To investors,

The global financial markets are obsessively watching what the Federal Reserve is going to do with interest rates in the coming months. Based on the most recent FOMC meeting, Fed Chairman Jerome Powell has signaled that the Fed is likely to hike interest rates approximately three times in 2022.

I don’t want to spend our time together this morning debating whether the Fed will actually raise interest rates or not, but rather I want to talk through what is likely to happen if interest rates are increased. The general consensus is that high growth stocks, risk assets, and other recent big performers would sell off when that occurs. As any student of history knows, we have seen this story play out before.

Keith Rabois @rabois

Amazingly, many journalists & people in tech don’t appear to know that the proximate cause of the “Internet Bubble” collapsing was Greenspan/The Fed raises interest rates.

November 19th 2021

71 Retweets779 Likes

History doesn’t always repeat. It sure does rhyme though. Keith Rabois’ expectations are shared by a large portion of the investing community, particularly those who understand interest rates and their relationship to risk assets.

Keith Rabois @rabois

@tbr90 @davidiach right to be clear, my prediction is tech markets collapse no later than the second interest rate hike by the Fed.

November 19th 2021

17 Likes

So if we are operating under the assumption that risk assets will sell off when the Fed raises interest rates, we should expect bitcoin to suffer the same fate, right? Well….no one knows yet.

The prevailing consensus view has been that bitcoin is a risk asset. It has an inverse relationship with interest rates. When central banks and politicians manipulate interest rates lower, and pump trillions of dollars into the market, bitcoin should go higher.

Over the last 18-24 months, we saw interest rates moved lower and trillions of dollars injected into the economy, along with bitcoin’s price going up hundreds of percent. But what if bitcoin’s price increasing has less to do with interest rates and QE? What if bitcoin’s price increasing was more related to the bitcoin halving in May 2020?

Hear me out for a second.

The inverse correlation between tech stocks and treasury yields has been playing out exactly how you would expect. Yields go up and risk assets sell off. Yields go down and risk assets go up.

Caleb Franzen @CalebFranzen

As an example of a normal correlation, here is the dynamic between Nasdaq-100 Futures & 10-year T yields. As we can see, the present value of tech stocks has an inverse correlation to yields! This is exactly what we expect to see: Yields ↑ Risk Assets ↓ Yields ↓ Risk Assets ↑

December 17th 2021

1 Like

This inverse relationship is not what we are seeing between bitcoin and Treasury yields though. We are actually seeing the exact opposite. Bitcoin’s price appears to be moving in lockstep with Treasury yields.

Caleb Franzen @CalebFranzen

The correlation between #Bitcoin (candles) & 10-year Treasuries (teal) since mid-2020 is uncanny. Perfect overlap and these quantitative relationships aren't being discussed. For the bull run to continue, will rates need to rise further?

December 10th 2021

2 Retweets12 Likes

Caleb Franzen @CalebFranzen

@APompliano @PrestonPysh @danheld @saifedean @RaoulGMI @WClementeIII @DylanLeClair_ @nic__carter @DefiRy_OCoinell @real_vijay @gladstein @Blockworks_ The direct correlation between $BTC and 10-year Treasury yields continues to be on display. This is NOT the dynamic we normally see between risk assets & yields. Typically they have an inverse correlation, not a direct one. #Bitcoin is working as an inflation hedge. Full thread↑

December 17th 2021

2 Retweets4 Likes

So if this short-term trend continues to play out, what would that mean for bitcoin? Again, no one knows for sure. But it would be very interesting if the prevailing consensus view is misplaced and bitcoin would actually benefit from increasing interest rates. That would violate the framework that many people have been viewing the digital currency through.

Caleb Franzen elaborates here:

Caleb Franzen @CalebFranzen

My perspective last year, which was echoed by many #Bitcoin bulls, was that low rates & monetary stimulus were extremely bullish for $BTC. Now, we must confront that idea that higher nominal rates are positive. With ongoing tapering & liftoff expected in 2022, is this bullish?

December 10th 2021

2 Likes

Caleb Franzen @CalebFranzen

More than anything else, this might be proof-positive that #Bitcoin is working as a hedge against inflation. If inflation continues to surge in 2022, anticipated actions by the Fed to speed up the taper & liftoff process will likely cause rates to move higher, faster.

December 10th 2021

1 Like

Caleb Franzen @CalebFranzen

The net present value formula teaches us that, all else being equal: yields ↑ asset prices ↓ yields ↓ asset prices ↑ However, based on the correlation between $BTC & Treasury yields, it appears that we might see: yields ↑ Bitcoin ↑ yields ↓ Bitcoin ↓

December 10th 2021

1 Retweet5 Likes

So why could this idea of bitcoin and yields increasing together potentially be true? Well…one idea is that some people actually deem bitcoin to be their reserve currency. They view cheap capital via low rates as a path to borrowing money and making investments that could earn them more bitcoin. If rates were to rise, risk assets would sell off and these people would go back into their safe haven asset — bitcoin.

This may sound insane to the legacy Wall Street crowd, but there is an increasing number of young people who see the digital currency as that safe haven asset in their portfolio. The entire point of investing in anything outside of bitcoin is to outperform bitcoin and eventually convert back into bitcoin. Obviously, if you’re a good investor than you can pick up more bitcoin. If you’re a bad investor, you end up with less bitcoin. This is the new risk-reward that many young people are evaluating.

Ultimately, none of us know what the Fed is going to do in 2022. We also don’t know how every single asset will react. If we see bitcoin moving in lockstep with interest rates though, my guess is that an entirely new crop of investors are going to start paying attention. Who doesn’t want an asset that moves with interest rates, yet produces a materially higher compound annual growth rate?

Keep your eyes on the relationship between risk assets, bitcoin, and Treasury yields. We are likely to learn a lot over the next 12 months. It will be worth learning, regardless of what occurs. Hope each of you has a great day. I’ll talk to everyone tomorrow.

-Pomp

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Scot Wingo is the Co-Founder & CEO of Spiffy, an on-demand car cleaning and car servicing app.

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