The Crypto Comms #24
Legacy capital markets are breaking. Bitcoin hasn’t been this attractive since the dawn of epochs, and yield-curve control is the default policy. Indeed, the BoE’s decision to intervene in the UK bond market is a pivotal moment that should not be underestimated.
Let’s dig in.
In this issue:
- Bitcoin analysis
- A rock and a hard place
- Yield Curve Control
- Historically speaking
- BoE intervention
- Latest happenings
- Listening material
The crypto airwaves are rife with chatter about the ‘Bitcoin bottom’. Analysts are talking about fresh lows with $10,000 price predictions, local highs followed by new lows, and everything in between. But one thing is absolutely clear: the majority is trying to pinpoint the Bitcoin renaissance as the heat in legacy markets reaches extremely uncomfortable levels.
Technically, Bitcoin/Dollar has held its rounding consolidation structure described on Sept. 20. This is certainly a positive sign in comparison with the SPX, which has lost 8% in the same time-period.
Put simply, if price revisits $22,000 on the back of increasing SPOT volumes (Coinbase), the case for a melt-up scenario to $30,000 is back in play. Conversely, losing $19,050 (Mo) opens the door to $18,300 and $17,000, respectively.
Floor prices have held so far, and with legacy markets essentially breaking, capital flight into Bitcoin and crypto markets (which have already witnessed two full-blown capitulation events) is a real possibility — dare I say probability.
Capital flight into Bitcoin is likely to become more pronounced as markets lose confidence in Central bank policies — and with good reason.
The question is: who will step through the door first?
A rock and a hard place
If history is any indicator, the cost of living crisis is unlikely to get any better in the months ahead. On one hand, if the Federal Reserve pushes interest rates too high, the global economic recession will push normal people deeper into poverty. On the other hand, pivoting or not raising rates will lead to hyperinflation.
Both scenarios are bad, and in this period of transition there is bound to be more economic fallout regardless of which path the Fed chooses.
The third way involves Bitcoin in a big way. It means seeking complex but correct answers over simple but wrong ones.
A major theme in this long-term Bitcoin thesis is the continued demise of centralised monetary policy, which tend to exacerbate systemic and structural issues. Volatility and economic reshuffling are the consequences of being trapped, which in turn hit people’s wallets and compound institutional distrust on a level not seen in decades.
The central challenge for central banks is to somehow solve the global monetary sovereign debt crisis. Since none of the traditional tools work, experimental policy such as yield curve control (YCC) is about to become a critical part of our future. In this post, we’ll talk about YCC and offer an example from history.
Yield Curve Control
YCC is a mechanism for central banks to influence interest rates and the general cost of capital. In practice, a central bank sets the desired interest rate for a particular debt instrument. This is followed by repetitive two-way buying and selling the debt instrument (10-year bond) no matter what in order to maintain the interest rate peg desired. This activity is normally facilitated using newly printed cash, which in turn adds to inflationary pressures.
YCC is used for a number of reasons: maintain stable interest rates to spark economic growth, maintain lower interest rates to decrease the cost of borrowing (capital) and interest payments, or intentionally creating inflation in a deflationary environment. In order for this to work, markets must ‘trust’ that central bankers will maintain the peg at all costs.
After WW2 in 1942, the United States had major debt expenses which financed the war, and the Fed capped yields to keep borrowing costs low. In that time, the Fed capped both short and long-term interest rates across shorter-term bonds at 0.375% and longer-term bills up to 2.5%. By doing so, the Fed threw its hands up with respect to the money supply and its balance sheet, both of which increased to maintain the pegs.
This was the method chosen to deal with elevated public-debt to GDP levels. Back then, debt-to-GDP stood at 119%. Today US debt-to-GDP stands at 137%, while the Euro-area’s debt-to-GDP stands at 95.6%.
By 1947, inflation hit 17% (measured year-on-year CPI) and worried about this figure, the Fed ended YCC on short-term bonds. In 1951, inflation hit 21%, and YCC on long-term bills was also halted.
Today, YCC is a tool used by both the Bank of Japan and Australia in 2016 and 2020, respectively. To maintain this policy, Japan, which has the largest debt-to-GDP ratio in the world (260%) chose to let the Japanese yen fall.
Currency devaluation is the consequence of sustained YCC policy, and now the Yen looks like your average shitcoin, pardon the French. In other words, more central bank intervention results in temporary relief, and exacerbated currency devaluation over time. This in turn destroys domestic purchasing power, causing further contraction in the economy all the while inflation remains high.
Debt-monetisation only goes one way.
BoE intervention; harbinger of things to come
Is it the return of quantitative easing or is it yield curve control? Whatever you want to call it, the BoE’s Sept. 28 announcement of ‘temporary and targeted purchases’ in the gilt (bond) market shows investor faith in the UK’s fiscal strategy has turned sour.
The BoE said it would carry out purchases of long dated gilts from 28 Sept. until 14 October to ‘restore orderly market conditions’. The BoE’s plan to start selling gilts as part of its quantitative tightening programme has been postponed until 31 October. If history is any indicator, the flip-flopping won’t stop.
The pound tanked to record lows in response to the energy crisis, huge tax cuts and borrowing, with gilt (bond) yields spiking to incredible levels.
The turmoil caused pension funds to meet head on with solvency issues (margin calls). This meant the UK government had to choose between pensioners and futile attempts to tame inflation.
But the bond market has nowhere to go, QT policies are overtly unsustainable and money printing is the default path of least resistance, as we all just witnessed.
Steady lads, the money printing is coming.
- Bitcoin to Surpass $12 million by 2031 — Former Hedge Fund Manager.
- Billionaire Stanley Druckenmiller Says Central Bank Failure would lead to a Bitcoin Renaissance.
- Bitcoin-Sterling Volumes Spike as British Pound Flounders.
The purpose of this newsletter analysis is to provide context to current events and cryptocurrency markets. It is released every Monday and Wednesday. I am not perfect and this is not a science — nor is this newsletter a signals service or financial advice. While I cannot promise perfection I do my best to be honest and transparent.
Thank you for reading.
Feel free to contact me with feedback on firstname.lastname@example.org.
Join the Telegram channel for live updates.
Follow me on Twitter.
You can also support me with Bitcoin!
BTC address: 3EydsEYpjHn68axKnCUqBB7EbqcxrEjamr