1/ Thread on the macro cycle and crypto interest rates.
Crypto interest rates are set by the market and self-correct, facilitating an anti-fragile digital economy.
Contrast this with centralized interest rates that have created an extremely sensitive system drowning in debt.
Crypto interest rates are set by the market and self-correct, facilitating an anti-fragile digital economy.
Contrast this with centralized interest rates that have created an extremely sensitive system drowning in debt.
2/ Interest rates in crypto will eventually approach the staking rate of top L1 blockchains. I will be using the mechanics behind ETH staking as a reference (post EIP-1559 and Merge).
The ETH staking rate is generated in 2 components:
1) Block Rewards
2) Fees (Economic Activity)
The ETH staking rate is generated in 2 components:
1) Block Rewards
2) Fees (Economic Activity)
3/ Firstly, block rewards will be the stable portion of the staking rate that provide a base rate/interest rate floor.
It is important to have this base issuance to secure the network over time and provide a minimum rate for lenders.
It is important to have this base issuance to secure the network over time and provide a minimum rate for lenders.
4/ Secondly, economic activity on the network (fees) will be the variable component of the staking rate.
This variable rate will discourage expansion in the system when it is “too hot” and makes it more attractive to borrow when the network has low activity.
This variable rate will discourage expansion in the system when it is “too hot” and makes it more attractive to borrow when the network has low activity.
5/ Currently we think of interest rates in crypto as being used for leverage. But as the market matures and builds out a crypto native yield curve this credit will be used productively fueling economic expansion.
6/ Now I will contrast free market crypto interest rates with the current system using the US as an example.
I could not help but add why I believe we are still firmly in a bull market for crypto, enjoy the macro take below:
I could not help but add why I believe we are still firmly in a bull market for crypto, enjoy the macro take below:
7/ Since 2008 the Federal Reserve (FED) has kept interest rates at near 0%.
A complete disconnect from the real economy instead supporting old debt and incentivizing new debt creating a vicious cycle as borrowing was essentially “free”.
A complete disconnect from the real economy instead supporting old debt and incentivizing new debt creating a vicious cycle as borrowing was essentially “free”.
8/ While rates were a mere .25% US M2 money supply grew at 7-8% per year causing massive distortions across markets.
Anyone holding cash or sovereign bonds was losing out on a real basis but taking on debt was being rewarded due to this cheap credit - a backwards system.
Anyone holding cash or sovereign bonds was losing out on a real basis but taking on debt was being rewarded due to this cheap credit - a backwards system.
9/ We have seen corporate at national debt explode as a result of these incentives.
Massive mal-investment and non-productive uses of capital, corporates indulging in record buybacks and governments running deficits at levels not seen since World War 2.
Massive mal-investment and non-productive uses of capital, corporates indulging in record buybacks and governments running deficits at levels not seen since World War 2.
10/ The FED is now backed into a corner and can not raise rates due to the US debt load.
US Gov tax receipts are currently lower than the pay-as you go portion of entitlements meaning it is issuing bonds (printing money) just to service its liabilities.
US Gov tax receipts are currently lower than the pay-as you go portion of entitlements meaning it is issuing bonds (printing money) just to service its liabilities.
11/ Things like this have made the US economy fragile.
Recessions with a debt burden this large would further slow tax receipts and corporates cashflow. Thus, magnifying the issues within the US Gov and the number of "Zombie" firms. Grinding the economy to a deflationary halt.
Recessions with a debt burden this large would further slow tax receipts and corporates cashflow. Thus, magnifying the issues within the US Gov and the number of "Zombie" firms. Grinding the economy to a deflationary halt.
12/ The FED has seen extreme growth on its balance sheet since COVID. Indirectly buying up US Gov debt via quantitative easing.
The US Government is effectively allowing the FED to fund its spending, with over 50% of treasuries issued since COVID being bought by the FED.
The US Government is effectively allowing the FED to fund its spending, with over 50% of treasuries issued since COVID being bought by the FED.
13/ Last time US Debt/GDP was this bad (130%) was after WW2, US bonds were capped between 0.5-2.5% across the yield curve.
Inflation was roaring and bond/cash holders were losing money on a real basis (-10% real rates). All so the US Gov could inflate away the value of its debt.
Inflation was roaring and bond/cash holders were losing money on a real basis (-10% real rates). All so the US Gov could inflate away the value of its debt.
14/ The US is stuck, it needs to de-lever from 130% Debt/GDP down to ~60-70%. This requires huge “nominal GDP growth” that will be fueled by inflation.
We are seeing this in real time with commodity prices booming and massive fiscal packages coming out of the US.
We are seeing this in real time with commodity prices booming and massive fiscal packages coming out of the US.
15/ The US Gov spending is >20% of US GDP and that still does not seem to be enough to stabilize things.
All this shows how fragile the US economy is. The root cause was a MASSIVE dislocation between interest rates, money supply, and the real cost of capital over the past 60yrs.
All this shows how fragile the US economy is. The root cause was a MASSIVE dislocation between interest rates, money supply, and the real cost of capital over the past 60yrs.
16/ It comes down to this, the FED + US Gov will do anything to stop a recessionary situation. The economy would break this late in the debt cycle under any pressure.
Inflation is the only way to de-lever. They will run the post WW2 playbook and bring on negative real rates.
Inflation is the only way to de-lever. They will run the post WW2 playbook and bring on negative real rates.
17/ These macro trends are overwhelmingly bullish for BTC and ETH.
When inflation comes we will see billions flow into BTC and ETH. Assets that are left to be inflated away like bonds and cash will seek a new home. The store of value narratives have positioned crypto well.
When inflation comes we will see billions flow into BTC and ETH. Assets that are left to be inflated away like bonds and cash will seek a new home. The store of value narratives have positioned crypto well.
18/ Although this situation seems somewhat bleak, I am optimistic for a digital economy built on the back of sound money and interest rates set by the market.
Its decentralized nature and sound monetary footing will allow for a solid foundation and productive use of capital.
Its decentralized nature and sound monetary footing will allow for a solid foundation and productive use of capital.
19/ In summary:
The FED and US Gov are cornered and must print money to deleverage the economy = Bullish BTC & ETH.
Staking rates will turn into the interest rates of crypto; leading to sound money and monetary policy that can not be distorted.
The FED and US Gov are cornered and must print money to deleverage the economy = Bullish BTC & ETH.
Staking rates will turn into the interest rates of crypto; leading to sound money and monetary policy that can not be distorted.
20/ Hope you enjoyed the thread, follow for more crypto content.
*This is not financial advice DYOR*
*This is not financial advice DYOR*
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