Ecoinometrics - February 22, 2021

How much?

Feb 22, 2021

How much money will the Biden administration need to implement its program? The answer: more than they currently have in the bank...

The Ecoinometrics newsletter decrypts Bitcoin’s place in the global financial system. If you want to get an edge in understanding the future of finance you only have to do two things:

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Now let’s dive in.

Draining the TGA

Do you remember the Treasury General Account?

The Treasury General Account is the account of the US Treasury at the Federal Reserve. This is where the US government parks the cash that it received from selling bonds.

This one came to my attention last year when the US Treasury issued a lot of debt at the start of the pandemic. Suddenly the balance of the TGA ballooned to more than $1.5 trillion in just a few weeks.

Since then the money has just been sitting there waiting to be deployed in the economy by the Federal government.

But now that the Biden administration is at work things are going to change. Janet Yellen announced last week that she plans to spend all that money and return the TGA to a more historical level.

That’s about $1 trillion going back into the system over a few weeks...

And apparently the speed at which that money will enter the system could be disruptive to the plumbing of the financial markets to the point that the Fed could have to temporarily raise short term rates.

Honestly who knows what’s going to happen in the short term. But on a longer time horizon I think it is important to keep some numbers in mind:

The current stimulus plan is for $1.9 trillion.
Student loan forgiveness is a potential $1.4 trillion bill.
Biden plans for investing in infrastructure development is a reported $3 trillion.

That’s all on the table for 2021 and the total is $6.3 trillion that the US Treasury is going to have to find somewhere.

Even if the final number comes lower it’s still several trillions, way more than what is sitting on the Treasury General Account at the moment.

You know what that means right?

Yep, more monetization of the debt by the Fed coming this year.

In that environment I can only see the narrative for Bitcoin as a hedge against the risk of inflation strengthening.

So who knows, we might be in for a supercyle after all.

Read the article.

Bitcoin vs Ethereum

Last month we looked at how Bitcoin performs against ETH. Time for a quick update.

First when it comes to both net performance and risk adjusted returns there is no big difference between the two assets:

For total returns Bitcoin performs better on the 2 years and 8 years time frames while Ethereum is doing better on the 1 year and 4 years time frames.
Bitcoin has a better risk adjusted return on the 1 years and 2 years time frame. Ethereum does better on the 4 years time frame. Finally on the 8 years time frame they are equal.

What that means is that there is no clear winner in this picture.

At the same time BTC and ETH are still highly correlated. The one month correlation has barely ever dipped below 50% since the bear market of 2018.

Right now the correlation is closer to 65%.

All of this confirms my original point of view:

Ethereum is mostly driven by the Bitcoin cycle.
Ethereum can outperform Bitcoin in the short term if DeFi is the new ICOs. But so far the DeFi movement hasn’t been strong enough to decouple both markets.

Now while I follow broadly what is going on in the DeFi space I haven’t done enough research to give a deeper opinion on the subject.

At this stage of the cycle the dominant narrative is about Bitcoin as digital gold. So my guess is that the correlation between the two will remain high for a while.

Digital gold

Here is an interesting Business Insider article.

Never mind, actually what's said in the article isn’t that interesting or new.

It boils down to ten quotes. Five quotes from gold bulls and five quotes from Bitcoin bulls.

But what strikes me is the difference of views between the two camps.

Let’s just go through some of the quotes.

"My vote would be for gold because it has thousands of years of a historical record as a store of value, has one-fifth the volatility of bitcoin, and doesn't face the same competition risk. The day that Queen Elizabeth trades in the five pounds of gold in her crown for crypto is the day I'll shift course." - David Rosenberg of Rosenberg Research, former Chief Economist and Strategist for Merrill Lynch Canada and Merrill Lynch in New York

Yes gold is not as volatile as Bitcoin. But focusing on the volatility alone isn’t very meaningful. Especially when for BTC most of the volatility is on the upside.

Something more meaningful is to look at risk adjusted returns. In that domain Bitcoin blows gold out of the water.

Moreover, I hope everyone appreciates the irony of this quote… thinking that Bitcoin faces competition risk from other cryptocurrencies while not acknowledging that gold is facing competition risk from Bitcoin itself…

"One of the assumptions underlying bitcoin's bull case is its limited supply, but the supply of cryptocurrencies, on the whole, is theoretically unlimited. Some extol bitcoin as a portfolio diversifier, but it has so far exhibited higher correlations to equities than gold, particularly during periods of equity market stress when diversification tends to add the most value. The demand for bitcoin may be over its skis relative to its likelihood to carve out a significant economic or financial use case." - Michael Reynolds, Investment Strategy Officer at Glenmede.

Alright, first the point about unlimited supply because other cryptocurrencies exists makes no sense. It is like saying that gold isn’t scarce because other precious metals exist. That doesn’t add up to how people view scarcity in practice.

Now when it comes to correlations it is true that gold dipped less than Bitcoin when the stock market crashed last year. But over a long enough period of time the equity market, gold and Bitcoin are uncorrelated.

So you might as well make use of all three assets to build your portfolio.

"Based on the trajectory of this digital gold path and use cases globally, we believe bitcoin will be a mainstream asset class in the future. While gold has clear value and safety, the upside in bitcoin is eye-popping if it stays on its current course over the next decade." - Daniel Ives Managing Director and Senior Equity Research Analyst at Wedbush Securities

Yes, I can agree with that. You can’t deny that gold is a store of value. It has served as such for a long time and for the data that we have in recent history (last 100 years) it has done its job at preserving your purchasing power in periods of high inflation / negative real yield.

But if only for its potential as an aspirational store of value you cannot dismiss Bitcoin.

"Gold is, no pun intended, the standard if you want to measure purchasing power over millennia. The liquidity of gold has been consistent over time. Gold is what defines the X-axis of purchasing power over time. Bitcoin, while it shares defensive qualities with gold, has the additional attribute of being aspirational. What bitcoin would seem to possess is the potential to go up to multiples of a moonshot. No one thinks gold will moonshot. Bitcoin is also finite, unlike gold. No increase in demand can change that. There is zero elasticity." - JP Thierot, CEO of Uphold, a digital money platform

Same here. Digital gold isn’t gold. It is an evolution. It operates with a different set of constraints and advantages compared to the legacy system. And given its technical properties as a store of value Bitcoin is an asymmetric bet when you consider that it is only beginning to get widespread adoption.

I think the difference of views between David Rosenberg and Michael Reynolds on one side and Daniel Ives and JP Thierot on the other side is pretty clear.

Most of the people who recognise Bitcoin’s potential also understand the value of gold.

Most of the people focused exclusively on gold dismiss or at least underestimate Bitcoin.

My advice is to keep an open mind. This way you can see value where other people have missed it.

Read the article.

That’s it for today. If you have learned something please subscribe and share to help the newsletter grow.

Cheers,

Nick