Crypto responds positively to an increase in the quantity of dollars in circulation. The quantity of Bitcoin is fixed at 21M, therefore when the dollar denominator grows Bitcoin’s relative value increases. Simply the expectation of an increase in the quantity of dollars through QE and interest rate cuts in 2023 will likely spur prices of cryptos and risk assets significantly higher. This is why a Fed pivot in policy is extremely important to signal when we can allocate again.
Of course, we may be completely wrong. We may have already seen ‘peak inflation’ and naturally the largest of the interest rate hikes at 75bps, alongside a Fed beginning to pivot in July. However, given the plethora of both geopolitical and economic evidence we have presented briefly above, we do not believe this to be the case.
Summary
- Inflation is a measure of the debasement of currency and purchasing power per unit – it is measured in CPI, Core inflation and PPI.
- Interest rate levels dictate the monetary velocity and availability of capital in an economy whilst being the main tool that policymakers have in controlling inflation rates.
- All markets topped in Q4 2021 due to the Fed signalling QT and interest rate rises in a bid to control rising inflation since the wanton money printing following COVID in 2020.
- Major market bottoms are formed when inflation ‘peaks’ and interest rates begin to decline – this is what we want to target for the generational buys.
- We believe that markets have another leg lower into Q4 and that when there is a meaningful reason for the Fed to pivot and start decreasing interest rates – we can begin to assume that markets have bottomed and begin to allocate investment capital into risk assets.