Macro conditions couldn’t be any worse. Starting this month, the Fed unleashed its quantitative tightening (QT) plans, trimming the $9trillion balance sheet at an unprecedented scale (current run-off cap: $47.5bn/month initial; $95bn/month 3 month later; 2017 run-off: max $50bn/month). The last two quantitative tightening led to a sharp rise in yields in 2013 and a repo crisis in 2019 respectively. Unfortunately, this time around, the Fed has to deal with a much larger balance sheet and all-time high inflation rate since 1982. Without the ability to print real world supply of goods and services (factories, natural resources), the Fed has lever on the demand side, but lowering demand means hikes in unemployment (which the Fed is already targeting). With a 7% gap between short-term rate and inflation rate, can the Fed “just rise unemployment a little bit” without causing a recession? Extremely hard unless real world supply of goods and services picks up.
For us crypto traders and investors, the question is - isn’t bitcoin an inflation hedge, and if global market enters a recession, wouldn’t bitcoin be the risk-off asset of choice? My take on this is not in this cycle. Bitcoin has not experienced a proper traditional finance bear market yet and has performed poorly during past tapering and quantitative tightening environments. Different phases of quantitative easing, tapering, and quantitative tightening are marked on the chart above. After three rounds of quantitative easing from 2010, the start of tapering in 2014 marked the beginning of bitcoin’s 2-year bear market. In 2017, quantitative tightening started in October, and the 2018 crypto crash soon followed. In other words, bitcoin’s inflation hedge narrative hasn’t been officially tested or widely accepted. With arbitrage opportunities, scams, hack risks, and run-on-bank fear, the crypto market is no doubt in its early stage. While superior security and scarcity give bitcoin the potential to replace gold in a new era of currency, early-stage demand side volatility makes bitcoin subject to wild price swings. The current reality is we see rising correlation between bitcoin and the equity market year after year, and the volatility is further heightened by the derivative market. In the current cycle, bitcoin’s inflation hedge value is overpowered by its volatility, and it is hard for bitcoin to rally under gloomy global macro conditions before the market matures and stabilizes.
Do you agree? What’s your take on crypto under the current global macro? Support and comment below!
For us crypto traders and investors, the question is - isn’t bitcoin an inflation hedge, and if global market enters a recession, wouldn’t bitcoin be the risk-off asset of choice? My take on this is not in this cycle. Bitcoin has not experienced a proper traditional finance bear market yet and has performed poorly during past tapering and quantitative tightening environments. Different phases of quantitative easing, tapering, and quantitative tightening are marked on the chart above. After three rounds of quantitative easing from 2010, the start of tapering in 2014 marked the beginning of bitcoin’s 2-year bear market. In 2017, quantitative tightening started in October, and the 2018 crypto crash soon followed. In other words, bitcoin’s inflation hedge narrative hasn’t been officially tested or widely accepted. With arbitrage opportunities, scams, hack risks, and run-on-bank fear, the crypto market is no doubt in its early stage. While superior security and scarcity give bitcoin the potential to replace gold in a new era of currency, early-stage demand side volatility makes bitcoin subject to wild price swings. The current reality is we see rising correlation between bitcoin and the equity market year after year, and the volatility is further heightened by the derivative market. In the current cycle, bitcoin’s inflation hedge value is overpowered by its volatility, and it is hard for bitcoin to rally under gloomy global macro conditions before the market matures and stabilizes.
Do you agree? What’s your take on crypto under the current global macro? Support and comment below!
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