After the Global Financial Crisis in 2009, Western Central Banks went on a quantitative easing (QE) path as the budget deficits skyrocketed. Central banks created money to stimulate the economy. An indirect effect of QE was lower interest rates on sovereign bonds. This kept interest rates low for more than a decade. Bitcoin was born into this monetary experiment.
The US debt-to-GDP ratio crossed above 100% for the first time since WW2 in 2012 and the Greek debt crisis in 2013 caused depositors to be bailed in when banks in Cyprus went under. Chinese capital was fleeing the country through over-invoicing of export receipts in the same year. Each of these ‘macro’ events had a profound impact on Bitcoin prices and in 2013, BTC-USD rallied by more than +5,000%.
When Satoshi Nakamoto mined the first Bitcoins, he made explicit references to the central bank bail-out programs in 2008. With fiscal and monetary policies having added a massive amount of debt since then, the case for an alternative store of value has become stronger than ever.
As foreign central banks (Saudi Arabia, Russia, China, etc.) are stepping away from accumulating US debt and therefore funding the US’s budget deficit, we are starting to wonder if the Fed will eventually have to step in and stop the explosive rise in 10-year bond yields and re-start their QE program again. While this sounds unorthodox, the QE of the 2010s was deflationary and allowed governments to fund their deficits.
The iShares 20 Plus Year Treasury Bond ETF has declined by -12.6% year-to-date. In fact, since 2020, this Bond ETF has declined by -50%, and even at these levels, the buyers’ strike continues. In March 2023, three US banks went under – mainly due to the duration mismatch of their bond portfolios.
Compare this to Bitcoin which has rallied by +62% year-to-date and while prices are also down -55% from the 2021 high, Bitcoin’s finite supply of 21 million coins has made it a better risk/reward trade-off during the last decade. But the past is the past and if there is ever a capitulation from central banks’ hawkish stance, Bitcoin prices could explode higher.
The Fed’s favorite inflation measure, the PCE price index, will be updated today and while the index has declined from 6.8% YoY in July 2022 to a 3.0% low in July 2023, the PCE index slightly moved higher in August and printed 3.3%. This 0.3% increase spooked the bond market and expectations are for another increase to 3.5% for today’s number. If the PCE surprises lower, below 3.0%, expect a strong rally for Bitcoin. In addition, expectations that the Fed would have finished its interest rate hiking cycle would also start to be re-priced into the market again – with Bitcoin being the main beneficiary.
During the last 24 hours, Bitcoin has broken the downtrend since the July 2023 high and there could be a snap-back rally towards $29,000 if US inflation data does indeed come in lower. Combined with the strong seasonals of October when the average return for Bitcoin has been +22% during the last 10 years, we can imagine a few wild days ahead.
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