1/ A simple explanation of what happened in the UK Gilt market yesterday, and why #Bitcoin is cheap hedge against financial instability (or catastrophe). 
2/ "Gilt" refers to UK government bonds, the equivalent of US treasuries.
Yesterday, Gilt prices plummeted (yields soared) and caused a possible melt down of UK pensions funds.
Bank of England had to step into the market to buy Gilt (see graph above).
Yesterday, Gilt prices plummeted (yields soared) and caused a possible melt down of UK pensions funds.
Bank of England had to step into the market to buy Gilt (see graph above).
3/ The liability of a pension fund is long term and hence its value is very sensitive to interest rate movement.
UK pension funds use swaps to manage this risk. To buy the swaps from banks, they use their assets (which are mainly Gilts) as collateral.
UK pension funds use swaps to manage this risk. To buy the swaps from banks, they use their assets (which are mainly Gilts) as collateral.
4/ Gilt prices dropped by A LOT, causing intra-day margin calls. To meet the margin calls, they had to sell their Gilts.
But the speed of the price drop was so fast that they couldn’t sell the assets fast enough, they were on the brink of being liquidated.
But the speed of the price drop was so fast that they couldn’t sell the assets fast enough, they were on the brink of being liquidated.
5/ The pension funds are not dumb, neither are the banks evil for selling those lucrative derivatives with leverage.
It simple supply and demand: pension funds need capital efficient ways to hedge their risk and banks need to sell leverage to be profitable.
It simple supply and demand: pension funds need capital efficient ways to hedge their risk and banks need to sell leverage to be profitable.
6/ Also, underlying all the pricing of those derivatives are sophisticated quantitative models. So what went wrong?
7/ One factor is that after Dodd-Frank Act, pension funds have to post margin for swaps. They didn’t have to in the past.
8/ The other is that we've had two decades of QE which artificially suppressed interest rates and their volatility. If you used 20 years of historical data to calibrate, your model outcome is useless right now.
We are entering a new paradigm of rising rates with very high vol!
We are entering a new paradigm of rising rates with very high vol!
9/ So what's the lesson to be learned? There exists several such "time bombs" in the financial system right now due to FED hiking.
We don’t know where/what will blow up next nor the extent of the contagion effect/collateral damage.
We don’t know where/what will blow up next nor the extent of the contagion effect/collateral damage.
10/10 But we do know that given the current real rate of ~1%, #Bitcoin is a cheap hedge against potential fiat catastrophes.
Pension funds should allocate into it.
@FossGregfoss @jameslavish @ALEXLabBTC
Pension funds should allocate into it.
@FossGregfoss @jameslavish @ALEXLabBTC
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