The season of altcoins will only come back after Bitcoin and Ethereum surpass $70000 and $4000 respectively.

Author: Arthur Hayes Compiled: Deep Tide TechFlow

(Any views expressed here are the author's personal opinions and should not be used as the basis for investment decisions, nor should they be interpreted as recommendations or suggestions for participating in investment transactions.)

Water, water, water everywhere, all the wooden boards have shrunk; Water, water, water everywhere, but not a single drop to drink—— Samuel Taylor Coleridge, Rime of the Ancient Mariner

I like premium coffee, but the coffee I brew at home always fails. I spent some money on coffee beans, but my coffee is always worse than the coffee in the caf é. In order to improve my brewing process, I started paying more attention to details. I overlooked an important detail, which is the quality of the water.

Water is crucial for the quality of coffee. Recently, an article in the 35th issue of Standart deeply shocked me.

During my tenure as a barista, I had a similar experience where I learned that over 98% of the ingredients in a cup of coffee and about 90% of espresso are water This kind of awareness is often realized later, possibly because the idea of investing money in new machines to improve coffee is easier. Ah, you have a conical grinder! That's why the coffee you brew is cloudy. Let's switch to a flat grinder! But what if the problem isn't with the ingredients? Can focusing on the solvent itself solve our coffee problem—— Lance Hedrick, "On Water Chemistry"

My next step is to understand the author's suggestion and order a home distilled water machine. I know a local coffee shop that sells mineral concentrates that can be added to water, which will provide the perfect foundation for my coffee to highlight the flavor of their roasted coffee. By this winter, my morning coffee will definitely be very delicious... I hope so. I pray for those adventurous friends who will taste my 'Black Gold' coffee before climbing Mount Yang Ti.

High quality water is crucial for brewing delicious coffee. Turning to investment, water or liquidity is also important for accumulating Bitcoin (sats). This is a recurring theme in all of my articles. But we often forget its importance and focus on small things that we believe will affect our ability to earn money.

If you can identify how, where, why, and when fiat currency liquidity is created, it will be difficult to incur losses when investing. Unless you are Su Zhu or Kyle Davies. If financial assets are priced in US dollars and US treasury bond bonds (UST), it can be inferred that the amount of global currency and US dollar debt is the most critical variable.

What we need to focus on is not the Federal Reserve (Fed), but the US Treasury Department. This will help us determine the specific situation of the increase or decrease in fiat liquidity of Pax Americana.

We need to return to the concept of 'fiscal leadership' to understand why US Treasury Secretary Janet Yellen made Federal Reserve Chair Jerome Powell her 'beta pack towel bitch boy'. Please read my article titled Kite or Board for a more in-depth discussion. During the period of fiscal dominance, the necessity of supporting the country exceeded any concern of the central bank about inflation. This means that bank credit, as well as nominal GDP growth, must be maintained at a high level, even if it leads to sustained inflation above the target level.

Time and compound interest determine the timing of the transfer of power from the central bank to the Ministry of Finance. When the ratio of debt to GDP exceeds 100%, debt mathematically grows at a much faster rate than economic growth. After this event horizon, the institution controlling the supply of debt was crowned emperor. This is because the Ministry of Finance decides when, how much to issue, and when the debt will be issued upon maturity. In addition, as the government now relies on debt driven growth to maintain the status quo, it will ultimately instruct the central bank to use its money printing machines to cash checks from the Ministry of Finance. The independence of the central bank is no longer important!

The outbreak of COVID-19 and the measures taken by the US government to isolate people at home, as well as to issue stimulus checks in exchange for their compliance, have led to the debt to GDP ratio rapidly exceeding 100%. It's only a matter of time before Yellen transforms from 'grandma' to 'bad girl'.

Before the United States enters a completely malignant inflation scenario, Yellen has a simple way to create more credit and drive asset markets. The Federal Reserve's balance sheet has two sterilized pools of funds, which, if released into the market, will promote bank credit growth and push up asset prices. The first pool is the Reverse Repurchase Pool (RRP). I have discussed in detail this funding pool, which refers to money market funds (MMFs) that deposit cash overnight at the Federal Reserve and earn interest. The second pool is bank reserves, and the Federal Reserve plans to pay interest on this pool in a similar manner.

When funds are on the Federal Reserve's balance sheet, they cannot be re collateralized into financial markets to generate broad money or credit growth. By providing incentives for reserve interest and reverse repo interest to banks and money market funds respectively, the Federal Reserve's quantitative easing (QE) program has created inflation in financial asset prices, rather than leading to rapid growth in bank credit. If QE is not disinfected in this way, bank credit will flow into the real economy, increasing output and inflation of goods/services. Given Pax Americana's current total debt, strong nominal GDP growth coupled with inflation in goods/services/wages is exactly what the government needs to increase taxes and reduce leverage. Therefore, the 'bad girl' Yellen took action to correct the situation.

Yellen doesn't care about inflation at all. Her goal is to create nominal economic growth in order to increase tax revenue and reduce the debt to GDP ratio in the United States. Given that no political party or its supporters have promised to cut spending, the deficit will continue to exist in the foreseeable future. In addition, as the federal deficit is the largest in peacetime history, she must use all available tools to finance the government. Specifically, this means transferring as much funds as possible from the Federal Reserve's balance sheet to the real economy.

Yellen needs to provide banks and money market funds with what they want. They hope to have a credit free, interest rate low-risk yield cash tool to replace the yield cash they hold at the Federal Reserve. T-bills with a maturity of less than one year have a slightly higher yield than reserve balance interest (IORB) or reverse repo rate (RRP), making them a perfect alternative. Treasury bonds are an asset that can be leveraged in the market, generating credit and asset price growth.

Does Yellen have the ability to issue Treasury bonds worth $3.6 trillion? Certainly. The federal government is running an annual deficit of $2 trillion and must be financed through debt securities issued by the Treasury Department.

However, Yellen or her successor in January 2025 does not necessarily have to issue Treasury bonds to finance the government. She can sell long-term treasury bond with poor liquidity and high interest rate risk. These securities are not cash equivalents. In addition, due to the shape of the yield curve, the yield of long-term debt securities is lower than that of treasury bonds. The profit motive of banks and money market funds makes it impossible for them to exchange the funds held by the Federal Reserve for anything other than Treasury bonds.

So, why do we cryptocurrency traders care about the flow of funds between the Federal Reserve's balance sheet and the broader financial system? Please take a look at this beautiful chart.

As the Reverse Repurchase Program (RRP, white line) falls from high levels, Bitcoin (gold) rebounds from low levels. As you can see, this is a close relationship. When funds leave the Federal Reserve's balance sheet, it increases liquidity, leading to price increases for limited financial assets such as Bitcoin.

Why did this happen? Let's consult the Borrowing Advisory Committee (TBAC) of the Ministry of Finance. In its latest report, TBAC clearly explains the relationship between increasing treasury bond issuance and the funds held by money market funds (MMFs) in RRPs.

Large overnight reverse repo balances may indicate strong demand for treasury bonds. During 2023-24, overnight reverse repo funds will be transferred almost one-to-one to treasury bonds. This rotation has facilitated the smooth absorption of record breaking treasury bond issuances—— Slide 17, TBAC July 31, 2024

As long as the yield of treasury bills is slightly higher than the reverse repo rate, money market funds will transfer cash into treasury bills - currently, the yield of one month treasury bills is about 0.05% higher than the funds in RRP.

The next question is whether the bad girl Yellen can channel the remaining $300 billion to $400 billion of funds from RRP into Treasury bonds. If you suspect the bad girl Yellen, you may face sanctions! Ask those poor souls from developing countries what happens when you lose the opportunity to obtain dollars to purchase basic necessities such as food, energy, and medicine.

In the recent Q3 2024 Quarterly Financing Announcement (QRA), the Ministry of Finance stated that it will issue $271 billion in Treasury bonds by the end of this year. That's good, but there are still funds in the RRP. Can she do more?

Let me quickly talk about the repurchase plan of the Ministry of Finance. Through this plan, the Ministry of Finance repurchases illiquid non treasury bond debt securities. The Ministry of Finance can provide funding for purchases by reducing its General Account (TGA) or issuing treasury bonds. If the Ministry of Finance increases the supply of treasury bonds and reduces the supply of other types of debt, it will net increase liquidity. The funds will leave the RRP, which is positive for US dollar liquidity. As the supply of other types of treasury bond decreases, the holders will turn to the risk curve to replace these financial assets.

The latest repurchase plan as of November 2024 will purchase a total of $30 billion worth of non treasury bonds. This is equivalent to issuing an additional $30 billion in Treasury bonds, bringing the total outflow of RRP funds to $301 billion.

This is a steady injection of liquidity. But how powerful is the bad girl Yellen? How much does she wish for the minority American presidential candidate 'Momolla Harris' to win? I call her a 'minority' because Kamala Harris changes her phenotype affiliation based on the audience in different situations. This is the unique ability she possesses. I support her!

The Ministry of Finance can inject a huge amount of liquidity by reducing TGA from approximately $750 billion to zero. They can do so because the debt ceiling will take effect on January 1, 2025, and according to the law, the Ministry of Finance can spend TGA to avoid or delay a government shutdown.

Bad girl Yellen will inject at least $301 billion and up to $105 trillion by the end of the year. Bang! This will create a brilliant bull market that covers all types of risk assets, including cryptocurrencies, just in time for the election. If Harris still can't defeat the orange man, then I think she needs to become a white male. I believe she has this superpower within her/his abilities.

grenade

Over the past 18 months, injecting $2.5 trillion into the financial market through reverse repurchase programs (RRPs) has been very impressive. But there is still a lot of dormant desire for liquidity to be released. Can Yellen's successor create a situation after 2025 where funds are withdrawn from the Federal Reserve's bank reserves and injected into the broader economy?

In a period dominated by finance, everything is possible. But how to do it?

Profitable banks will exchange one type of cash instrument for another in terms of capital adequacy, as long as regulatory authorities treat them equally and the latter has a higher yield. At present, the yield of treasury bonds is lower than the reserve balance held by the Federal Reserve, so banks will not purchase treasury bonds.

But what will happen next year when reverse repurchase is almost zero and the Ministry of Finance continues to sell a large amount of treasury bonds to the market? Adequate supply and money market funds (MMFs) are unable to purchase treasury bills with funds parked in reverse repos, which means prices must fall and yields will rise. Once the yield of treasury bonds is a few basis points higher than the excess reserve rate, banks will use their reserves to purchase a large amount of treasury bonds.

Yellen's successor - I'm willing to bet Jamie Damon - will not be able to resist the ability to continue dumping Treasury bonds into the market to gain political benefits for the ruling party. Another $3.3 trillion of bank reserve liquidity is waiting to be injected into the financial market. Shout with me: Treasury bonds, baby, treasury bonds!

I believe TBAC is quietly hinting at this possibility. Here is another excerpt from a previous report, highlighted in bold for my comments:

Looking ahead, many factors may need further research to consider the share of future treasury bond issuances:

TBAC hopes that the Ministry of Finance will consider the future and the size of the issuance of treasury bonds. Throughout the report, they advocate that the issuance of treasury bonds should be maintained at around 20% of total net debt. I believe they are trying to explain what will cause this proportion to increase and why banks will become the main buyers of these treasury bonds

The evolution and continuous evaluation of the banking regulatory environment (including liquidity and capital reform), as well as the impact on banks and dealers' meaningful participation in the main treasury bond bond market to mediate and store (expected) the future maturity and supply of US treasury bond bonds

Banks do not want to hold more long-term bills or bonds that attract stricter collateral requirements. They are quietly stating that we will no longer purchase long-term debt because it would damage their profitability and pose too much risk. If major traders strike, the Ministry of Finance will be in trouble because who else has a balance sheet to absorb huge debt auctions

The evolution of market structure and its impact on the treasury bond market resilience initiative, including:,

The SEC's central clearing rules will require the release of large amounts of margin in covered clearing institutions

[If the treasury bond bond market turns to the exchange, it will require dealers to issue billions of dollars of additional collateral. They cannot afford such costs, and the result will be a decline in participation.]

Future (expected) auction size of US treasury bond bonds and predictability in cash management and benchmark treasury bond issuance

If the deficit continues to remain so large, the issued debt may increase significantly. Therefore, the role of treasury bonds as a "buffer" will become increasingly important. This means that higher treasury bond issuances are needed

Future Monetary Fund Reform and Potential Structural Demand for Treasury Bonds

If money market funds return to the market after the complete withdrawal of reverse repo, the issuance of treasury bonds will exceed 20%. "- TBAC, July 31, 2024, slide 26

The banks have effectively gone on strike to stop buying long-term treasury bond. The bad girls Yellen and Powell almost led to the collapse of the banking system, because they filled the banks with treasury bond, and then raised interest rates from 2022 to 2023... Rest in peace, Yinmen Bank, Silicon Valley Bank and Signature Bank. The rest of the banks don't want to take any more risks to see what will happen if they greedily buy high priced treasury bond bonds again.

Example: Since October 2023, American commercial banks have only purchased 15% of non treasury treasury bond bonds. This is very bad for Yellen, as she needs banks to step up when the Federal Reserve and foreign countries exit. I believe that as long as banks purchase treasury bonds, they will be willing to fulfill their responsibilities because the risk characteristics of treasury bonds are similar to bank reserves, but the yield is higher.

Widow Maker

The movement of the US dollar Japanese yen currency pair from 160 to 142 has caused a severe reaction in global financial markets. Many people were reminded last week to sell what they could sell. At that moment, there was a textbook like correlation. The USD JPY ratio is expected to reach 100, but the next wave will be driven by foreign capital inflows from Japan Inc., not just hedge fund investors unwinding yen arbitrage trades. They will sell US treasury bond bonds and US stocks (mainly large technology stocks such as NVIDIA, Microsoft and Google).

The Bank of Japan attempted to raise interest rates, and the global market reacted strongly. They compromised and announced that raising interest rates was not under consideration. From the perspective of fiat currency liquidity, the worst-case scenario is yen sideways trading, with no new low-cost yen positions established. As the threat of yen arbitrage trading recedes, the market intervention of the bad girl Yellen has once again become the focus.

dehydration

Without water, you will die. Without liquidity, you will face collapse.

Why has the cryptocurrency risk market been sideways or downward since April this year? Most taxes are generated in April, which requires the Ministry of Finance to reduce borrowing. We can see a decrease in the number of treasury bonds issued between April and June.

Due to the net decrease in treasury bonds, liquidity in the market has been removed. Even if the overall government borrowing increases, the net decrease in cash instruments provided by the Ministry of Finance will lead to a decrease in liquidity. Therefore, cash is still trapped on the Federal Reserve's balance sheet, and the Reverse Repurchase Program (RRP) is unable to drive financial asset price growth.

This chart of Bitcoin (gold) and RRP (white) clearly shows that from January to April, when treasury bills are net issued, RRP decreases and Bitcoin rises. From April to July, when treasury bills were net withdrawn from the market, RRP rose and Bitcoin traded sideways, accompanied by several sharp declines. I stopped on July 1st because I wanted to showcase the interaction between the US dollar and Japanese yen before the strong decline from 162 to 142, which led to a widespread sell-off of risky assets.

Therefore, according to the words of the bad girl Yellen, we know that there will be a net issuance of $301 billion in Treasury bonds between now and the end of the year. If this relationship holds, Bitcoin will quickly replenish the sell-off caused by the appreciation of the Japanese yen. The next target for Bitcoin is $100000.

When is the season for altcoins?

Shanzhai coin is the encryption gameplay of high beta Bitcoin. But in this cycle, Bitcoin and Ethereum now have structured buying in exchange traded funds (ETFs) listed in the United States. Although Bitcoin and Ethereum have experienced a pullback since April, they have escaped a disastrous defeat in the altcoin market. The season of altcoins will only come back after Bitcoin and Ethereum surpass $70000 and $4000 respectively. Solana will also exceed $250, but considering its relative market value, the impact of Solana's rise on the wealth effect of the entire cryptocurrency market is far less than that of Bitcoin and Ethereum. By the end of the year, the rebound of Bitcoin and Ethereum driven by US dollar liquidity will lay a solid foundation for the return of the sexy altcoin party.

Transaction Settings

With the issuance and repurchase plan of treasury bonds running in the background, the liquidity situation will improve. If Harris wavers and more firepower is needed to drive the stock market up, Yellen will reduce TGA's funding. Anyway, I expect cryptocurrency to start breaking free from its sideways downward trajectory in September. Therefore, I will take advantage of this weak period at the end of summer in the northern hemisphere to increase investment in cryptocurrency risks.

The US elections will be held in early November. Yellen will reach the peak of manipulation in October. There is no better liquidity opportunity this year. Therefore, I will take advantage of the situation. I won't liquidate my entire cryptocurrency investment portfolio, but I will profit from more speculative momentum trading and store the capital in pledged Ethena USD (sUSDe). The rise in the cryptocurrency market has increased the chances of Donald Trump winning the election. Trump's chances of winning the election peaked after the assassination attempt and the disastrous debate performance of Slow Joe. Kamala Harris is a top-notch political puppet, but she is not an octogenarian vegetative state. That's exactly what she needed to defeat Trump. The election is a coin toss. I would rather watch the chaos on the spot and enter the market again after the US debt ceiling is raised. I expect this to happen between January and February.

Once the farce of the US debt ceiling ends, liquidity will flow out of the Treasury Department and the Federal Reserve to restore the market to normal. Then, the real bull market will begin. One million dollars in Bitcoin is still my basic prediction.

P. S.: Once the bad girl Yellen and towel man Powell join forces, China will ultimately release its long-awaited fiscal stimulus. The cryptocurrency bull market in China and the United States in 2025 will be brilliant.

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