This article is based on an epic article by Arthur Hayes, the former CEO of Bitmex, read it in full here.
A recent escalation of violence between Israel and Palestinian militant group Hamas has raised concerns about broader geopolitical implications. This conflict comes at a perilous moment for US Treasuries and could act as a catalyst for shifting investor funds into cryptocurrencies.
- The conflict between Israel and Hamas has wider geopolitical implications, potentially drawing in the US, Iran, Russia, and China. This could lead to increased military spending by major powers.
- The Fed signaling a pause in rate hikes has led to a “bear steepener” in the US Treasury yield curve, with long-term yields rising faster than short-term. This is problematic for banks’ hedging strategies.
- The bear steepener and potential for higher US military spending is causing a sell-off in long-term Treasuries. Yields are rising on expectations of more government borrowing.
- Gold and Bitcoin are starting to rally as investors seek alternatives to bonds. This suggests the market is worried about inflation from increased military spending.
- The author believes the situation supports rotating out of short-term Treasuries and into crypto, starting with Bitcoin and Ether. The trigger is the market realizing the Fed will eventually fix rates and remove pretense of free markets.
- Key risk is the author could be wrong and the setup not perfect yet. But at some point must take action based on developing situation rather than waiting indefinitely.
When the US Federal Reserve recently signaled a pause in interest rate hikes, it led to a rare “bear steepener” in the US Treasury yield curve. This means long-term bond yields are rising much faster than short-term yields, which is highly unusual. A bear steepener wreaks havoc on the complicated hedging strategies banks use to manage interest rate risks.
As the fighting between Israel and Hamas intensifies, the United States may substantially increase military spending to support its ally Israel. Markets are betting this will require massive new government borrowing, sparking a sell-off in long-term US Treasuries. Yields continue marching upwards on expectations that proxy wars could cost trillions.
"The Periphery" is an essay explaining why I believe the $BTC bear market is officially over.
A proxy war in Israel morphs into WW3, and a Fed that is paused means lights out for treasuries.
— Arthur Hayes (@CryptoHayes) October 24, 2023
Between the bear steepener and potential for ballooning military budgets, the environment for Treasuries is growing toxic. As a result, alternative safe haven assets like gold and Bitcoin are starting to rally. Investors want an inflation hedge that can withstand the coming deluge of spending.
This confluence of factors sets up the perfect condition for rotating out of short-term US Treasuries and into cryptocurrencies. The strategy should start with major coins like Bitcoin and Ether, before moving into smaller, more speculative assets.
The end game is the Federal Reserve losing control of interest rates, conclusively proving US Treasuries do not trade on a free market. When this charade is exposed, it will launch the next massive crypto bull run.
The triggers are already appearing. Investors should gradually shift into digital assets as the macroeconomic situation develops. There is no benefit to waiting indefinitely for an obvious “all clear” signal.
While global conflict is never a good thing, its economic impacts look poised to accelerate the adoption and appreciation of cryptocurrency. The brewing crisis in US Treasuries could be the disturbance that upends the legacy financial system in favor of a digitally native alternative.