24.10.2020

First Mover: As Fed Assets Top $6T, BitMEX Has Some Inflation-Busting Advice

Just since the start of 2020, the Fed’s balance sheet has increased by nearly $2 trillion, swollen by self-funded purchases of U.S. Treasury bonds, mortgage bonds and corporate bonds. Wall Street dealers are taking out emergency loans, companies are issuing bonds directly to the Fed and other central banks have now borrowed $385.4 billion of dollars to smooth out swings in foreign-exchange markets.
Bitcoin has been relatively stable in recent days, pausing after a powerful rally that saw prices nearly double in under a month.

What hasn’t paused is the Federal Reserve’s money machine: A report late Thursday showed that the central bank’s total assets surged this week above $6 trillion for the first time in its 107-year history.

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Federal Reserve total assets. Source: Federal Reserve Bank of St. Louis

The liquidity injections – part of the efforts by authorities around the world to mitigate the economic damage from the novel coronavirus – haven’t gone unnoticed in cryptocurrency markets. Some investors and analysts see bitcoin as a useful hedge against inflation, since supplies of the cryptocurrency are strictly governed by computer-programming code written 11 years ago when the underlying blockchain network was launched.

And there’s little expectation that the human-managed Fed’s money machine will stop whirring anytime soon.

A report Thursday from the U.S. Labor Department showed that unemployment continued to surge last week, with jobless claims numbering 17 million over the past three weeks alone. The dismal reports portend rising U.S. government costs, even as tax revenue shrinks due to the loss of economic activity. More sales of Treasury bonds will be needed to cover the swelling budget deficits.

The Fed separately announced $2.3 trillion of emergency funds, including junk-bond purchases and loans to state governments. There’s also financing for a type of instrument called “collateralized loan obligations,” which are the small-business-loan equivalent of the toxic mortgage-backed debt that helped to cause the 2008 financial crisis.

Fed Chair Jerome Powell noted Thursday in a speech that the decision to open the money spigot came after “essential” financial markets “had begun to sink into dysfunction.” The emergency programs will continue to be deployed “forcefully, proactively and aggressively,” he said.

Enter Arthur Hayes, a prominent figure in the crypto industry because he’s CEO of BitMEX, one of the largest exchanges for trading bitcoin futures contracts. Traders can use the derivatives to bet on bitcoin in amounts 100 times their initial deposits. Liquidations are common, according to the website Rekto.

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BitMEX CEO Arthur Hayes. Source: CoinDesk

On Thursday, Hayes wrote a company blog post predicting that governments are set to “embark on the greatest fiscal stimulus binge the world has ever seen.”

Because unemployment will be so high, tax revenue won’t be sufficient to cover the budget outlays, he predicted.

“It will not be paid for by tax receipts,” he wrote. “It will be paid for by the printing press,” and at that point inflation becomes a forgone conclusion.

“Can the hipsters handle a $40 smashed avo toast?” Hayes wrote.

Ready to guess where this is going?

“There are only two things to own during the transition to whatever the new system is, and that is gold and bitcoin,” according to Hayes.

In crypto markets, this is the view from the top.

Bitcoin Watch
BTC: Price: $6,900 (BPI) | 24-Hr High: $7,390 | 24-Hr Low: $6,881

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Trend: Bitcoin is on offer this Good Friday, having failed to put in a positive performance Thursday despite a rally in the stock markets.

The top cryptocurrency by market value is trading around $6,900 at press time, representing a 6 percent decrease on the day.

Buyers remained on the sideline, even though the U.S. stock markets cheered Federal Reserve’s latest stimulus program.

The S&P 500, Wall Street’s equity index, rose 1.45 percent as Fed’s now $2.3 trillion “bazooka” overshadowed the daunting weekly employment figures. The U.S. dollar took a beating in the foreign exchange market and against gold.

Bitcoin, however, remains in a tight range and has traded in the red so far today. Some analysts are citing profit taking as the reason for the cryptocurrency’s lackluster response to the Fed stimulus. That could be the case, as the cryptocurrency rallied by more than 90 percent from $3,867 to $7,450 in the 3.5-weeks to April 7. Such strong rallies are usually followed by profit taking or temporary price pullbacks.

From a technical perspective, the Thursday’s bullish outlook stands neutralized, as sellers have violated support at the trendline connecting the March 13 and March 20 lows. Further, the cryptocurrency has fallen back below the three-day chart’s 200-period average at $7,100, weakening the case for a quick rally toward $8,000.

That said, bitcoin’s bias would turn bearish only if prices find acceptance under $6,773 – the low of a bullish marubozu candle created on April 6. To revive the bull case, prices need to end the day above $7,300.

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