- The government shut down after its credit collapsed has become a problem about equal to having an elephant in the living room. It's so big you just can't ignore it.
- We have to admit that it is difficult to set up a valuation system for cryptocurrencies, but you can't deny the fact that they are a new generation of currency.
- Bitcoin can accumulate more and more foreign exchange reserves under the premise of absolute independence of monetary policy, free capital flow and fully market-oriented exchange rate.
- For investors seeking stability, holding BTC may still be the best way to get average returns and avoid macro risks.
Bitcoin, as we all know, is not as "rational" as the Federal Reserve can be in printing dollars to create purchasing power in foreign exchange. But in other words, the Fed can use quantitative tightening to curb domestic inflation and weaken other sovereign currencies. The theory of interest-rate parity dictates that the currencies of relatively loose sovereigns should be weaker than those of the strongest countries. Given that global commodities are priced in dollars, tighter monetary policy in the US has contributed to increased liquidity volatility in fiat currencies in the rest of the world.
Source: Bloomberg
We can clearly see that human society has entered an era of "distribution > growth" after 2018. Population growth has stalled, and industrial policy and economic activity have been hurt more by COVID-19 and the energy crisis. Similarly, we haven't seen much in the way of surprising technological innovations and tech startups lately with the exception of cryptocurrencies. Worse, more and more sovereigns are being swallowed up by the debt crisis. This chronic suicide is often accompanied by the bleeding symptom of inflation.
FUD based on the deviation of economic reality is ubiquitous
PTSD caused by excessive austerity
Policymakers, including the Fed, are trapped in a cycle where the government expands its debt faster than the economy grows. The only result would be the end of government credibility. In other words, both Powell and Biden are gatekeepers to interest groups. I will discuss the study of government credit bankruptcy in another article. If you are interested, please follow our twitter. In fact, we find that at least seven of the economic crises since 1929 were caused by excessive Fed tightening.
We're in the middle of a Fed rate hike cycle right now. Market interest rates are high, but recession is still some way off. It seems that the history of the 1960s and 1980s is repeating itself. Domestic inflation has risen sharply. The league of Nations system formed since 2000 is on the verge of disintegration. The russia-Ukraine war and the accompanying energy crisis and other macro background are aggravating the risk of economic crisis.
Source: Federal Reserve Bank of St. Louis
Notably, the U.S. consumer price index rose 9.1 percent in June on a non-quarterly basis, the largest increase since November 1981. At present, the Fed only focuses on the immediate inflation data which is no different from the blind men touching the elephant. If the fiscal risk is not included in the policy safe, it is very likely to lead to the stagflation crisis of the 1980s. I think the Fed is approaching an inflection point for a policy shift.
The Fed is seeing pink elephants
First, 9% is already a very high inflation threshold. Bearish expectations of higher inflation have been priced in for three months. The bulk of the money in the market has started to bet on the possibility of inflation falling.
Second, there is still considerable uncertainty in the unemployment data. Although non-farm employment has recovered, the policy transmission effect after the interest rate hike is still continuing, so there is a certain lag in the real employment situation in the market. Instead, cryptocurrencies and Bitcoin in particular have multiple narratives. As a result, it has a high correlation with the U.S. stock market as an inflation-proof asset. But I don't think it will last.
Source: Federal Reserve Board of Governors via FRED, June 2022
Over the past year, the cryptocurrency market has been buffeted by FUD information in traditional financial markets. However, such FUD generated based on the deviation of economic reality may be more due to the fact that institutional funds pay more attention to the attributes of Bitcoin as a risk asset similar to securitization, thus weakening the attributes of Bitcoin as a hedge asset.
These are only temporary. Bitcoin will ultimately revert to the basic model of supply and demand. Bitcoin's correlation with U.S. stocks will eventually break down. The impact of macro factors such as interest rate rise, war, inflation and epidemic on the price of Bitcoin will give birth to new permutations and combinations in the context of the new asset narrative.
BTC/USD price trend based on the theory of balance of payments
BTC/USD balance of payments comparison
One of the main questions in research on bitcoin is whether it is a currency. From the perspective of asset attributes, Bitcoin is independent of commodities, stocks, gold and other major assets, and should become a new decentralized sovereign currency.
A decentralized peer-to-peer currency system acts as the sovereign government of the country. This positioning is based on the fact that crypto assets are increasingly intertwined with the traditional financial system, and thus jointly influenced by macroeconomic factors.
No one can deny that the bitcoin community has amassed the demographic base and sovereign credibility necessary for a country. That's why I try to analyse bitcoin's future value using the foreign exchange supply and demand framework of the balance of payments.
Source: Bloomberg
In 1999, Krugman proposed that under the condition of an open economy, a country's three goals which includes monetary policy independence, free capital flow and fixed exchange rate can only be achieved at most two at the same time. That is, there are three cases, independent monetary policy, fixed exchange rate, then capital control; Fixed exchange rate, free capital flow, and the monetary policy is invalid; Independent monetary policy, free capital flow and then floating exchange rate.
The relationship between the three is one and the other. After the collapse of the fixed exchange rate system in 1973, the independence of monetary policy and the free flow of capital were realised, and the floating exchange rate system stepped onto the historical stage. Floating exchange rates bring an independent monetary policy and sufficient capital flows.
If bitcoin is regarded as a sovereign state, the constant amount of bitcoin means that its monetary policy is completely independent and stable. As the foundation of bitcoin countries, blockchain technology is like the constitution, which basically stipulates the value orientation of "free capital flow". That is to say, the exchange rate of Bitcoin against the US dollar is bound to float.
Historically, bitcoin's balance of payments relative to the U.S. dollar has clearly developed along the "double surplus" trend: 1. There has been a huge increase in the amount of money pouring into bitcoin which is so-called "growing reserves", 2. Bitcoin's overall exchange rate against the dollar is at a high rate of positive growth.
Triangle Paradox and the positive growth of BTC/USD exchange rate
After the 2008 financial crisis, most countries resorted to quantitative easing to attract capital inflows. But the flood policy is highly inefficient, especially as international capital begins to flow back to the U.S. market as emerging economies slow down due to lack of innovation and unequal distribution. Bitcoin, due to its absolute capital flow efficiency and hedge property, leads to the gradual flow of cross-border liquidity into the country. No sovereign fiat currency has as much currency flexibility and retains its hard-currency purchasing power as Bitcoin.
Modern macroeconomic theory believes that policy is the basic method to solve internal and external contradictions. But in essence, the government's use of various policy tools often affects policy efficiency because of too many artificial factors. Floating exchange rate and capital flow are two marketisation tools for balance of payments adjustment in developed economies.
Source: Kyle(Twitter: FatRatKiller)
For Bitcoin in an emerging country, code is the basic method to solve its internal and external contradictions. Therefore, it can only accumulate more and more foreign exchange reserves under the premise of absolute independence of monetary policy, free capital flow and fully market-oriented exchange rate.
International spending in Bitcoin Republic is minimal so far, aside from small development costs and community maintenance. Think of the huge amounts of government spending and foreign aid that some countries need to inflate their debt sheets. It is like walking on a tightrope while maintaining a certain degree of monetary independence, a managed floating exchange rate and managed capital flows, and ultimately sacrificing the wealth earned by its citizens.
In my opinion, Bitcoin would be a dimensionless blow to traditional sovereigns. You would not believe how efficient and open the market environment is created by a fully market-based exchange rate adjustment mechanism and a fully codified monetary policy.
In addition, the constant size of bitcoin reserves of 21 million is enough to enable the residents of bitcoin countries to cope with the monetary policy shock of the withdrawal of funds. In terms of balance of payments theory, Bitcoin is far and away the most successful algorithmic stablecoin although it is not stable yet. It would create a freer, more trusting and more transparent decentralized sovereign state, which is hugely attractive to international capital.
The future of the cryptocurrency market
Elephant in the corner
We have seen the exit of weak short-term holders, both institutional and retail, but the market still needs a sustained period of consolidation to establish a resilient bottom. Markets already price in their exchange rates expectations of the future value of crypto assets. So the outlook for the cryptocurrency industry is clearly undervalued relative to the decline that has been expected so far.
In addition, the unstable international situation is turning the fiat currencies of some major powers into risky assets. So far, Sri Lanka has proved that, but they will not be the last. The government shut down after its credit collapsed has become a problem about equal to having an elephant in the living room. It's so big you just can't ignore it. We have to admit that it is difficult to set up a valuation system for cryptocurrencies, but you can't deny the fact that they are a new generation of currency.
Source: lookintobitcoin
The crypto market continues to be standardised. Bitcoin's diverse narrative will not stop. The more complex the macro environment, the greater the market demand for bitcoin. The overall resilience of the cryptocurrency market will continue to grow, and high-quality cryptocurrency projects will continue to attract more capital inflows in the future.
Bitcoin, the new king of inflation fighting
Therefore, innovative projects based on Web3 technology and cryptocurrencies following the same value orientation as Bitcoin will become the main driving force for the development of the crypto industry. Bitcoin, as the underlying asset of cryptocurrency, still has high growth expectations, so it is highly likely that bitcoin will decouple from the trend of the US stock market in the future. The Ethereum ecosystem will become a "green deflationary bond" after the Merge in the future, which also has the potential of underlying assets.
I know some people are worried that the deep bond between the US dollar, especially the US dollar stablecoin, and Bitcoin may make Bitcoin another harvest object for the US dollar. But what I want to say is that we will witness the strong anti-blood-sucking ability of Bitcoin in this down cycle. The policy of raising interest rates will finally make the world see the true ability of Bitcoin to resist inflation.
Source: lookintobitcoin
The story isn't over yet. We will eventually see the dollar act as a bridge for people to seek bitcoin insurance after those rubbish centralized governments go bankrupt. Note that the U.S. dollar will eventually become the best intermediate fiat currency, while Bitcoin is the real real-time global currency. All in all, it is Bitcoin that is sucking the blood of the dollar, not the other way around.
The current market bubble, accompanied by the bankruptcy of mainstream institutions, has almost disappeared. How to rebuild confidence in the crypto market will be the theme in the coming year. I have no doubt that the Fed will help make Bitcoin the new king of inflation fighting. For investors seeking stability, holding BTC may still be the best way to get average returns and avoid macro risks.
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