Money Printing Could Bring Crypto Back to Life

By Juan M. Villaverde and Alex Benfield On August 18, 202304:00 PM Eastern
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by Juan Villaverde
By Juan Villaverde

Oftentimes, many in the financial sphere link liquidity directly to central bank actions. 

While there's truth in this, another influential factor is frequently overlooked: bond market volatility. Specifically, the fluctuations of the Treasury market play a vital role in determining liquidity dynamics.

Liquidity isn't just a central bank's game. In fact, commercial banks and other financial institutions join the fray, driven primarily by profit motives. 

For these institutions, the return on their investments — especially after the 2008 Great Financial Crisis — became paramount. This has led to an emphasis on high-quality collateral, like U.S. government debt or Treasurys. 

So, as expected with Treasurys, borrowing becomes significantly easier.

Now, the significance of bond volatility was evident when the Treasury market faced a downturn. 

You see, its high volatility left lenders unsure about accepting devalued Treasurys as collateral. And this hesitancy played a major role in last year's liquidity crunch. 

Notably, the MOVE Index chart over the last 12 months — which is a volatility index measuring the price liquidity and volatility of the bond market — pinpoints the peaks of volatility in October 2022 and March 2023. 

These peaks saw interventions from Treasury Secretary Janet Yellen and Federal Reserve Chair Jerome Powell, aiming to stabilize the markets.

But here's the crux: Bond volatility is again on the rise. If this continues, another bond market storm might be imminent. 

However, financial bigwigs are on alert. After all, recent measures from the likes of Powell and Yellen signify a U.S. government wary of its escalating debt.

In essence, only the Fed can effectively safeguard the U.S. bond market. Anticipating another round of the Fed's money printing by the middle of next year isn't too far-fetched. 

But if the bond market remains unstable, this could happen sooner.

So, while the liquidity landscape shifted in 2023, challenges persist. What's clear is the Fed and U.S. Treasury’s commitment to stabilization, likely pumping trillions more into the system. 

With this, crypto assets remain pivotal for investors, especially when central banks gear up for printing. The time for such action may be imminent.

 

by Alex Benfield
By Alex Benfield

Alex Benfield’s Notable News, Notes and Tweets

What’s Next

Recently, just a rumor of SpaceX selling its Bitcoin holdings paired with the news of Chinese real estate company Evergrande’s bankruptcy was enough to send prices falling. 

But the crypto market has been too quiet for too long. So, it’s not all that surprising to see this latest correction. 

Overall, a rally has been long overdue. This might be the final blowoff in selling pressure needed so that prices can rise from here. 

Looking ahead, there are multiple bullish catalysts waiting in the short- to mid-term future — namely potential money printing and the looming spot ETF decisions that could come as early as this year. Now is certainly not the time to panic. 

We’ll continue to keep you updated on these situations as they unfold, but for now, stay cool, calm and collected. 

Best,
Juan

Juan M. Villaverde
Editor
About the Editor

When econometrician and pro trader Juan M. Villaverde first applied his algorithms to Bitcoin years ago, he discovered a regular cyclical pattern. And he has since used it to build the world’s first crypto timing model based on cycles. Thanks to his analysis, the Weiss Ratings team has accurately picked the top and bottom of major crypto booms and busts.

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