Efficient Frontier BD Associate Andrew Tu discussed the macro impact on crypto markets with host Teana Baker-Taylor. He pointed out how the biggest change in macro in the last month has been the rise of the new administration in the United States. Now that the uncertainty is gone, and the Democrats control both chambers of Congress and the presidency, they have the ability to pass pretty strong stimulus bills in a way that probably would not otherwise have been possible. (1:58) “Now they’re talking about $1.9 trillion for stimulus. And the worry from some folks on Wall Street and some just people in general is that if you combine the monetary stimulus that we’ve already seen and that continues to happen to some extent, though much less so than March, and if you combine that with the fiscal stimulus, that we’re going to see inflation. So that really feeds into this thesis that a lot of folks have had since the beginning of digital gold as a hedge against inflation,” said Andrew.
Meanwhile, hedge funds and funds in general as well as S&P 500 companies are looking at the USD as a potential source of weakness. There is not really inflation now, as January inflation was not bad at all. But the question is what happens when things open up, travel starts again, demand picks up in the economy, money starts to get to work and we see a velocity of money increase — does that cause a spike in inflation?
A lot of these fund managers and companies are looking at this and asking, how do I defend myself and hedge out the risk of inflation? Bitcoin is a part of that equation.
(4:04) “The more gung-ho progressive CEOs like Michael Saylor and Elon Musk are willing to take a huge balance sheet risk on that. But I think even for companies like Apple or just like BlackRock, you see companies looking to take small positions in bitcoin just because of the fact that it is a hard asset and you want to defend against inflation,” Andrew noted.
Every time the market gets weak and starts to drop as it did in March, even though that was a unique situation, we see the Federal Reserve pump liquidity into the market to save it. So in its mandate to keep markets stable, the question is, has the Fed created a moral hazard in the markets by basically saying to investors, we’ll pump liquidity if the market gets weak. Investors realize that if the market drops, the Fed is going to step in so they just go wild and invest in anything.
(5:48) “So it’s created this moral hazard. And that’s a pretty dangerous situation because that means it’s harder to say what the end game is. But it’s potentially possible that the market stops believing in the Fed and stops believing in liquidity, like the liquidity as a solution no longer works. And the psychology of markets break down and you see a massive drop in the market,” said Andrew.
Last March, the market crash stimulated a move from bitcoin acting like a risk-on asset to a risk-off asset. While it’s difficult to predict the future, if you look back, in 2008-2009, for example, when the market first crashed, gold as an asset went down before going back up.
(6:45) “And I think you could see a similar situation with bitcoin. If we see a flash crash, again we probably will see bitcoin drop a lot. But the question is what happens in the aftermath of the drop? And I think the hope of a lot of fund managers is that it picks up and it rises much faster than the equities market,” said Andrew
The crypto bull market is probably in about the sixth inning in comparison to 2017. It’s at that point when you see something pumping daily between 10-50%. And it is an avalanche, Andrew said, with all of these tokens pumping. It is pretty much being driven by speculation at this point.
Crypto cycles have been based on psychology, so when there is euphoria, the market goes up really quickly. As speculative markets, however, prices drop massively at the end of that euphoria. At some point, this thing will hit a ceiling and then it will drop really quickly. There is a key difference this time around, however.
(9:51) “I think that this cycle is a lot more mature. The market structure is much more mature now. You have much more robust futures and derivatives markets to be able to hedge, to be able to short,” said Andrew, pointing to perpetual swaps that have changed the liquidation process and made things more stable as a result.
Bitcoin and the balance sheet
Tesla caused a splash by announcing it has bitcoin on its balance sheet. This idea from many years ago has slowly started to come into fruition, and that is that companies, hedge funds and other funds are putting 1-2% of their balance sheets into bitcoin.
(11:31) “As bitcoin becomes ubiquitous within society as just another asset and another asset class, probably these companies will start just incorporating it as a normal part of their balance sheet,” said Andrew.
As for who is next to do so, Andrew has his eye on the hedge fund and macro side.