Posted 1 year ago | by Ben Armstrong
JP Morgan/FED Action May Have Been Behind Crypto Takedown
Interbank liquidity isn't the sexist topic out there, especially with crypto enthusiasts. The forces in play in the interbank market are enormous, and an explanation of how complex the FED/FOREX/REPO/Funding markets are is well beyond the scope of a single article (or book).
For now, let's just say that all of the biggest markets are highly connected, and when combined, make the global equity markets look like a craps game being played on a piece of cardboard in an alley.
When mega-bank JP Morgan decided to shift its 'cash' holdings around this year, it would appear that the net result was a funding crisis on the level of what happened in late 2008 after Lehman and Bear went belly up.
Banks live and die on liquidity, and JP Morgan's move to rebalance around $130 billion in 'cash' seemed to push the FED (US Federal Reserve-a PRIVATE bank) back to what is being called 'not-QE'.
Cryptos are a Small Fish in a Big Ocean of Liquidity
This article isn't suggesting that JP Morgan decided to rotate its cash equivalents away from traditional assets in order to crush the budding crypto bull market.
If we look at a chart of the effective funds rate (follow this link), we see that the spike that the FED crushed with not-QE happens at around the time that Bitcoin prices fell off their plateau, and plumbed new depths for their post 2019 peak.
The short story here is that the liquidity party that former FED chief Bernanke launched with QE1 in 2009 is officially on life support, and the mega banks and their minions badly need new sources of liquidity to keep the asset price (and low interest rate) party going.
A recent BIS paper concluded with:
Since 17 September, the Federal Reserve has taken various measures to supply more reserves and alleviate repo market pressures. These operations were expanded in scope to term repos (of two to six weeks) and increased in size and time horizon (at least through January 2020). The Federal Reserve further announced on 11 October the purchase of Treasury bills at an initial pace of $60 billion per month to offset the increase in non-reserve liabilities (eg the TGA). These ongoing operations have calmed markets.
While the FED has calmed markets, it also seems to have put a cap on assets like precious metals and cryptos. The FED was clearly trying to save the world from a Lehman 2.0 X 10 moment, but it may have come at a big price.
Is Bitcoin a Liquidity Driven Asset?
The takeway from all this for crypto markets might be something along these lines: adoption is meaningless, no one cares about the technical side of tokens, and the only thing that matters is speculative capital.
Of course, a single market current isn't indicative of its future direction, but there is a long-standing correlation between EZ money and crypto prices. In fact, cryptos were born around the time that Bernanke launched QE1.
Given the fact that the FED has done little more than introduce life support to the global markets, we should be able to see how important interbank liquidity and cheap funding costs are to token prices in the not-too-distant future.