SHIFT Asset Management
SHIFT Asset Management 10 minutes reading from Bitcoin

What is the ‘Correct’ Method of Money Debas?

Bear market is a good time to reflect on the market. Lately one of the common discussions was again a debate on what Bitcoin is. bitcoin btc inflation

Is it an inflation hedge, money debasement hedge, or something else altogether? @RaoulGMI @invest_answers @jclcapital @intocryptoverse had some videos on this lately

But what is the ‘correct’ metric to gauge inflation or money debasement? While CPI is an obvious choice for inflation (leaving aside the issues of how CPI is calculated, and the fact that it is a very lagging indicator), there’s no commonly accepted metric for money debasement

Another argument is that the narrative around BTC changes over time, which makes sense since BTC started as a geeky method of payment for pizza, and now being argued as an ‘inflation hedge asset

We looked into several metrics during the 4 cycles of BTC to see if any common dependencies exist. The metrics used were:

1. US M2 money supply 2. USD liquidity 3. Fed interest rates 4. Fed balance sheet 5. Aggregate balance sheet of G7 central banks 6. CPI

We have compared BTC/USD price with absolute values of indicators and their rate of change. Rate of change is often a more important measure - for instance, M2 money supply and Fed balance sheet have a tendency to constantly increase, but their rate of change is what matters

1. US M2 Money Supply Orange line - US M2 money supply, blue line - rate of change YoY. As you can see there has been no dependency except for cycle 4, when sharp increase in M2 coincided with a bull run, and the drop in rate of change coincided with a first market top

2. USD liquidity Another angle to look at money debasement is the amount of USD liquidity in the market. To get a ball park gauge on this, it seems quite rational to use a simplified metric: FED Balance sheet - Overnight Reverse Repo Agreements - Deposits with FED banks

Red line - USD liquidity in USD bln, blue line - rate of change of USD liquidity. Interesting to see that in cycles 2,3 and 4, a drop in the rate of change in USD liquidity in the market more or less coincided with the start of the bear market

3. Effective Fed interest rate During cycle 1 and 2, the Effective Fed funds rate was ~0% and didn’t change much. In cycle 3 there was no clear dependence. However, cycle 4 has clearly showed that start and end of the bull market has coincided with low interest rates environment

4. Fed balance sheet Cycles 1, 2 and 4 had a strong correlation with the rate of change of the FED BS. As for cycle 3 - only the start of the bear market coincided with the drop in the rate of change of Fed BS, but the bull run actually started with almost 0 growth in FED BS

5. Aggregate balance sheet of G7 central banks Aggregated balance sheet G7 central banks - orange line, trillions. Rate of change of G7 balance sheet - blue line. G7 balance sheet was lagging behind BTC tops (Cycles 2 and 3). It led BTC in cycle 4

Conclusions: 1. Inflation hedge vs money debasement hedge. Money debasement narrative has more proof to be true, for almost all cycles. Also, when money debasement happens and later manifests in hyper-inflation, BTC can have a ‘value perseverance’ function as fixed supply asset

2. Even though some cycles more than others correlate with money debasement narrative, it seems that only the last cycle ticked all the boxes. All metrics showed that a narrative that BTC is a ‘money debasement hedge’ is sort of valid

Our take is that the rate of change both in CB balance sheets, money supply and liquidity was so drastic that such a big tide couldn’t have NOT influenced BTC

After March 2020 we saw a peculiar situation that all assets (even those that are usually inversely correlated): equity, bonds, gold, crypto, real estate, all had a substantial increase in prices. Big tide lifts all boats

On top of that, BTC has become more institutionalized, which means it should be more dependent on macro, since institutional liquidity is

3. To sum it up, it seems that the end of the bear market can only start, when ‘money debasement’ narrative comes back to the market. Some say that BTC will decouple from the equity market and stop being just a higher beta risk asset, and that’s when the bull run will start

However, we’ll show in our next analysis that historically that hasn’t really been the case bitcoin btc inflation

This post is based on this twitter thread.


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