A looming liquidity crisis in established markets might have a severe effect on the price of bitcoin.
Today, we witnessed another increase in the United States Consumer Price Index for February, with data coming in at 7.91 percent, in line with consensus predictions. Previously, we anticipated inflation to peak in Q1 and then stay high for the remainder of the year, but that scenario is becoming more unlikely as the spike in commodity and energy prices takes hold.
Even if it has a little effect on price stability, the Federal Reserve and other central banks are now obligated to aggressively tighten monetary policy in order to preserve the integrity or illusion of their price stability objectives.
Since December, a rise in 10-year rates, accompanied by increased borrowing costs, has corresponded with a decline in bitcoin’s price.
So what does this all signify in the grand scheme of things?
Credit markets are recognising that inflation is here to stay, in a major manner, as seen by the increasing yield trend since Q4 2021. As credit instruments mature, interest rates rise in a historically over-indebted economic system, resulting in a decrease in the net present value of financial assets and increased interest loads on consumer, corporate, and sovereign balance sheets.
In the short/medium term, our basic assumption is for tightening financial conditions and a reduction in debt (in legacy markets, as bitcoin derivatives have already de-risked substantially).
This regime, in our opinion, will conclude with a liquidity crisis in legacy markets, which will very certainly have a negative net effect on the bitcoin price, followed by a return of central bank policy to quantitative easing and eventually yield curve management.
Apart from short/medium term liquidity concerns, the ultimate objective remains unaltered. The argument for a non-sovereign, infinitely scarce digital currency has never been greater.