Bitcoin may enter a bull run again

After recently finishing the summer holidays in the Northern Hemisphere, I spent two weeks skiing in the Southern Hemisphere. Most of the time was spent backcountry skiing, which requires attaching climbing skins to the bottom of the skis to ascend, and then removing the skins at the top to adjust to downhill mode and enjoy the powder.

A typical four to five hour skiing day consists of 80% uphill and 20% downhill, resulting in a huge energy expenditure. My basal metabolic rate is about 3000 kilocalories, and combined with the energy required for exercise, my total daily expenditure exceeds 4000 kilocalories.

Due to the huge energy required for the activity, the combination of food consumed throughout the day is crucial. For breakfast, I eat a hearty mix of carbohydrates, meats, and vegetables, which I call "real food." To manage blood sugar levels, I also prepare some snacks that I usually don't eat, such as Snickers and syrup, and consume them every 30 minutes.

I pair periodic sugar spikes with the intake of real food that burns for a longer time to maintain performance throughout the day. This dietary strategy leads to a discussion about the relative importance of currency price and quantity. Currency price is like candy that provides energy quickly, while currency quantity is like real food that burns slowly and sustainably.

At last Friday's central bank meeting, officials from the Federal Reserve, the Bank of England, and the European Central Bank all indicated that they would continue to lower policy interest rates. Risk assets subsequently rose, and the dollar weakened. However, this may reduce the interest rate differential between these currencies and the yen, reigniting the risk of yen carry trades.

The US dollar against the Japanese yen subsequently fell by 1.44%, which is in line with expectations, as US dollar interest rates decline while Japanese yen interest rates remain steady or rise, leading to an anticipated narrowing of the interest rate differential. The coming months will be a critical period during which close attention should be paid to changes in monetary policy and their effects.

If the interest rate cuts by major economies lead to a rise in the yen, the market may react negatively. Given the scale of global financial assets financed in yen, a rapid appreciation of the yen could offset the benefits brought by the interest rate cuts. Central banks may need to further ease policies and expand their balance sheets to cope with the impact of the yen's appreciation.

From an economic perspective, the Federal Reserve should have raised interest rates instead of lowering them. Since 2020, the U.S. CPI has risen by 22%, and the Federal Reserve's balance sheet has increased by over $3 trillion. The U.S. government deficit has reached a record high, partly because the cost of debt has not yet risen to the point of forcing the government to increase taxes or cut spending.

If the Federal Reserve really wants to maintain confidence in the dollar, it should raise interest rates to curb economic overheating. However, as a highly financialized economy, the United States needs asset prices to continue rising to maintain the public's sense of wealth. Therefore, even when the economic situation is good, the Federal Reserve may still be forced to cut interest rates to support the market.

The U.S. Treasury has recently issued a large amount of Treasury bonds, pulling funds from the Federal Reserve's reverse repurchase program to inject into the broader market, driving the stock market up. Measured in physical currencies such as gold and Bitcoin, the actual returns of the S&P 500 index are limited and even negative.

Powell lowered interest rates citing employment data revisions, but this may just be a political excuse. The Biden administration faces electoral pressure and needs to maintain a rising stock market, thus it is willing to use various monetary policy tools.

The appreciation of the yen may offset the short-term stimulus brought about by interest rate cuts. If the yen continues to strengthen, the Federal Reserve may be forced to halt quantitative tightening or even restart quantitative easing. Yellen may also increase dollar liquidity by issuing more government bonds.

Overall, the current liquidity environment for fiat currency is favorable for cryptocurrencies. Factors such as global central banks lowering interest rates, U.S. fiscal stimulus, and the Bank of Japan's focus on exchange rates may drive up assets like Bitcoin. Although there are differing views on the stock market outlook, for Bitcoin, which has a limited supply, more currency supply means a higher likelihood of price increases.