As an analyst with over two decades of experience observing financial markets, I find Hayes’ insights intriguing and well-grounded. His unique perspective on economic policies, rooted in his deep understanding of the crypto market dynamics, adds valuable nuance to discussions about Bitcoin and its relationship with broader macroeconomic trends.
In a recent article named “Boom Times… Postponed,” Arthur Hayes, BitMEX’s co-founder and former CEO, discusses why the anticipated Federal Reserve interest rate reductions might not immediately boost the crypto markets as some investors anticipate, according to his viewpoint. Published on Substack, this essay offers an in-depth analysis combined with Hayes’ insights on broader economic policies and their potential effects on asset values such as Bitcoin and cryptocurrencies
A New Paradigm
To start off, Hayes counters the conventional investor approach towards crypto, which is to “buy on dips” (BTFD), in light of interest rate cuts. Instead, he encourages a more thoughtful analysis of the current economic landscape, particularly as it pertains to post-COVID fiscal policies and potential inflation
According to Hayes, the global financial policies implemented to combat the COVID-19 pandemic marked the end of a deflationary period and signaled the beginning of an inflationary one. He underscores the fact that central banks recognized these inflationary effects relatively late, leading them to take reactive instead of proactive measures
Hayes highlights the critical importance of the U.S. Treasury market because the U.S. dollar functions as a global reserve currency. Despite the Federal Reserve’s aggressive interest rate increases, the bond market indicates trust in the central bank’s dedication to curbing inflation. This is demonstrated by how the 10-year U.S. Treasury yield remains below 4% during periods of substantial inflationary pressure
Nevertheless, a significant shift occurred during the August gathering at Jackson Hole hosted by the Federal Reserve, where Chairman Jerome Powell subtly suggested a potential interest rate reduction, thereby stirring market unrest. Hayes expresses concern over persistent high government expenditures, which he perceives as a political tactic rather than sound fiscal management, and believes these actions impact inflation rates and, consequently, the Federal Reserve’s monetary policies
Hayes suggests that when the Federal Reserve tried to control inflation by curbing government spending, it didn’t happen, instead, the market took action on its behalf. This is evident in the quick increase in the 10-year Treasury yield after Powell’s announcement. His assertion implies that even though the Fed can lower interest rates, the bond market will still respond to economic conditions independently
Bitcoin And Crypto Are Short-Term Bearish
Hayes emphasizes that Bitcoin closely follows changes in dollar liquidity conditions. In essence, he states that when the Reverse Repurchase Agreement (RRP) started increasing by approximately $120 billion, Bitcoin’s value decreased significantly. This is because as the RRP rises, money becomes immobilized on the Federal Reserve’s balance sheet, preventing it from being reused within the global financial system, which Hayes explains
He suggests a direct correlation between Federal Reserve policies, dollar liquidity conditions, and the Bitcoin price. He further predicts that if the Fed doesn’t cut rates before their September meeting, the rising balances in the Fed’s Reverse Repo Program (RRP) could see the Bitcoin price either stabilize or potentially decline further towards $50,000.
If the Federal Reserve chooses not to reduce interest rates prior to their September meeting, it’s likely that Treasury bill yields will remain significantly lower than those of the Required Reserves Program (RRP). This situation should result in an ongoing increase in RRP balances. In terms of Bitcoin, it may fluctuate around its current levels or gradually trend downwards towards $50,000 at its worst. As I wait to see how things develop, my viewpoint keeps me poised to potentially make a purchase. I’m not selling cryptocurrency because I believe the short-term outlook is bearish, but I’m not fully convinced of this stance
Even though there are current challenges, Hayes continues to be hopeful about Bitcoin and cryptocurrencies’ future possibilities, especially in light of policy changes that could boost liquidity. Hayes hypothesizes that U.S. Treasury Secretary Janet Yellen may take steps to stimulate financial markets before the upcoming U.S. presidential election
Hayes asserts that it seems likely that Yellen may exhaust the Treasury General Account (TGA) in order to induce a positive market response, and could also direct Federal Reserve Chair Jerome Powell to halt quantitative tightening (QT) and resume quantitative easing (QE), with the ultimate goal being to aid Kamala Harris’ election as the U.S. President
In simpler terms, Hayes is saying that all these financial maneuvers are beneficial for investments with higher risk, such as Bitcoin. If the Federal Reserve continues reducing interest rates and injecting a substantial amount of money into the economy, this trend should continue until late September. During this period, Bitcoin may fluctuate, but could potentially stay stable, while other cryptocurrencies might plummet even further
He concludes his analysis noting a shift in his expectations for a bull market. Originally anticipating a resurgence in September, he now foresees a more turbulent period for Bitcoin and cryptocurrencies but remains steadfast in his long-term strategy. “I’m still long as fuck in an unlevered fashion. The only additions to my portfolio will be increasing position sizes in solid shitcoin projects at deeper and deeper discounts to my perception of fair value,” he declares.
At press time, BTC traded at $56,615.
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2024-09-04 17:54