FED, Bitcoin, Jeff Snyder discussed on The Breakdown with NLW


What's going on guys, it is Thursday, January 6th. Welcome back to the breakdown. If you're enjoying the show, give it 5 stars, leave a rating, or join the Discord community. It's been growing very quickly recently. There's a lot more discussions going on. You can find that address in the show notes or you can go to bit dot LY slash breakdown pod. Bitly slash breakdown pod. Also, as always, as they're now a sponsor, I do marketing at FTX. So that is a disclosure. So to today's topic, just a few days in and we've got our first big crypto macro fed show. The markets have been brutal for the last 24 hours, but hopefully this show helps you put them in context. So let's do a little primer on the fed and markets and crypto just for those of you who might be joining us for the first time, or who are still new in this journey. So the fed's relationship with markets. If you can't already tell, it's a little pavlovian right? When the fed signals cheap money, lower interest rates, more support in terms of asset purchases more liquidity. Financial market actors respond positively and part of what the accumulation of that is is that they feel like they can take more risk. That benefits all risk assets, of course, but it's certainly benefits the riskiest the most because some additional number of actors or percentage of the market feels like they can move even farther out on the risk spectrum. Indeed in the extreme they feel like they have to. This is sort of the story of the last I don't know 15 years or so in market history. As the yields from safe assets have gone down, institutions of all stripes have had to move farther and farther out onto the risk spectrum. That's why you see so many more types of previously extremely risk averse organizations getting into asset classes like venture capital are more recently crypto. This has been the story for the last decade for sure between the great financial crisis and certainly this was supercharged over the last couple of years. Remember the dominant meme of 2020 was money printer go bird. And the genesis of that meme and that attitude was retail traders who were completely convinced that the Federal Reserve would not let market struggle based on COVID shutdowns and would come in riding on their monetary policy horses with all of the capital injections that the markets needed. Now, 2020 was complimented by fiscal stimulus, which is different than what the fed does and led to what has been a booming last couple of years. Now for all of this though, the pavlovian reaction works in both directions. And so when the fed signals tightening, raising rates withdrawal of asset purchases, or even balance sheet reduction, quantitative tightening, markets go in the other direction, risk off. And sometimes they go that way even more than they should. The most dramatic historical example of this was the so called taper tantrum in 2013. When markets reacted extremely poorly to the very idea that the fed would withdraw support from its quantitative easing program. So we have a pavlovian response between the fed and markets in both directions. In fact, some folks like Jeff Snyder think that the cultivation of that pavlovian reaction, the ability to influence markets via statements and media rather than through actual action is at this point the fed's chief tool in its toolkit. But what about crypto and the relationship between crypto and the fed? A big thing you see a lot of people talking about over the last 6 months is crypto's correlation to stocks. There have been a number of folks in FinTech who have tried to show Bitcoin charge versus equities charts in a way to somehow diminish Bitcoin or say it's not actually an uncorrelated asset yada yada yada. Now, my basic explanation for the relationship between crypto and stocks is super simple. For the first 8 years or so of its life, Bitcoin was not in the mainstream. It attracted a totally different type of investor than traditional equities markets. There's a lot that we could get into on that on how much it was ideological, how much it was international. Yada yada yada, the point was there wasn't ultimately that much overlap. And even in 2017, when that whole bull market happened in the ICO boom happened, it was dominated by retail investors, not traditional Wall Street types. We've now spent the last four years or so lobbying Wall Street to get in. And over the course of the last 18 months, it worked. Wall Street now has huge investment in exposure in Bitcoin and starting to be in other crypto assets as well. And this happens at both an individual and institutional level. We're talking about Wall Street institutions and traditional finance institutions coming in, as well as traditional traders who have hung up their priors and decided to just make their allocations into Bitcoin. So it follows from that that if some meaningful percentage of Bitcoin holders are now Wall Street types, things that impact Wall Street are going to impact Bitcoin. And this is especially true for these nibbly little short term things like moves between risk off and risk on. There's a whole different conversation to be had about how far this correlation really goes and how much it undermines core arguments for Bitcoin, which spoiler alert it doesn't, but that's for a different show. Nexto is a trusted and easy to use crypto platform, where you can buy cryptocurrencies at the touch of a button and start earning up to 17% annual interest that is paid out daily. 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