This is another episode of a weekly cryptocurrency news series called Last Week Crypto.
We cover the latest global news stories affecting the cryptocurrency markets May 23rd through the 29th of 2021.
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This week we will discuss what’s going on in the traditional world of finance with repo markets, reverse repo markets, the fed’s continued display of ignorance, and how I think this will affect the crypto markets in the future.
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Things have definitely been interesting in the crypto world the past few weeks. 1 - Crypto investors be warned: be prepared for a volatile holiday weekend.
A tweet from the Chief Investment Officer of Guggenheim Partners, a global asset management group controlling $270 billion dollars worth of assets. A public service announcement, or more coordinated market manipulation from institutional whales?
How about: 2 - Wall Street be warned: be prepared for a volatile decade of disruption.
Hello, I’m Crypto Casey, and welcome to another episode of Last Week Crypto.
Every Sunday, we review the performance of the largest cryptocurrencies, top gainers, as well as the latest global news stories affecting the crypto markets this past week.
This week we will discuss what’s going on in the traditional world of finance with repo markets, reverse repo markets, the fed’s continued display of ignorance, and how I think this will affect the crypto markets in the future.
To check out the links to all of the articles we discuss, go to CryptoCasey.com/Last-Week-Crypto.
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Definitely dropped the ball on that one and did a belated AMA. A belated AMA is better than no AMA, though.
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Awesome. Last Week Crypto, let’s go.
3 - Looking at the top cryptocurrencies by market cap, bitcoin diving down 8.8%, ETH down 4.5%
Binance Coin down 4%, and Cardanodown 11.2%.
4 - Looking at the top gainers this week:
Helium up 22.3%, Theta Fuel up 17.7%
Polygon holding it together fairly well through the tumultuous times, up 10.8%, and Celsius up 9.8%
Nice. The crypto markets are insane, but that’s really not out of the ordinary. There are a lot of content creators in the crypto space that focus mostly on hour to hour, day to day, week to week price action. What to buy, when to buy it, comparing charts from this market cycle to previous market cycles, trying to time the market, predict the bear and bull trends.
I’ve featured some of that content as well. However, the coordinated manipulation of the market that caused an extreme pullback the other week, and considering all of these other factors like covid, massive stimulus, inflation, supply chain breakdowns, the super-heated housing market, among other things we will discuss in this video,
considering all these things, it become quite clear that referencing historical charts, trends, and how traditional financial activity usually plays out with financially savvy players: whatever crypto’s fate price-wise in the near or distant future,
I have a prediction. I’m just not certain on the timeline as it would all be predicated on the continued political and institutional manipulation of, essentially, the world at large at this point.
So in this episode we are going to discuss some interesting things afoot that may affect the bedrock of the entire global financial system, and that would undoubtedly shake things up in crypto as well.
We will look at how domestic and global financial entities like banks, hedge funds, and other financial institutions have been playing the pandemic-stricken, politically-manipulated market and what may be on the horizon if we start experiencing an economic collapse.
This is a semi-long explanation of what we should be aware of from the foundational financial system that affects the entire global financial system. So bear with me here.
The fed controls the US money supply two ways: one, printing money, and two: issuing, buying, and selling treasury bonds. And a “bond” is just a fancy word for a loan. So bonds are loans, or debt instruments. And Treasury bonds refers to debt Issued by US Gov
So how does Fed’s issuance, buying, and selling of treasury bonds affect the money supply? Show animation of banks with cash, then the cash moves from banks to behind graphic representing the Fed, and bonds move from behind Fed to the banks. So swapping cash and bonds- Well, when entities buy treasury bonds from the fed, the dollars they use to buy the bonds are taken out of circulation, and locked up with the fed, which show text: Decreases Money Supply decreases the overall money supply in circulation.
Show same animation as before but opposite, cash goes from Fed to banks and bonds go from banks to Fed - And when the fed buys back treasury bonds, the dollars they pay to the entities they are buying it from is put back into circulation, therefore show text: Increases Money Supply increasing the money supply.
And treasury bonds are assets similar to blue chip stocks like Apple that pay their stockholders dividends over time; except by holding treasury bonds, the holder receives set interest payments over time.
So, when people or entities feel uncertain about markets and the economy at large, they typically choose to buy and hold treasury bonds because they are less risky than other assets. Nice. Next, let’s talk about what the repo market is and how it works.
The word “repo” is short for repurchase agreements. And the repo market is where the other entities that make up our traditional financial economy besides the fed, like banks, hedge funds, and financial institutions like insurance companies, pension funds, etc,
can lend assets like treasuries, mortgage-backed securities, or other types of assets to each other in exchange for cash for a fixed amount of time at a certain interest rate.
And the interest rate is simply the cost to borrow the money. While the fixed amount of time, or term of the loans can range from show animation of calendar with highlighting overnight then to two weeks then one month - overnight, two weeks, one month, or whatever they decide, but it’s usually a short term loan.
So out of all of the types of assets used as collateral in the repo market, the safest and preferred asset is, of course, treasuries. When hedge funds, financial institutions, or banks need cash for liquidity, show animation of treasury with arrows swapping with graphic of cash - they can swap treasuries they have, for cash from banks in the repo market.
And when the term of the loan expires, show animation of cash plus interest coming from bank - the financial institution pays the cash they borrowed back to the bank with interest. The interest rate charged is usually dictated by how much money is in circulation. The show text: More Money = Less Interest more money in circulation, the lower the interest rate, and vice versa. So the supply versus demand of cash sets the interest rates.
However, there are other factors that can cause interest rates to increase and decrease. For example, if there’s more demand for cash than the circulating supply of cash, interest rates can get too high. When this happens, show the graphic from above where treasuries go from banks to the Fed and cash from Fed goes to banks - the fed usually steps in and buys treasuries from banks in exchange for cash to put more cash into the ecosystem to lower interest rates.
Another factor that can cause interest rates to borrow cash to increase, is if the show graphic of bank with cracks or looking like it’s about to break, or maybe on unstable ground breaking in half - hedge fund or financial institution is not financially stable, possibly close to insolvency, and therefore a much riskier borrower.
So if there are a lot of high-risk entities that need cash in the repo market, they’re willing to pay higher interest rates for cash, show graphic of the text “interest” and arrow going up - which naturally causes interest rates to go up.
And yet another factor that can increase interest rates, is if there isn’t enough of preferred collateral, like treasuries, available in the market. So if an entity that needed cash was a high-risk borrower with no preferred collateral like treasuries to secure the loan, banks can refuse to lend them the money.
This high demand for cash, and low supply of preferred collateral also drives up the cost to borrow money. And when the supply of treasuries in the market is low, institutions will engage in what’s known as rehypothecation. Which is just a fancy word that basically means an entity letting another entity get a loan using their collateral.
For example, let’s say a hedge fund needs cash, but doesn’t have any treasuries to secure a loan themselves. Show animation of graphic of bank then a graphic of a phone connecting to another bank with a treasury. Then make the treasury duplicate or copy to the other bank - The hedge fund can call in a favor from one of their financial institution buddies that has treasuries and essentially borrow it from them to use as collateral for the loan.
When financial institutions let other people borrow their treasuries, the treasuries are deemed rehypothecated.
And as you can imagine, rehypothecated treasuries aren’t exactly a safe form of collateral because, at the end of the day, the banks lending the money don’t know who actually owns the treasury.
And they also don’t know how many times that treasury has been rehypothecated, because yes, Show animation of a treasury in the middle of the screen with multiple banks around it. Then show the copies of the treasury in the middle multiplying, greyed out and a copy moving to each bank - the same treasury can be hypothecated multiple times allowing multiple entities to essentially re-use that same exact treasury as collateral.
Awesome. Now that we have a good summary of how the fed controls the money supply by counterfeiting, I mean, creating money and treasury bonds for financial institutions to use to manipulate markets, I mean, do big, important financial stuff lay people like us couldn’t possibly understand or wrap our heads around,
Let’s talk about how and why interest rates in the repo market have gone negative and what that may mean about the current state of the global financial system.
Interest rates in the repo market have gone negative because there has been both an increase show text: increased demand for collateralin demand for collateral versus cash, show text: shortage of collateral and a supply shortage of preferred collateral, treasury bonds, in the repo market.
Since the fed show animation of money coming from the Fed and then bonds soaked into Fed and money continuing to come from Fed - has been both printing news dollars into the ecosystem and buying up all the treasury bonds from the repo market in exchange for cash, further increasing the amount of dollars in the ecosystem: show animation of money flooding into bank and blowing off roof or similar -banks and financial institutions are bursting at the seams with excess cash they do not want.
As a result, all these entities with excess cash are now saying to other entities, hey, we will pay you interest to borrow our cash, in exchange for treasury bonds. So instead of the borrower having to pay the lender interest on the cash loan, the lender is literally paying the borrower to take their money.
This is because the cash lender wants to pay the cash borrower interest to borrow their collateral. Strange right? So all the financial institutions would rather pay to borrow treasury securities than hold cash. They want the show animation of text: “collateral” with green check mark, and text “cash” with red X - collateral, not the cash.
Now, why is it so? Well, why do financial entities do anything ever, in order to make a profit. In this particular situation, the financial institutions were looking to short treasuries.
And the most clever way for entities to short treasuries was by borrowing other entities’ treasuries to sell on the treasury market, with the intention of buying those same treasuries back at a later date at a cheaper price. In this scenario, the entity profits from the difference of the interest they paid to the original holder of the treasury for the cash they gave them to borrow the treasury.
Wow, that doesn’t sound sketchy at all right? Borrowing a security you don’t own to sell to the treasury market, to wait for the price to decline, to then buy it back to profit from the short? Only at the wonderful racket that is the repo market.
So basically a bank can go to a financial entity and say hey, you want some money because I want your treasury. And since there’s so much money circulating right now in the US, they’re like nah, we’re good good on the cash front from stimmy checks and PPP, brah.
Then the banks like, look guys: We will pay you to take our money if you just give us your treasuries. Hence, the negative interest rate. So the entity is like, damn you’re going to pay us to take your money, sign me up.
The reason the bank wants treasuries, is because they are taking a short position on treasury bonds, under the belief that inflation is increasing, therefore the interest rates on the treasuries are increasing, and in turn, causing the price of treasuries to decrease.
So what does this mean for the domestic and global financial systems? Is this an indication that a global financial crisis or economic collapse is imminent?
Well as if this completely asinine process couldn’t get any weirder, leave it to the fed to take it to the next level by doing what they do best, or rather what they try and fail miserably at, which is manipulating the price of money by trying to keep interest rates down, while creating a massive treasury and cash supply imbalance. Lovely.
What the fed could’ve done is issued more treasuries into the market, which would’ve led to financial entities buying treasuries from the fed, in exchange for cash. And when this happens, all the cash paid to the fed is actually locked up in the fed’s account, therefore decreasing the supply of money in circulation.
But instead of locking up more money and getting it off the streets, the fed has been locking up treasuries and depriving the market of the collateral it needs to operate, in order to increase the already excess supply of money.
Look, I know this stuff is boring and hard to follow, but stick with me here. If financial entities are paying other entities to take their money so they can borrow treasuries, to sell to the market, and buy back at a lower price in the future, HOWEVER, the fed continues to buy treasuries, locking them up, and making a massive supply shortage of treasuries, what is that going to do to the value of those treasuries?
Well, if demand is high for treasuries and the supply is dwindling, those treasuries, the banks were banking on decreasing in value, are actually becoming more valuable due to short supply and high demand imbalance.
Nice. So then what happens?
Well, the banks shorting treasuries would be forced to start buying them back as quickly as possible, at any price, because they would start to lose money extremely quickly. Sound familiar? Of course, this is exactly what happened with the GameStop fiasco: a short squeeze.
And if you’d like to learn more about how the GameStop short squeeze happened, 4.5 - show thumbnail you can check out my video explaining what went down by clicking on the link above.
So if banks start scrambling to buy up all of the treasuries from the treasury market, what happens to the repo market? It basically has what caused this whole issue in the first place, a shortage of sufficient collateral.
Then what happens is more of the same we discussed earlier: more rehypothecation, where entities start borrowing each others’ collateral in order to stay liquid. And if 5 or 10 or 20 entities are using the same exact treasuries as collateral to stay liquid, what happens if one of them goes insolvent?
Yeah, it’s basically a game of musical chairs with, like, show animation - 1 chair per 20 people trying to sit in it when the music stops. And that’s just assuming banks with cash would be willing to lend to all of the entities using treasuries that have been lent out to god knows how many others.
If the banks considered the trade too risky, they would just choose not to lend to them, which would create a global liquidity problem from shortage of dollars, causing the price of the dollar to skyrocket, all on top of an already unstable financial system.
Scary stuff. Well, we’ve got some stories fresh off the press that may have pivoted us off of a more short term collision course, but probably not. Let’s check it out.
This week 5 - The Fed Drained $485 Billion Dollars in Liquidity from the Market via Reverse Repos, Undoing 4 Months of Quantitative Easing, Even as QE Continues, and Total Assets Near $8 Trillion
It’s a crazy situation the Fed backed into as a tsunami of liquidity goes haywire, the banking system strains under $4 trillion in reserves, and General Treasury Account gets drawn down.
We discussed repos and the repo market. But what are reverse repos?
Well, 6 - The Fed’s reverse repo program lets eligible firms, like banks and money-market mutual-funds, park large amounts of cash overnight at the Fed, at a time when short-term funding rates have fallen to next to nothing, and finding a home for cash has become harder.
So basically, financial entities are allowed to off-load cash to the fed in exchange for treasuries for a short period of time. This is done to ease the burden of having to hold onto cash that financial entities can’t really put anywhere.
Holding cash requires entities to have a certain amount of collateral backing it, and with a collateral shortage, the temporary breather the reverse repo program gives them has become extremely popular again. Let’s review further:
7 - Why demand for Fed’s reverse repo facility is surging again
“Either there is too much cash or not enough collateral,” said Scott Skyrm, executive vice president in fixed income and repo at Curvature Securities.
8 - Skyrm views high demand lately for the Fed’s reverse repo facility as a sign that the central bank’s roughly year-old $120 billion-a-month bond-buying program no longer works as intended by adding liquidity to financial markets, and should be scaled back.
“Right now, the more money you put in, you get it right back,” he said. “The market is saying ‘It’s time.’ There is the evidence that QE has gone too far.”
9 - “The thing is, the liquidity is being placed here as there is nowhere else for it to go to,” Garvey wrote of the Fed’s reverse repo program. “And it’s not really where you want to park cash, given that the rate paid to the cash lender is 0%.”
10 - Declining Treasury bill supply since February has contributed to the imbalance.
11 - “With more market rates threatening to go negative (either explicitly or through deposit fees), pouring money into the Reverse Repo Program facility at a zero rate is the least painful alternative,” said Lou Crandall, chief economist at Wrightson ICAP.
12 - The Fed could stop buying securities altogether and reduce its balance sheet, which would also drain liquidity from the market. But the Fed cannot do that because it said it would be slow and deliberate in announcing changes in its monetary policy, and that it might eventually talk about talking about tapering, so it can’t just suddenly do an about-face.
But this liquidity-haywire situation appears to be an emergency that needs to be addressed now, and so the Fed is addressing it through the backdoor via the overnight reverse repos.
13 - A BTIG Research team led by Julian Emanuel described the situation like a game of cat and mouse.
High demand for the Fed facility “underscores pressures on the short end of the yield curve as near-term rates probe negative territory after a year-plus of extraordinary accommodative policy,” the team wrote in a Sunday note.
But they also expect the issue to last “until investors are confident enough to shift to longer-duration bonds,” which isn’t expected to happen until markets get more clarity on the Fed’s plans to taper its bond purchases.
Yes, a flurry of disturbing information for sure. I’ll let the savage Sven Henrich summarize it nicely for us:
14 - Are nearly half a trillion in daily reverse repos signs of smooth market functioning or just a hint of a financial system grossly bloated with excess liquidity because a certain central bank doesn't have the moral courage to say enough is enough?
But are we even surprised? I mean we are talking about 15 - The most undemocratic institution in the country, unelected by the people with absolute power and no checks and balances & congressional oversight only on paper and not in practice.
Unchallenged by the media. Hiding under the mantle of independence. A monetary North Korea.
Awesome. So what does this mean for crypto? I’ll keep my prediction short and sweet. If or when we have a global financial crisis, the crypto market will fall, as well as the stock market. Significantly? Probably. When? I don’t know.
But once it happens, the only place for investor money to go will be crypto. I mean what else are you going to buy? More overvalued stocks? Certificates of gold that have likely been rehypothecated over and over again. Most “gold” investments are undercollateralized. If everyone demanded their physical gold, there’s not enough to go around.
Hm, what else? Over-priced houses? Rental properties that the government at any time could suspend rent payments towards? Guns? Bullets? Here’s the deal, everyone should do their own research. The way I see it, a lot of financially savvy money has been quietly pouring into crypto. Because they’re speculative investors? Or do they see the writing on the wall?
Bitcoin was born out of the 2008 financial crisis in order to withstand financial crises. And it still hasn’t gotten its chance to prove itself.
If and when a crisis occurs, I think we would see a significant dump in crypto, followed by an explosion in value, and sustained growth over time for decades to come. The timing of all of that? I don’t feel comfortable calling because as I said at the beginning of this video, it’s going to be largely predicated on the continued political and institutional manipulation of, essentially, the world at large at this point.
Either way, as the value of crypto increases or decreases in these crazy times, make sure you are transferring your crypto off of exchanges to hold safely in a cold storage hardware wallet.
You can scroll down to the description area below to access the correct and official sites of my recommended hardware wallets.
BC Vault is my personal favorite, another option is the Ledger nano backup pack. So Scroll down to check them out.
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Protecting your ability to generate income so you can buy more crypto is another important thing to consider. So if you’d like to learn more about the advanced technical concepts of blockchain and become a developer in the space, check out Ivan on Tech’s academy.
If you use the link below, you can access the academy at a discounted price, so scroll down, and check it out.
Well that was Last Week Crypto, with me Crypto Casey.
If you enjoyed the episode, please make sure to like this video and subscribe to my channel for more crypto content.
To check out the links to all of the articles we discussed, go to CryptoCasey.com/Last-Week-Crypto.
So what do you think about this whole reverse repo situation?
Are we getting closer to an actual economic collapse?
Or do you think the global financial system will balance itself out?
Let me know in the comments below.
Be safe out there.