Bitcoin's Money-Printing Machine Breaks Down

You can also listen to our radio show at two pm Eastern Time on Bloomberg Radio or watch us on YouTube search Bloomberg Global News. So it's only June, and yet what a year it's already been for bitcoin. We hit a high of what more than sixty four thousand. Just today we went back below thirty thousand, and now we're back up above that mark twenty thousand, nine hundred and four dollars. Carol, it's been in here, but who's counting but fifty below the record, So it's quite a

swing in a short period of time. Volatility is the name of the game. Fortunately, we have Katie Greifeld, who's Bloomberg News cross Asset reporter, also Bloomberg Quick Take, co anchor of quick Take stock with menon Eastern Time on Bloomberg quick Takes. She's joining us now from New York City. Katie, you have a new article out. It's called Bitcoin's money printing machine breaks down as futures fall Bitcoin, it's not just about for hedge funds um buying and holding it.

What's going on here, That's exactly right. So there's a lot more to crypto trading than just buying and selling these coins. And there's been that's just really reliable trade called the basis trade, and it works because if you look at the Bitcoin futures curve, those longer dated contracts they traded a premium to the shorter daily contracts and

to the price of bitcoin in the spot market. So it's pretty simple if you break it down, a hedge fund or any other sort of institutional type trader, they would buy uh crypto in the spot market and then sell the longer dated future and then basically pocket the difference between those two prices. And it was basically risk free because of your counterparty is the CME group, but

not a lot of counterparty risks. But that's collapsed. You've seen Bitcoin futures across the curve collapse over the last several weeks, and that's because really that built in bullishness that because of bitcoin scarcity, you had that nice premium out the curve that's really come down and the market kind of doesn't know where it wants to go, all right to this arbitrage. I mean, I feel like to me, it's a reminder that it's just kind of a play

in the markets, or is it? You know that argument, is bitcoin, Katie, something much more substantial, and we're moving towards it becoming kind of a normal and accepted part of our financial system versus man, this is just a really cool trade. I mean, it's a great way to make money. And for traditional Wall Street players, there's so many different ways to bring sort of the traditional type of arbitrage as you would try to do to the bitcoin market, and that's what you saw here, and it's

not working anymore. And this was a way to get pretty much guaranteed double digit annual games doesn't work, and so you're left to deal really with the technicals because again bitcoin, it doesn't have any fundamentals, doesn't have any cash flows, and the technicals don't look too good right now either. So, uh, it's it's hard to say where it's going to go from here, but the stakes are much higher because Carol, like you say, uh, you know, Wall Street is much more in this trade than it

has been in the past few years. So what are your sources telling you, Katie about this, this kind of arbitrage being over? Obviously, nobody knows where it goes from here, but it is the idea that if it starts rising again, the retail traders will will pile in again and they'll drive that price higher. The bullishness will be back, the demand will be back. Yeah, so chatting the sources about what's going on. So it may be dead for now, but there is a hope that maybe it could come

back in the weeks and months to come. What's happened here, it's partly that basically too many people found out about it. You know, it's great the first you know, the first or second or you know, hundreds of trader in a trade, but if you're you know, the ten thousand's, it's not gonna look too good. So maybe as some of the frost comes out, you know, the traders onto walking through their hopeful that this could come back, but for right now,

it's it's not. It's not a great trade. Do you feel like bitcoin and crypto we can liken to anything in our financial history? You know? I think about when high yield junk bonds were kind of considered a new fangled and wonky type of financial product and now it's part of the norm, right, So is there something we can kind of liken bitcoin and crypt crypto to or not? Really?

It's a great question. And there is this, uh sort of name or inside joke in the crypto community that when you do get crashes like this, people will say, I'm in it for the technology, you know, they go back to the roots. They're in it for the blockchain. Blockchain technology that will maybe revolutionize the way we pay for things, maybe it'll revolutionize the banking system. So you're you are seeing more of that emerged that you know,

we're not. It's there's still value here, But in terms of what it reminds me of it, I mean, it's hard to say. In some ways, it just feels completely new. Yeah, she didn't say tulips, you did, and you didn't say you didn't say, you know, it wasn't like the tech rally right. I don't. I don't. Wouldn't compare it to the tech rawl. It wouldn't do it. It's new, it's new, and it does have the potential to kind of, you know,

to really disrupt um our system, our financial system. And I'm still kind of intrigued by blockchain, Tim, you got I can do? I do because this all comes at a time when institutional investors have an increased interest in bitcoin and cryptocurrency, and I wonder, Katie, if what if the volatility that we've seen over the last six months makes them second? Guess, Okay, wait a second, even though our clients want us to do this, um, is this something we want to touch and we have about forty

thirty seconds left. That's what I would love to know too, because it's hard to look at bitcoin right now and the volatility that we've seen and say, as a corporate treasurer, I want to put this on my balance sheet. This is a great cash alternative. So that will definitely be a thread to watch. But I'm guessing if you ask Michael Saylor, he'll say I'm okay with this, but he

gets it. You had him on last week and he seem all in and you know, issuing debt or selling debt like he's using it to buy more and more bitcoin. And we know that some of those purchases, depending on when he bought them, could be a little bit underwater. Right now, micro Strategy shares down by four point two percent, but it's not coming undone, it's not going apart. Four some would say would be managable. Kitty Gray Felt, Bloomberg News,

crosses at reporter Bloomberg Quick take co anchor. Thank you so much. You're listening to Bloomberg Radio. I'm bro mac journal. Yeah, but you let me drive? Oh no, no, no, no, who's going to drug honey? Please, I'll do the riding gravel. I want to drive, Just drive baby? The question dry? Yeah, this is the drive to the globe. Give me thanks, we'll drying us. Dawn on Bloomberg Radio. All right, we've got just about ten and a half minutes left in

today's trading session. J Powell. We heard, he came, he got, he spoke away. Stocks are higher, thank you very much. And stocks are higher, and yields I think they even backed off a little bit. So it seems like he certainly has created some calm or kept the calm and peace in the markets. Craig Fair is investment strategist at Edward Jones. Let's see what he has to say. He's

on the phone from St. Louis. Craig, we are actually coming off our highs of the session, but as J. Powell was speaking, we did see an uptick in stocks and we really did see uh, it looked like yields maybe back off just a hair there. Um. Any comments on J. Powell, Yeah, I think I think your comment he came, he spoke dr higher. I mean that could be uh, maybe the moniker for the last fifteen months, if not the last ten years. Um. I think today, in particular, we did see a notable move higher during

Chairman Poles testimony. During the day, stock flatish or most of the morning. I think again, taking a bit of a breather after two whipsaw days on Friday and Monday, I think that I think the reaction today was if Friday was a everything's about the change from the fad, if Monday was okay, maybe not. I think today was

just a little bit of a calming effect. As Pal reiterated the fact that the FED is not going anywhere anytime soon, he also took took care to make sure that he noted that they're going to continue to focus on the employment mandate and that they still believe inflation is transitory, and that's exactly what the market wants to hear at this point. So was the volatility at the

end of last week. Was was that warranted? I think to a degree only because you know, the word we've been using to describe this environment up until last week was a bit of complacency. The market felt a little too complacent about inflation risk equities continued to climb higher seemingly every single day and shrug off all the risks. I still think that the opportunities, the tail winds far

outweigh the headwinds at the stage. But I think that was just shaking a little bit of a loose fruit out of the tree, which is necessary, particularly in a bull market as strong and as steady as this one

has been over the last fifteen months or so. So I think it did serve to wake the market up a little bit that the Fed isn't going to keep its foot smashed on the accelerator forever um, and probably put a little bit more attention back on the will they won't they And part every single word that every FED governor says now for the next several weeks, UM probably just restored a little bit more realism into the market, is probably the way I would I would characterize it.

And let's not forget that on a historical basis, folks, look at interest rates, they are still really really low, and they're really really low at the longer end of the yeeld curve. So it's not like we're going back to the levels we saw in the seventies or when we saw you know, people paying double digit high percentage you know, teams uh, mortgage rates. I mean, we need to put things in perspective, and we do expect the

economy to get back on track. Having said that, do you agree with the Fed to maybe let the economy run a little hot, especially to work off those seven million plus jobs that are now are seven million Americans that are now out of work. I generally agree insofar as I would prefer the FED to air on the side of um letting the economy on hot, versus airing

on the side of undercutting the recovery too soon. And and again we could go back to the sixties and there was a there was a kind of a mantra from the FED that changed again in the nineties, where the FED was much more tolerant of inflation, rightfully so, because operation was running low as globalization was picking back up. I think that paradigm has changed for a whole host of reasons. But obviously the pandemic has shifted things around, and I think inflation is a much more real threat

than it was for the past two or three decades. Um. All that being said, I think that I think the FEDS approach now to outcome based um policy as opposed to expectation based policy, is probably the right one, but it also it should be it should be noted that also certainly raises the risk that the FED makes a policy mistake or falls behind the curve. But do you think that's what's out the markets a little skinish at

this stage. Well, because it's it's it's an outcome based approaches is good for the economy, right the idea of getting these people, getting seven million Americans back to work. But if the concern is inflation and that creates some hotspots throughout the economy when it comes to prices, how do markets react? I think the markets are going to react in more of a knee jerk fashion like we

saw over the last couple days. Because I think you're spot on, which is the FED will now take the approach of being tolerant of higher inflation until they believe higher inflation is here to stay, and we'll only know that once it's here. And I think that's the real concern here, which is the market is taking some comfort, or has taken some comfort at least, and the fact that the Fed isn't going to um pull the turn

the music off or pull off the rug prematurely. But it does introduce a different kind of tail risk, which is at the FED falls behind the curves. Maybe it's for the FEDS fell slightly behind the curve and tried to catch up pretty quickly, and it wasn't great for stocks or bonds for a very short period of time, right, I don't think, but you know, back to your earlier point, I don't think this is the seventies. And then perspective use the word perspective, which couldn't be more perfect here.

Interest rates, for goodness, six tenure yields are still at one fifty um and so that's that shouldn't be lost on the market at the stage, and I think some days it is yeah, no, exactly exactly, And and we know the FED. This is something that we've heard from several FEDS I feel like over the last decade or so, is that they will adjust according to what's needed and according to what their dual mandate shows them. In the meantime, what does it mean in terms of how you invest

in this market environment? We're still broadly favorable on equities, and I think in an environment we look at what we call the three legged stool fundamentals, which is when you have a growing economy, that growing economy than fosters rising corporate profits and all of that is uh is supported by accommodative monetary policy. Over history, that's been a good a good environment to be fully invested in equities.

And that's exactly where we are at this stage. It doesn't mean we're not going to have these these bouts of indigestion, which I think are going to become much more frequent as we move forward. And that's the you know, we have a neutral allocation to bonds within that strategy as well, because that is going to be the portfolio insurance, so to speak. When we get those bouts of of indigestion.

But you know, our view is you want to continue to uh to diversify into a kind of a risk on environment where until we see an economy that's showing cracks or until we see an environment where the fet is truly tightening. Right, we're talking at this stage so much about just being less accommodative. We will be a bit more cautious when when the when the conversation shifts to tightening, because that's probably when the economic cycle and the business cycle are going to start to uh to

wear thin. But I think we're still a ways away from that. So you get more specific there when the conversation shifts to tightening, Does that mean when the Fed hikes interest rates or does it mean before that? Yeah, it means before that so far as in just like we the conversation that picked up last week, which is it's the talk about the talk of tapering, right, the is not gonna taper until much later this year, if

at all this year, maybe December. UM time will tell on that the market is going to um to get a little more jittery when when the Fed starts talking about it. And last week was the market talking about the FED talking about it, and so I think exactly to your point, Uh, real restrictive policy is the actual rate hikes that are are going to come for um sometimes you know would be would be our our best bet. James Bullard mentioned maybe two that's still a ways off.

The market will start to recalibrate readjust in advance of those actual rate hikes. But that's the that's the policy that actually starts to undermine echhen you use at that stage exactly and in some ways folks were saying at this least most recent FED meeting was the FED plane catch up a little bit about what we've already seen play out in the market. So watch in particular that bond market in terms of what's going on. Hey, Craig,

good stuff, Craig Fair. Uh so appreciate it. Investment strategies at every Jones on the phone from St. Louis. Thanks for listening to Bloomberg Business Week. Download the podcast on iTunes, SoundCloud, or Bloomberg dot com, and you can also listen to our radio show at two pm Eastern on Bloomberg Radio or watch us on YouTube search Bloomberg Global News m