How long will it take?

What has happened before, will happen again and we certainly can learn from it. In this article we will try to learn from the past how long can this economic crisis be.

In the last 100 years we have seen at least 7 major downturns and many minor ones, but we will concentrate on the major ones because we believe this is one of them. Some may think it is a wrong point of view, but the basic economic parameters (debt, inflation, growth) make us think that we are facing one of the big ones. Let’s hope we are wrong.

At the moment the S&P has fallen 25% from its peak

If we take the S&P index and consider the time to recover the moment when it reaches the ATH (All Time High) again, we can create this table of major crises order from the biggest to the smallest.

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In my opinion, the one that has more similarities is the 1973 crisis, where inflation was the main problem and the Bretton Woods system collapsed, when the USA definitively suspended the direct convertibility of the dollar to gold. We are facing an international battle to overthrow the dollar as the international reference currency (Bitcoin, Yuan, …) . 

Are we entering into a new economic paradigm where Bitcoin (or digital currencies) can substitute the dollar for international reference? It’s too early to say. At the moment BTC is too volatile for mass adoption as a currency of exchange, but is a good asset to store value.

We are far from the “Great Recession” scenario of 1929, because of globalization and all the instruments we have now to impulse the economic recovery. 

But we see connections with the second big crisis, the Global Financial Crisis of 2008. It took us 6 years to recover and a drawdown of 58%. We have a lot to learn from this crisis, but to center the analysis into crypto, just remember that  Bitcoin was created after this crisis as a solution for some of the basic problems of the financial system. Maybe this crisis is a new opportunity for BTC to demonstrate why it was created. Never before could demonstrate it with such a solid base of institutional and social adoption, that’s why I’m pretty optimistic about it.

From the Dot Com crisis of 2000 we can learn some things also. There was a Bubble in 2021 if we analyze the Price/earning ratio (how many years it takes at its earning ratio to cover the price of an asset). 

For example, take a look into TESLA PE ratio:

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The good news from this point of view is that we are close to the levels before the bubble.

And we also have the Covid crisis of 2020, where we recovered in a record time of only 6 months after a drawdown of -36%. But this is tricky for me. We recovered from the Covid Crisis by burning trillions of new dollars/eruos that created this current crisis, with a bubble and inflation rates at highest levels. In my opinion, when the next generation of economists analyze the current crisis will explain it as a single crisis with two phases, the Covid phase (20-22) and the Inflation phase (22-?). Of course, the name of the second phase will be Ukranian invasion otherwise would be that international institutions recognize their responsability in the current crisis, and I don’t think we will see this.

The current crisis has similar components to at least three big previous crisis (1973, 2000 and 2008):

  • Hiperinflation
  • Bubble
  • Institutional failure of FIAT system

It’s hard to know how much of each component we have here and how deep and long it will take to recover. It took years to recover from the other big crisis.

But remember, in the long term profit rates always return. S&P is up 200x over the past 100 years.

BTC is up 8x over the last 5 years, and that includes the current adjustment for the actual crisis.