How does the US Treasury bond interest rate affect the crypto market?

The U.S. 10-year Treasury bond interest rate suddenly spiked to 1.6%, causing the Nasdaq market and the crypto market to plummet at the same time, and also shaking the market’s confidence in the future trend of Bitcoin prices.

How does the US Treasury bond interest rate affect the crypto market?

Recently, Junhaeng Lee, the founder of South Korean blockchain finance company Streami, wrote about this matter. Based on changes in U.S. Treasury bond interest rates and the Federal Reserve’s response policies, three different scenarios and results were deduced, and the prospects of the crypto market were analyzed. The chain catcher translated and edited the original text without affecting the original intent.

With the simultaneous decline of the Nasdaq market and the price of Bitcoin, and the rise of interest rates on 10-year bonds in the United States, many people are worried about the direction of Bitcoin’s price. The reason for fear is that because market interest rates have risen and the price of Bitcoin has plummeted by more than 20%, market sentiment may shift to a risk aversion model in the future.

We believe that on-chain indicators and macroeconomic indicators are the core drivers of bitcoin prices. In fact, the recent increase in US 10-year Treasury yields caused by rising inflation expectations is the most likely scenario. Contrary to the concerns of many people, although Bitcoin prices will experience short-term ups and downs, they still have more room for growth in the long run.

In the second half of last year, I predicted that there will be two important variables in macroeconomics in 2021. First, after the economic recovery after the epidemic, will inflation expectations lead to an increase in market interest rates? Second, when market interest rates rise, how will the Fed set policies to respond?

If these two variables are used for deduction, there will be a total of three possible scenarios. This article starts with the least likely scenario.

Rising market interest rates + currency contraction

Market interest rates will rise as the inflation rate rises. Suppose I bought a 10-year long-term Treasury bond at an interest rate of 1%. However, if the inflation rate is expected to be 3% this year, then long-term bonds will lose money. Therefore, a large number of long-term bonds will circulate in the market, and the price of long-term bonds will fall and relative interest rates will rise. Anticipated inflation uses this mechanism to raise market interest rates.

However, if the interest rate of long-term bonds rises, the interest rate of short-term bonds will also rise. Long-term bonds and short-term bonds are issued by the same central bank and have the same credit rating, so price recognition will occur.

Interest rate is a determinant of the benchmark interest rate. Usually, the central bank adjusts the price of short-term government bonds (that is, interest rates) by buying or selling short-term government bonds, thereby setting the benchmark interest rate (except for extreme situations such as quantitative easing). In this case, if the Fed does not take any response to the rise in long-term bond interest rates, then the benchmark interest rate will also circulate through the following loop. Moreover, if the benchmark interest rate rises, it will offset inflation, so currency circulation and employment opportunities in the market will decrease, and the economy will stagnate.

Decrease in long-term bond prices (increased interest rates)→decrease in short-term bond prices (increased interest rates)→increased base interest rates→increased bank interest rates→currency contraction→decrease in employment (decrease in expected inflation)? Economic recession

Considering the fragile real economy development trend after the reduction of high-quality jobs, the expansionary fiscal policy stance of the Biden administration, and the Fed’s inflation-tolerant monetary policy tone, the possibility of such a situation is very low.

This situation may lead to economic recession. In the case of currency contraction, the prices of all risky assets are basically under downward pressure. Bitcoin is called a “risky safe asset”, but whether it is a risky asset is a very relative concept. In this case, long-term Treasury bonds are more worth investing in than Bitcoin.

At this time, the price of Bitcoin is affected by downward pressure, and long-term Treasury bonds are affected by upward pressure. However, considering the declining supply of BTC in 2020 and the still strong long-term investment demand of institutions, I don’t think there will be a plunge like 2018.

Maintain low market interest rates + currency expansion

When the market interest rate is zero, in order to prevent substantial deflation and promote employment, the government must release currency, which in turn leads to inflation. If the same content is explained from the perspective of the Fed, there is no problem in providing more funds to the market when the expected inflation rate is low. In fact, this has almost always been the case since 2010.

After the 2008 financial crisis, we have experienced unlimited expansion of liquidity and liabilities under the long-term negative interest rate situation. In the real economy, there is no consumption and investment, and the released liquidity only flows into the asset market and raises asset prices, but the result of this situation is deflation. Former US Treasury Secretary Larry Summers and many other economists predicted last year that this is unlikely to happen.

This situation may lead to inflation. Risky assets are wandering around in the inflation market, and assets with higher growth potential have attracted much attention. Bitcoin will also show a strong rise, but this upward momentum will weaken over time, and projects like Gamestop will diversify investment demand. In other words, in this case, the price of Bitcoin is not essentially different from the trend of the 10s.

Rising market interest rates + currency expansion

In this case, although market interest rates have risen, the standard interest rate has remained at zero through monetary expansion. In fact, Australia artificially lowered the interest rate on the 3-year Treasury bond through YCC (Yield Curve Control). As the inflation rate rises, the long-term Treasury bond interest rate rises accordingly, leading to a depreciation of cash and a drop in the interest rate of short-term Treasury bonds. Expected inflation is no longer an “expectation” but a “reality”. This situation of ignoring the deteriorating currency and continuing to inflate is called “hyperinflation”.

In the case of inflation, the value of the currency falls, and the purchasing power of citizens declines. This is a reverse trend. From the standpoint of those in power, this is a better choice than the economic depression caused by deflation, so the possibility of realization is very high. The key is will market interest rates really rise? I am on the side of the imminent inflationary environment. In fact, as commodity prices rise, market interest rates are also rising.

This situation may lead to hyperinflation. As mentioned earlier, the expected increase in inflation is reflected in the increase in market interest rates. The increase in U.S. 10-year bond yields (= risk-free interest rates) driven by expected inflation rather than economic fundamentals reduces the present value of stocks (= the sum of future cash flows). In addition, as the central bank’s monetary policy becomes more uncertain, the temporary downward pressure on risky assets will also play a role. Bitcoin will be adjusted in the short term.

However, because inflation has led to a decline in the actual purchasing power of currencies and the price of long-term Treasury bonds, this raises a basic question, namely, “How can I protect my wealth?”, whether it is an individual or an institution.

In the end, all economic participants will be very active in finding new types of safe assets that can protect wealth. In the past, gold was almost the only refuge, but I think Bitcoin, which has recently gained nearly $1 trillion in stability, will become a much-watched alternative to gold.

If Bitcoin wins the competition with gold as a safe asset, the liquidity released in the market will be sucked into the Bitcoin black hole. In that case, the price discovery mechanism of all assets in the world may be Bitcoin-centric.


When the hyperinflation described above becomes a reality, the market will verify whether Bitcoin is really an asset against inflation like gold. So, under hyperinflation, what kind of world change will Bitcoin’s suppression of gold mean?

In the financial market, the phenomenon of preferring Bitcoin to US long-term Treasury bonds does not mean the end of the US dollar. The U.S. dollar is a currency, and long-term Treasury bonds or gold are just a “store of value” to support it. Even with the rise of Bitcoin, the United States will collect taxes in U.S. dollars, just as U.S. dollars are used to settle the mined Bitcoins in the same way that U.S. dollars are used to settle oil.

However, this has changed the composition of the US dollar collateral, which means that part of the current 100% US Treasury bonds has become Bitcoin. The language of the developer will change the existing infrastructure agreement.

Changes in monetary infrastructure mean changes in the rules of the game for economic activities. In 2010, due to the excessive issuance of national debt, the allocation of funds was based on political logic rather than market logic. In addition, compared to profitable companies, funds are mainly concentrated in companies like WeWork, which are selected by large funds and can provide unlimited liquidity through blueprints.

However, this paradigm cannot be fully maintained in the financial system. In this kind of financial system, Bitcoin, which is “scarce”, will anchor the value of currency at some point, rather than government bonds that can be printed indefinitely.

In the end, it means the new and the old alternate. Those younger generations who have already understood the potential of Bitcoin in advance and invested in Bitcoin, most of which do not have real estate, will have great economic dominance. In addition, the new generation of digital economy based on Bitcoin and virtual assets will have More opportunities.

Seeing the large-scale fiscal deficit in the United States, the decline of the national education level, and the increasing inequality, countless people are looking forward to the decline of this empire. At the same time, China has become a large trading country with strong industrial competitiveness. Many people believe that the economic dominance of the 21st century will be transferred from the United States to China (just like the transfer from the United Kingdom to the United States in the early and mid-20th century). But I think that the “new empire” is the “digital space” and the “new sovereignty” is “bitcoin.”

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