonds, gold and others. This means they have the capacity to diversify their investment portfolio and deliver greater returns.

However, since cryptocurrency is a volatile investment instrument, a small allocation is recommended. Research shows that a virtual currency allocation of around 5% can help maximize risk-adjusted returns for investors with a diversified portfolio of stocks and bonds. Despite this, investing in cryptocurrency tends to increase portfolio risk.

Users should study and understand the markets, evaluate their willingness to take risks, and understand their financial goals before investing in cryptocurrencies. These instruments are high risk and may not be suitable for those who avoid taking risks or want to achieve short-term investment goals.

Advantages of investing early and holding

Given that any macro-environmental factor (such as inflation) reduces future purchasing power, an effective strategy to combat this threat is to start investing and increasing assets at an earlier stage. This can ensure that the investor’s portfolio benefits from the compounding effect.

It is important to understand all the factors that can influence investors’ investment decisions and style, including the impact of stress and fear on the performance of different asset classes during financial distress. It is crucial to develop flexibility, focus on diversity and consider the long-term perspective.

A good investment portfolio should include a diverse mix of financial instruments. Investing funds in various capital assets (such as commodities, real estate, bonds, stocks, and cryptocurrencies) spreads risks.

There is still room for larger speculative investments. Oil harvesting was a profitable venture in the 20th century. Investing in internet stocks was a primary money-making activity in the 1990s. Cryptocurrency is what makes people millionaires today. The future of investing is now. Cryptocurrency can help balance reward and risk in an investment portfolio.

Nicholas Otieno

Nicholas Otieno is a fintech writer specializing in cryptocurrency markets. Since 2019, he has been writing articles to educate readers about cryptocurrency and its significant positive impact on global prosperity. Nicholas is a Bitcoin owner who firmly believes in its fundamentals. His work has appeared in publications such as Finance Magnates, Blockchain.news, Bitcoin Magazine, Technewsworld.com, and Business2community.com, among others.