Bitcoin will enter a bull run again

After the end of the summer holidays in the Northern Hemisphere, I went to the Southern Hemisphere to spend two weeks skiing. Most of the time was spent on backcountry skiing trips. This activity requires attaching climbing skins to the bottom of the skis to ascend, removing the skins to adjust the equipment once at the top, and then enjoying the fun of powder snow.

A typical skiing day consists of 80% uphill and 20% downhill, consuming a lot of energy. My basal metabolic rate is about 3000 kcal, and with the energy required for exercise, my total daily expenditure exceeds 4000 kcal. To maintain my physical condition, I need to plan my meals reasonably throughout the day.

For breakfast, I will have a hearty "real food" meal, including carbohydrates, meat, and vegetables. To manage my blood sugar levels, I will also prepare some snacks that I usually don't eat, such as Snickers and syrup, consuming them every 30 minutes. In addition, I will bring homemade meal prep boxes containing chicken or beef, stir-fried leafy greens, and a large amount of white rice.

By combining periodic sugar supplementation with the intake of slowly burning real foods, I am able to maintain a good state throughout the day. This dietary strategy reminds me of the relative importance of the price and quantity of currency.

At last Friday's Jackson Hole central bank meeting, Federal Reserve Chair Powell announced a policy shift, committing to lower policy interest rates. Officials from the Bank of England and the European Central Bank also stated that they would continue to cut rates.

Risk assets generally rise when currency prices decline. However, the anticipated interest rate cuts will reduce the interest rate differential between these currencies and the yen, potentially reintroducing the risks of yen carry trades.

This article will delve into this issue and look ahead to the crucial moment before the U.S. elections.

The Premise of the Bull Run Argument

The rapidly appreciating yen poses a threat to the global financial markets. If interest rate cuts in major economies lead to an appreciation of the yen, the market may react negatively. The positive effects of rate cuts will contend with the negative forces of yen appreciation. Considering the vast scale of global financial assets financed in yen, the negative impacts of yen appreciation are likely to outweigh the benefits of modest rate cuts.

Major central bank policymakers may realize that they need to ease policies and expand their balance sheets to counteract the adverse effects of the yen's appreciation.

From an economic perspective, the Federal Reserve should have raised interest rates instead of cutting them. Since 2020, the U.S. CPI has risen by 22%, and the Federal Reserve's balance sheet has increased by over $3 trillion. The U.S. government deficit has reached a record high, partly because the cost of borrowing has not yet risen enough to force politicians to raise taxes or cut spending.

However, the Federal Reserve is committed to never allowing financial markets to stagnate. The United States is a highly financialized economy that requires the prices of fiat assets to continue to rise. Therefore, Yellen began intervening in the Federal Reserve's interest rate hike cycle in September 2022.

The U.S. economy does not really need to cut interest rates, but Powell will provide stimulus. Because monetary authorities are extremely sensitive to stock price declines, they are likely to soon provide some form of "real food," that is, expand the Federal Reserve's balance sheet to offset the impact of the yen's appreciation.

The Impact of Yen Fluctuations

Currency exchange rates are mainly influenced by interest rate differentials and future interest rate expectations. The USD/JPY exchange rate shows a clear correlation with the USD-JPY interest rate gap. In July of this year, the yen depreciated to a historical low, after which it began a strong rebound.

If the yen continues to appreciate, the Federal Reserve may stop quantitative tightening and even restart quantitative easing. Yellen may also increase dollar liquidity by issuing more government bonds.

Trading Settings

At the end of the third quarter, the legal liquidity conditions are good, and cryptocurrency investors are facing the following favorable factors:

1. Central banks around the world are lowering funding costs.

2. Yellen promised to inject $301 billion in liquidity before the end of the year.

3. There is about $740 billion available in the U.S. Treasury general account for market stimulation.

4. The Bank of Japan expressed concerns about the speed of yen appreciation, and future interest rate hikes will consider market conditions.

For assets with limited supply like Bitcoin, an increase in money supply will drive up their prices.