Why did this happen to Bitcoin?
Today January 10th, Bitcoin dropped from $42K to $39K and came all the way back in a few minutes:
We already know central banks create narratives to justify actions. Today, the narrative changed from 3 rate hikes to 4, in 2022. However, the impact this potential narrative change had, was a very short term effect. About a minute! We know stocks and Bitcoin can get “choppy” sometimes. But in this case, the instant response to the rate hike change was soo fast, and reversed just as quickly, only to do the same thing again. It signals an inability to decide a direction, doesn’t it?
Meanwhile, $462 Billion in treasury bonds have been issued in the last two months. However, in October 50% of those issuances were being bought up by the Fed. Now, it’s 26%. Thus, rates will have to rise, or else the Fed will have to re-enact QE policies from 2021. Here is the chart of treasury bond issuances:
The Fed can calibrate rather quickly between buying up more treasury bonds or tapering. Based on today’s price action, with S&P 500 swinging the exact opposite of Bitcoin. It stands to reason, if rates are hiked that much this year, stocks will tank, and Bitcoin will rise. Yet, if they reverse course, stocks and Bitcoin may very well rise together. Over the last two weeks we have felt like the Fed may reverse course, as inflation signs are unavoidable and very damaging. However, we know the Fed is trapped. Rate hikes back to back to back to back, is also very damaging. To stock prices, not to mention real estate values! Which poison will the Fed pick?
They can’t go both directions at the same time, they have to choose!
Looking historically, the Fed never lets effective funds rates go negative. To avoid that in 2022, the Fed has their back against the wall. They have to raise rates and fast! This upheavel to lending practices will send real estate and stocks reeling. Investment and Capex budgets will be impacted overnight, once the rate increase is first announced. The second, third, or fourth rate increase only makes it worse. These are expected to be significant increases, although we are not hearing specific targets publicly. Problem is, the negative downside risk of that many rate hikes is severe. We can still see, after the first or second rate hike, the Fed reversing this decision. Once that cat is out of the bag. Bitcoin will catapult! Failing to be able to raise rates is too much signal amongst the noise. Fear will abound! Right now the dollar is up and looking much stronger on the rate hike news! Let’s just see how markets react into April, and May. Probably won’t take that long. Here is some history on fed funds rates with unemployment rates:
2021 was most similar to 1970. Back then the Fed could take the US off the gold standard and let fiat currency float. That is not an option today. There is nowhere to hide. The USD is in serious trouble. If effective fed funds rates get back to 8% like in 1970, over the next few years. How low would the SPX and Nasdaq drop? It would be a bloodbath! How can the Fed afford to do that now, with no gold standard pegged to the USD for almost 51 years?
So, compare Bitcoin to the USD:
Bitcoin offers he World, a self sovereign monetary system, on a public ledger. It cannot be consored. Your Bitcoin is yours, as long as you posses the keys. We always suggest holding an offline wallet like Trezor or Coldcard. Trezor.io or coldcard.com.
Once the offline wallet is possessed, keep the seed phrase, “keys”, in a separate, secure location. Once you have Bitcoin stored offline, you are sovereign! You are your own bank. Start running your own node, or mining your own Bitcoin, and your sovereignty has increased! Bitcoin represents a separation between money and state. The central bank was never supposed to be involved in government. It is private. Yet, over hundreds of years, central banks are involved in governments now. We are not here to discuss politics. Bitcoin seperates us from politics. We are self banked when we own it. It seperates money from state. Therefore, rate hikes, are not a direct effect to savings.
Back to where we are now, present day. Bitcoin is being moved. Not because the demand is down. It is considered dangerous. Bitcoin is the antithesis to fiat currency, we all know this. It is THE counter trade.
Here is how, as we can see it, central banks could be effecting Bitcoin through these announced rate hikes. Of course, there is collateral damage involved. Higher treasury bond rates will make borrowing more expensive, obviously. This “wet blanket” will impact Capex budgets. A major corporation will slow down after it’s Capex (capital expense) budget is adversely effected. It affects the rate of growth. Subsequently, multiple treasury bond rate hikes would obviously impact major corporations with high overhead and high capex budgets to uphold. Without them, growth is stunted, stock prices implode. These implosions, or deflationary crashes have happened many times in history. If the before mentinioed rate hikes, go forward unchecked, no reversal enacted, Bitcoin would likely suffer along with stocks longterm. Central banks would be throwing the baby out with the bathwater. Strengthening the USD, that is always bad for Bitcoin. Central banks know this. However, if, due to public and political pressure, QE was instead re-enacted. That would reverse the affects of rate hikes and allow the Fed to run strong negative effective funds rates. Thus, the USD would be weakened, Bitcoin, naturally, would be strengthened. However, over a longer term, Bitcoin could excel in either scenario because a stronger dollar would eventually reverse, and money would flow to the scarce asset. Bitcoin. Think of it as a way to delay the obvious decision, which is in favor of the most scarce asset, Bitcoin. Rate hikes, strengthening the doomed USD, would be kicking the can down the road.
Obviously, this has not happened yet, and there are several scenarios that could play out. Many factors from the outside, could effect this. Bitcoin represents where money might flow in the event of a collapse:
In this above presentation we see the federal reserve balance sheet. It peaked during WWII, and now has peaked again, but not to fund a world war.
Moreover, to fund businesses (stock buy backs). Money from the Fed, buying treasury bonds, being used by commercial banks (as bank reserves), to loan to major corporations. Major corporations buy back their own stock with these bank reserves (loans). The economy is no longer functioning independently! This is why so many global issues have come up. It is a reason for a lot of unrelated issues we have seen. Bitcoin, Stocks, and Real Estate may fall a long way from where they are now. Hold on to your Bitcoin and your Real Estate! You will need it! The flow of money will end up back in Bitcoin. We don’t know how bad this is going to get. Just that Bitcoin will be the safehaven coming out of this. We hope this next year or two will not be too bad. We see the set up. We see how we got to this point. All fiat currencies in history have hyperinflated eventually. It usually takes 80-100 years. The USD is 109 years old. In each case the central bank allowed hyperinflation, rather than destroy the economic market of that time, and allow a 100% collapse. It was hyperinflation that ended Rome, Italy, France, and England as super powers financially. Bitcon is your hedge against that proverbial hyperinflation! This will take years to play out as we keep saying. It is provably historical, if you look at financial history. Currency inflation has killed past economic jugernauts like the United States. Why would the Fed behave in a way that would re-write history!
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