Why are cryptocurrencies going ballistic (Chart 1)? Because the current (IMHO extremist) meme is that inflation will come roaring back AND the dollar will collapse. Thus, cryptos are a buy one, get one free double hedge. At least that’s the “story” - and we know there’s one behind every bubble, don't we?
What’s the likelihood that the US Empire will commit suicide by continuing to print trillions AND maintain interest rates at zero AND continue a fiscal policy of enormous budget deficits? In my opinion, zero - at least past the next few COVID-critical weeks.
Once the crisis passes, it is certain that both monetary and fiscal policy will revert to normal. Let’s not forget that Mr. Biden’s election platform called for raising corporate tax from 21% to 28%. And while the Fed is still stuck on a very accommodative policy, it could change stance instantly if faced with higher inflation and/or a run on the dollar. Also, there are "trial balloon" type hints going around about tapering, though the Fed officials themselves are steadfast in their official, public announcements.
Talking to my buddies in the FX market the current, mainstream view is that the dollar will go down, perhaps even by a lot.
On the inflation front, NO ONE is worried about deflation, while the bond market itself is clearly concerned about inflation - just look at the yield curve (Chart 2). The 10Y - 2Y spread is at 118bp, the highest since 2017 (Chart 3).
Chart 3
In short, the market is expecting both a weaker dollar and higher inflation. Now, the FX and bond markets are not like the wild and wooly stockmarket. They are 99% professional and very, very big. No place for Redditors and RobinHoods. And they are usually correct in their predictions.
But... what if they're not? What if (a big if) something happens and throws the US back into recession? Or - and this is much more likely - the Treasury and the Fed realize that they cannot keep printing and spending and a) raise taxes and, b) start tapering fast.
Then, the whole Crypto meme goes out the window and the rocketship comes crashing back to Earth. Something like SpaceX, in other words and not coincidentally, either.
Yup, the non-logarithmic BTC chart is ridiculous. On the log chart one can better look under the hood of the rally. Crazy nonetheless. Many seem to be thinking it will be the new world currency? With prices that have zeroes to the left and to the right. As in 0.00125 BTC for example.
ReplyDeleteI'd like to see the price of chewing gum in btc if it becomes mainstream lol... around 0.0000133929 at current prices.
ReplyDeleteBitcoin can never become a real global currency, as it is right now anyway, because it is “capped”. Just about every Bitcoin has already been “mined”, the rest will take another 120 years to extract. Since money supply must keep expanding to accommodate “growth”, BTC is not suitable. Unless, of course, we adopt a negative growth economic and social model, globally...
ReplyDelete...interesting, or prices in btc could just keep adding zeroes to the left.
DeleteIt’s not about prices, obviously BTC can be split 100:000 to 1 to accommodate transactions. But the total stock of money would still stay the same...
DeleteIt’s like cutting a single loaf of bread in thinner slices..
Yes, by prices in btc adding zeroes to the left I mean ever more thinner slices... But yes, I get it. There would come a point with many, many zeroes to the left (thinner slices) and each btc costing a million o more. I suppose that's what the fans are also betting on.
DeleteUnless the global economy stagnates or goes into perma-recession, BTC can never be a real currency.
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