On quantitative easing, crypto and modern monetary theory
With the COVID-19 crisis showing no signs of abating in the United States, central banks around the world have deployed financial airbags in the form of quantitative easing, and they plan to do a lot more. Modern Monetary Theory has taken center stage, and we are witnessing it in action. It’s a sight that will leave you awestruck: like witnessing the financial version of the first atomic explosion of Los Alamos and the Manhattan Project.
What is going on with the world’s economy is unprecedented. We are entering completely new and uncharted territories, and all bets are off with respect to inflation/deflation. How will different asset classes react to the stimulus? Will we see price inflation, price stability or chaos? No one knows. One thing is certain: More absurdity is surely in store, and one should keep their wits about them and pay close attention.
QE 2020 vs. QE 2008
In 2008, the QE money printed did not enter circulation — it stayed at the Federal Reserve in a charter account of the member banks in the form of accounting entries on computers. This was just ignorance of how the financial flows worked, even though the net effect was positive: Bitcoin (BTC) was born as a reaction to QE.
The QE of today is, however, one of a different animal — it is meant to go to households and small businesses to pay for food and rent, or simply put, prevent famine, mass homelessness, general riots and societal breakdown. What we have been witnessing is the end of 19th-century industrial capitalism and the reign of monetary capitalism. This has been true since the end of the Bretton Woods Agreement some 50 years ago, but not entirely evident for all. The goal is humanistic: to avoid death, misery and social upheaval. This new money has entered circulation all at once — no questions asked — directly into the bank accounts of households and small businesses as deposits pumped by the Fed, and these have inadvertently found their way into the financial markets. The result: a monster rally in the equity markets that has snapped a few necks and caught sociopathic short-sellers by surprise.
Do not bet against the Fed. Doing so will give you a quick, unglamorous and leveraged death. While Robinhood traders are typically thought to be behind the market’s rallies, the truth is, operators directly linked to the Fed do the bulk of the “behind-the-scenes” buying, and they buy everything from bonds to index funds and single equities, and soon –– cryptocurrencies.
What does this mean for crypto?
Ironically, crypto heads are uniquely conditioned to understand what is going on with the current monetary system and market-led shenanigans — it’s all in the market-making order books. Cryptos never had a real economy backing them — they have no endogenous cash flows. Their main economic value propositions are (1) speculation; (2) drugs and tax evasion; and (3) alternative stores of value outside the traditional banking system.
In short, they are valid financial instruments. Increasingly, stocks are becoming uncorrelated from the underlying economic value and rely solely on the supply and demand dynamics of the financial markets, without economic underpinning. The economy is crashing, yet stocks are going skywards — this is not a paradox, but a feature: This is exactly what is happening with cryptocurrencies.
The paradox of zero cash flows and infinite valuations is one of perception. Asset backing is important. Cryptos, in general, have held their own as an investment class even with little asset backing and –– perhaps! –– because of it. Since cryptos are not directly linked to the health of the economy, their movements have been largely independent of economies. They performed well as stores of value by paring March’s losses and seem poised, as of this writing, to break out going forward. This is pure supply and demand logic — the psychology of a numerus clausus financial assets (limited supply of only 21 million BTC) and a seemingly infinite wall of liquidity chasing them. What you are seeing is an inflow of financial and monetary demand, not economic demand on the demand side of the order books of market makers, both in stock and crypto markets.
Forget fundamentals, narratives and traditional valuation methodologies. Stocks are now like crypto: a store of value that exists in the traditional economy and purely in exchanges. Something’s value is determined by whatever someone is willing to pay for it. Pay attention to the flow of new money and the technical depth of the order books in front of it. The wall of liquidity is huge, yet the order book pales in comparison.
The main way to value a stock is not through its economic value but through the exchanges and the technical arcana of market-making bots. A stock’s worth is determined by whatever someone is willing to pay for it, similar to that of crypto. This layer of indirection among economy, exchanges and stocks/coins allows for a decoupling of price from cash flow and can be a blessing when the economy crashes. This is at the heart of what is generally going on in the financial markets at the moment.
When Tesla’s stock rallies to increase twofold in a couple of months while Elon Musk blabs incoherently about weed, predatory Lithium mining and a regime change he instigated, you would think that the company’s stock is the new darling overachieving asset class in an attempt to rationalize the rally.
When analysts and your friends cry in disbelief at what is going on in delusional public markets, the crypto cultists should feel smug in their knowledge that ab initio stores of value can and do in fact exist, with BTC as the poster child. You are not witnessing an increase in economic demand for electric Tesla cars, or whatever Musk is tripping about at the moment, you are witnessing an increase in the monetary demand for Tesla’s stock, probably helped by the unhinged rants of Musk himself.
These are purely technical financial moves, not economic, and are nothing new. Stocks behave more like cryptos now in how they find valuations, and investors are the main source for demanding cashing financial instruments. This is why trusted brands are so important. What is this economy you speak of?
The QE/crypto irony
At a time of economic hardship, it is somewhat sociopathic to focus on the narrow and cold-hearted technical details of a speculative financial instrument and the arcana of monetary issuance — but herein may lie the keys to social stability and the future of money. The wall of liquidity that has hit the public markets is now finally finding its way, almost by overspill or trickle-down, to the crypto markets.
Money has been looking to take new shapes, for such is the spirit of money. QE will reach more people through these channels. It’s QE that will soon land us on the moon. It is ironic. We actually expected this sooner, but it seems to be underway at the moment. What was seen first as a rally in alt-coins is now a rally in Bitcoin and Ether. Where alt-coins don’t move is a bullish sign for cryptos in general. This may spell the beginning of a monster rally — the pendulum has swung from the crypto winter and the trough of disillusionment.
With literally nothing to anchor the valuations, the price of cryptos is technically and psychologically positioned to exponentially blow up. And this price is a direct function of the fiat QE sloshing around the financial markets and a direct function of the monetary levels. It is ironic that QE is actually propping BTC when it was born in antagonism to said QE.
Where do we go from here?
What may have delayed the move up is that getting into crypto is still a complicated affair. Liquidity in the crypto markets remains opaque. Most exchanges are vast washing machines that do not serve any social purpose but perpetuate pump-and-dump schemes, which are just proxies for degenerate gambling. Dealing with custody and keys is still a thing and a complicated affair for most people. Wallets are mostly useless, and there are a plethora of them — but they are making progress.
We should all pay close attention to the fact that U.S. banks have just been cleared to do crypto custody, thereby removing one of the biggest technical hurdles to retail and institutional growth outside of the crypto ghetto. While we are still a long way from the Federal Deposit Insurance Corporation insurance on deposits, this is a significant step, and crypto may yet play a central role in the future of money and banking.
Bank custody will create unprecedented retail and institutional comfort and, thus, demand. Those who want to live outside the banking system, for whatever reason, ideological or legal, still can, and those who want the security of the traditional banking system (essentially, the vast majority) can do that as well. Having more options is always good, and crypto maximalism and dogmatism are just that — a series of “isms.”
Understanding the different schemes of crypto is difficult and time-consuming even for savvy investors. Due diligence is meaningless and almost impossible — you really have to take a deep dive to know whom to trust, what to trust, who knows what they are doing, who is still high on the unicorn powder of blockchain for good, and who will preserve and grow your money as opposed to blow it all on flimsy tech no one needs or has asked for. Similarly, some newfangled financial products have raised eyebrows, prompting people to ask themselves: “How can anyone offer 8% APY on crypto when we are entering an era of negative interest rates on fiat?”
These are still the many elephants in the crypto room. All those things that seem to defy (pun intended) logic and financial gravity are enough to deter newbies — for if it seems too good to be true, it is probably too good to be true. We need to shed all linguistic pretense of tech pompousness and grandiose societal schemes. Cryptos work well as stores of value — they are either volatile stores of value, such as BTC or ETH, or stablecoins.
In short, we need stable growth coins. We are seeing the rise of stable growth hybrid coins, such as FF1 by TwoPrime or Bitcoin trust by Greyscale, that marry upside potential with downside protection and leverage what the crypto markets do well. Expect more to come as the DeFi wave stabilizes and cashes in.
All in all, the crypto markets have been lagging behind the equity markets in terms of feeling the impact of QE. It simply means the critical mass is still not here. It’s easier, safer, more liquid and simply more expedient to buy Tesla stock for twice the return in three months via your 401K than to gamble on an obscure pump-and-dump that promises gains of up to 10 times. But with thinner and lower liquidity, cryptos will also feel the pressure in an exponential way when the QE tsunami hits its shores — it won’t be doubled... It may increase by 40 times. Who knows. We may be in the middle of this movement — the mother of all rallies. It will be swift and brutal. Don’t miss out; don’t short out; don’t hold out; and don’t chicken out. Pay attention to what is happening around you — these are once-in-a-lifetime events.
This article does not contain investment advice or recommendations. Every investment and trading move involves risk, readers should conduct their own research when making a decision.
The views, thoughts and opinions expressed here are the author’s alone and do not necessarily reflect or represent the views and opinions of Cointelegraph.