Patience is Beautiful

(Any views expressed in the below are the personal views of the author and should not form the basis for making investment decisions, nor be construed as a recommendation or advice to engage in investment transactions.)

The weekend before I travelled to Miami for this year’s edition of the annual celebration of our Lord Satoshi (aka the Bitcoin Conference), I hung out in Tokyo. Most of my time was spent ambling around the metropolis eating and drinking the sumptuous creations of a wide range of talented humans. In particular, I drink a lot of coffee — I am an unabashed coffee snob, and Tokyo produces superior cups of black gold.

One morning, I decided to venture to a previously unexplored neighbourhood in search of a celebrated coffee roaster I had heard about. I arrived at the venue 30 minutes after it opened, and all the seats inside were already filled with patrons and a queue had formed. By my (apparently naive) estimation, the line looked pretty short, so I decided to stick around. After about 15 minutes, no additional patrons had been served and the shop was half empty. I thought to myself, “hmm, that’s strange…why hasn’t anyone from the line been let into the shop to order?”

Out walked what I assumed to be the manager, and she was the embodiment of the quintessential Japanese hipster. Her outfit was on point, complete with a baggy top and pants (it’s all about the drape), an oversized tweed vest, and a faux beret. She walked to the middle of the line, and in a soft, respectful, but firm tone, said, “I just want to inform you that the wait will be about 45 minutes. We hand make each cup of coffee one by one because we are committed to creating beautiful coffee.” The subtext was, “we are not in any way sorry that you will be waiting a long time outside because our coffee is the shit, and if you don’t like it, you can fuck right off.”

That was my cue to exit stage left, because I had a lunch appointment for some bomb-ass teppanyaki and couldn’t wait all day outside for a cup of coffee (regardless of how delicious it might be). However, I knew I was coming back to try this coffee. My patience paid off, and two days later, I showed up before opening time at their other Tokyo location. To my surprise, the same woman emerged from the store, and remarked, “I remember you from the other day — sorry the wait was so long.” I smiled and expressed my excitement to finally sample their product.

The coffee was sublime. I drank a Panamanian geisha varietal. The brew and roast was excellent. The floral notes sung in the cup, and the anaerobic processing method allowed the flavours to punch hard. My patience paid off, and my taste buds thanked me.

Patience is also required in the financial markets. Since the onset of this year’s US banking crisis, I and others have been banging on our proverbial drums and shouting to all who will listen that when it comes down to it, the US and global fiat banking systems will be bailed out by a fresh round of central bank-driven money printing (which should in turn drive up the price of risk assets). However, after the initial spike in Bitcoin and gold, these hard monetary assets have given back some of their gains.

With respect to Bitcoin, volatility and trading volumes across spot and derivatives have sagged. Some have begun to wonder why, if we are truly in the midst of a banking crisis, Bitcoin hasn’t continued rising. And in a similar vein, why the US Federal Reserve hasn’t started cutting rates, and why yield curve control hasn’t started in America.

My answer to those sceptics? Patience. Nothing goes up or down in a straight line — we zig and we zag. Remember “Kaiseki:” the destination is known, but not the path.

Money printing, yield curve control, bank failures, etc. will all come to pass, starting in America and eventually spreading to all major fiat monetary systems. The goal of this essay is to explore why I believe the fireworks and the real Bitcoin bull market will begin in the late third and early fourth quarter of this year. Between now and then, chill the fuck out. Take a vacation, and enjoy nature and the company of your friends and family. Because come this fall, you better be strapped into your trading spaceship, ready for liftoff.

As I have said many times, the Bitcoin price is a function of fiat liquidity and technology. Most of my essays this year have focused on global macro events that influence the fiat liquidity side of the equation. I hope that during the lull of the northern hemispheric summer, I can transition to writing about exciting things happening on the technological front of Bitcoin and crypto more broadly.

The goal of this essay is for readers to come away with a solid road map of how the fiat liquidity situation will evolve in the coming months. Once we are comfortable with how USD and fiat liquidity will expand into year end, we can focus completely on what technological aspects of the certain coins are most exciting. When you combine “money printer go brrr” with truly innovative technology, your returns will vastly outstrip the cost of energy. That is ultimately our ever present goal.

The Premise

The bureaucrats in charge of central banks and global monetary policy believe they can rule a market of over 8 billion humans. Their hubris is ever present in the way they talk about certainties based on economic theories developed in academia over the past few hundred years. But however much they would like to believe they have, these men and women have not solved the monetary version of the Three Body Problem.

When the “debt to productive output” equation gets out of whack, economic “laws” break down. This is similar to how water changes state at what would appear to be random temperatures. We can only know the behaviour of water through ex-post observations and experiments, but not by theorising in an ivory tower. Our monetary masters refuse to actually use empirical data to inform how they should adjust their policies, instead insisting that the theories taught by their esteemed professors are correct regardless of the objective results.

Throughout this essay I will delve into why, contrary to common monetary theory, due current debt to productive output conditions raising interest rates will cause the quantity of money and inflation to rise, not fall. It sets up a situation wherein regardless of which path the Fed chooses, be it to hike or cut rates, they will accelerate inflation and catalyse a general rush for the exits from the parasitic fiat monetary financial system.

As true believers of Lord Satoshi, we want to time our trading around this mass exodus as carefully as we can. I want to hang out in fiat earning a phat yield for as long as I can until it becomes necessary to dump my dollars and go all in on Bitcoin. Of course, I’m engaging in my own form of hubris by believing I’ll be able to divine the most opportune time to jump off the burning ship without catching fire myself. But what can I say? At the end of the day, we are all fallible humans — but we have to at least try to understand what the future might look like.

With that out of the way, let’s move on to some statements of (debatable) fact.

  • Every major fiat monetary regime has the same problems, regardless of where they sit on the capitalism to communism economic spectrum. That is, they all are highly indebted, have a declining working age population, and feature a banking system in which the assets of the banks are low-yielding government and corporate bonds/loans. A global rise in inflation renders the global fiat banking system functionally insolvent.
  • Due to its role as the largest global economy and issuer of the reserve currency, the US is experiencing those issues more acutely than anyone else, and is in the most dire situation.
  • Central banker groupthink is very real, because all senior officials and staffers of central banks studied at the same “elite” universities which teach versions of the same economic theories.
  • Therefore, whatever the Fed does, all other central bankers will eventually follow.

Keeping that in mind, I want to focus on the situation in Pax Americana. Let’s quickly run through the players in this tragedy.

The Fed exerts influence using its ability to print money and warehouse assets on its balance sheet.

The US Treasury exerts influence using its ability to borrow money by issuing debt to fund the federal government.

The US Banking System exerts influence using its ability to gather deposits and lend them out to create credit and fund businesses and the government. The solvency of the banking system is ultimately propped up by the Fed and the US Treasury with printed or taxpayer money.

The US Federal Government exerts influence using its ability to tax and spend on various government programs.

Private businesses and individuals exert influence through their decisions on where and how to save their money, as well as through their decision to borrow (or not borrow) money from the banking system.

Foreigners, and specifically other nation states, exert influence through the decisions they make regarding whether to purchase, hold, or sell US Treasury bonds.

By the end of this essay, I hope to distil each of these constituents’ major decisions down into a framework that shows how we’ve reached a point that leaves each actor with very little room to manoeuvre. This lack of flexibility allows us to forecast with high confidence how they each will respond to the current monetary issues of Pax Americana. And finally, because financial crises are still very attuned to the cycle of agricultural harvests, we can be fairly certain the market will wake up and realise shit is fucked right on cue in September or October of this year.

The Harvest

Bear with me, as I have just a bit more setup before we jump into the details. I am going to lay out a few axioms that I believe will occur by or intensify into autumn.

Inflation will reach a local low this summer and re-accelerate into the end of the year.

I am talking specifically about US Consumer Price Inflation (CPI). Due to the statistical phenomenon known as the base effect, the high month-on-month (MoM) inflation readings of 2022 will drop out to be replaced with lower MoM inflation readings of summer 2023. If June 2022 CPI MoM inflation was 1% and it is replaced by June 2023 CPI MoM inflation of 0.4%, then YoY CPI declines.

As the chart above shows, some of the highest MoM CPI prints of last year (which are accounted for in the current YoY data) occurred in May and June. For 2023, MoM CPI has averaged 0.4%, which means if we just take the average and replace all readings from May to December 2022 with 0.4%, we get the following chart:

The Fed doesn’t care about real inflation — they care about this make-believe thing called ”core inflation,” which strips out all the stuff people actually care about (like food and energy). The below chart conducts the same analysis for core CPI:

The takeaway is that the Fed’s 2% core inflation target ain’t happening in 2023. Which means, if you believe Powell’s and other Fed governors’ rhetoric, the Fed will continue to hike. This is important because it means the rates paid to money parked in the Reverse Repo (RRP) and Interest on Reserve Balances (IORB) facilities will continue rising. It will also contribute to higher US Treasury bill (<1 year maturity) rates.

Don’t get bogged down trying to work out why these inflation measures don’t correspond to how prices actually change for you or your family. This is not an exercise in intellectual honesty — rather, we just want to understand the metrics that influence how the Fed adjusts its policy rates.

The US Federal Government cannot reduce its deficit due to entitlement spending.

The baby boomers are the richest and most powerful members of the US electorate, and they also are getting older and sicker. That makes it political suicide for a politician to campaign on a platform of reducing boomers’ promised social security and medicare benefits.

For a country that has been at war for almost every year of its existence, it is also political suicide for a politician to campaign on a reduction of the defense budget.

Source: FFTT

HHS + SSA = Old age and medical benefits

Treasury = Interest paid on outstanding debt

Defence = War

Entitlement plus defence spending will only increase into the future. That means the USG’s fiscal deficit will continue rising. It is estimated that deficits of $1 to $2 trillion per year will become the norm in the next decade, and unfortunately there is zero political will on either side of the aisle to alter this trajectory.

Source: CBO

The end result is a consistent gargantuan flow of debt that the market must absorb.


As I have written about a few times this year, there are many reasons why foreigners have turned into net sellers of US Treasury debt (UST). Here are a few:

  • Property rights are dependent on whether you are a friend or foe of the ruling politicians of Pax Americana. We have already seen the rule of law take a backseat to the rule of national interests, with the US freezing Russian state assets held in the Western financial system due to the Ukraine war. Therefore, as a foreign holder of USTs, you cannot be sure you will be allowed to access your wealth when you need it.
  • More countries have China as their biggest trading partner than America. That means that, from a purely trade-driven perspective, it makes more sense to pay for goods in Chinese Yuan (CNY) rather than in USD. As such, more and more goods are being invoiced directly in CNY. That results in lower demand for dollars and USTs at the margin.
  • Over the past two decades, USTs have lost purchasing power in terms of energy. Gold has maintained its purchasing power in terms of energy. Therefore, in a world where energy is in shorter supply, it is better to save in gold vs. USTs at the margin.

TLT ETF (20-year+ US Treasuries) Divided by WTI Oil Spot Price (white)
Gold Divided by WTI Oil Price (yellow)

Long-term US Treasuries underperformed the price of oil by 50% on a total return basis. But, gold has outperformed the price of oil by 190% since 2002.

The net result of this is that foreign ownership of USTs is falling. Governments outside the US are not buying new issues and are also selling their stock of existing USTs.

TL;DR: if there is a large amount of debt to be sold, foreigners cannot be counted on to purchase it.

US Domestic Private Business and Individuals — The Private Sector

What we are most concerned about with this cohort is what they will do with their savings. Remember that during COVID, the US government (USG) handed out stimmies to err’body. The US provided more stimulus than any other country in order to fight the disastrous economic effects of lockdowns.

This stimulus was deposited into the US banking system, and ever since, the private sector has been spending its free money on whatever it pleases.

The US private sector was happy to keep their money in the bank when yields on deposits, money market funds, and short-term US Treasury bills were all basically 0%. As a result, deposits in the banking system ballooned. But when the Fed decided to fight inflation by raising interest rates at the fastest clip in its history, the US private sector suddenly had a choice:

Keep earning essentially 0% at the bank.


Pull out their mobile banking app and within minutes purchase a money market fund or US Treasury bill that yields up to 10x as much.

Given that it was so easy to move money out of low-to-no yielding bank accounts into higher yielding assets, hundreds of billions of dollars started fleeing the US banking system late last year?

Over $1 trillion has been removed from the US banking system since last year.

The big question going forward is, will this exodus continue? Will businesses and individuals continue to move money from 0% yielding bank accounts into money market funds yielding 5% or 6%?

Logic tells us the answer is an obvious and resounding “absolutely.” Why would they not, if all it takes is a few minutes on their smartphones to 10x their interest income? The US private sector will continue to pull money from the US banking system until the banks offer competitive rates that match at least the Fed funds rate.

The next question is, if the US Treasury is selling debt, what type of debt would the public like to buy (if any)? That’s an easy question to answer as well.

Everyone is feeling the effects of inflation, and therefore has a very high liquidity preference. Everyone wants access to their money immediately because they don’t know the future path of inflation, and given that inflation is already high, they want to buy things now before they get more expensive in the future. If the US Treasury offered you a 1-year bill at a yield of 5% or a 30-year bond at a yield of 3% because the yield curve is inverted, what would you prefer?

Ding ding ding — you want the 1-year bill . Not only do you get a higher yield, you get your money repaid faster, and you have 1-year inflation risk vs. 30-year inflation risk. The US private sector prefers short-term USTs. They will express this preference by purchasing money market funds and exchange traded funds (ETF) that can only hold short-term debt.

Note: an inverted yield curve means long-term yields less than short-term debt. Naturally, you would expect to receive more income to lend money for a longer period of time. But inverted yield curves are not natural and point to severe dysfunction in the economy.

The US Federal Government

I touched on this above, but indulge me as I expand on the same theme in a more colourful and illustrative manner.

Imagine there are two politicians.

Oprah Winfrey wants everyone to be happy and live their best lives. She campaigns on a platform of ensuring that everyone has food on the table, a car in the garage with a full gas tank, and the best possible medical care, all the way up until they expire. She also says she won’t raise taxes to pay for this. How will she pay for all these goodies? She’ll borrow money from the rest of the world to do it, and she believes it can be done because the US is the global reserve currency issuer.

Scrooge McDuck is a miser and hates debt. He will give little to no government benefits because he doesn’t want to raise taxes and doesn’t want to borrow money to pay for things the government cannot afford. If you have a job that allows you to afford a full fridge, a pick-up truck, and top notch medical care, that’s your business. But if you can’t afford those things, that’s your business as well. He doesn’t believe it’s the government’s job to provide them for you. He wants to preserve the value of the dollar and make sure there is no reason for investors to hold anything else.

This is a photo of US Treasury Secretary Andrew Mellon, aka Scrooge, who famously said during the great depression, “Liquidate labor, liquidate stocks, liquidate farmers, liquidate real estate. It will purge the rottenness out of the system. High costs of living and high living will come down. People will work harder, live a more moral life. Values will be adjusted, and enterprising people will pick up the wrecks from less competent people.” As you can imagine, that message was not well received.

Imagine you are in the late stages of an empire where income inequality has skyrocketed. In a “one human, one vote” democratic republic, where mathematically, the majority of the population is always below average in terms of income, who wins? Oprah wins every single time. Free shit paid for by someone else via the use of a money printer always wins.

The number one job of a politician is to get re-elected. Therefore, regardless of which political party they belong to, they will always prioritise spending money they don’t have in order to garner the support of the majority of the population.

Absent a serious rebuke from the long-term debt markets or hyperinflation, there is no reason not to run on a “free shit” platform. Which means that, moving forward, I don’t expect to see any material change in the spending habits of the US Federal Government. As it pertains to this analysis, trillions of dollars will continue being borrowed every year to pay for goodies.

The US Banking System

Simply put, the US banking system — and all other major banking systems — are fucked. I will quickly recap why.

Due to the COVID stimulus provided by governments globally, assets in the banking system ballooned. Banks followed the rules and lent these deposits to governments and businesses at very low rates. That worked for a while because banks paid 0% on deposits but earned 2% to 3% lending to others on a longer-term basis. But then, inflation showed up and all major central banks — the Fed being the most aggressive — raised short-term policy rates well above what government bonds, mortgages, business loans, etc. yielded in 2020 and 2021. Depositors could now earn vastly higher amounts of money buying money market funds that invested in the Fed’s RRP or in short-term USTs. Therefore, depositors started pulling money out of the banks to earn a better yield. The banks could not compete with the government because it would destroy their profitability — imagine a bank with a loan book that yields 3% but pays 5% on deposits. At some point, that bank will go bust. Therefore, bank stockholders started dumping shares in banks because they realised those banks mathematically cannot earn a profit. This has led to a self-fulfilling prophecy in which a number of banks’ solvency has been called into question due to their rapidly falling stock prices.

In my recent interview at Bitcoin Miami with Zoltan Pozar, I asked him what he thought of the US banking system. He replied that the system was ultimately sound and it was just a few bad apples. This is the same message trumped by various Fed governors and US Treasury Secretary Janet Yellen. I vehemently disagree.

The banking system will ultimately always be bailed out by the government. However, if systemic problems facing the banks are not addressed, they will be unable to fulfil one of their most crucial functions: channelling the savings of the nation to long-term government bonds.

Banks now face two choices:

Option 1: Sell assets (USTs, mortgages, car loans, commercial real estate loans, etc.) at a massive loss and then raise deposit rates to attract customers back to the bank.

This option recognises the implicit loss on the balance sheet, but guarantees the bank cannot be profitable on an ongoing basis. The yield curve is inverted, which means the bank will pay a high short-term interest rate on deposits without being able to lend those deposits out longer term at a higher rate.

US Treasury 10-year Yield Minus 2-year Yield

The banks cannot purchase long-term government bonds because it will lock in a loss — VERY IMPORTANT!

The only thing banks can buy is short-term government bonds or park their money with the Fed (IORB) and earn slightly more than they pay out as deposits. The banks will be lucky to generate 0.5% of Net Interest Margin (NIM) following this strategy.

Option 2: Do nothing, and when depositors flee, swap your assets with the Fed for freshly printed dollars.

This is essentially what the Bank Term Funding Program (BTFP) is. I talked about this in great detail in my essay “Kaiseki”. Forget about whether what the bank holds on its balance sheet is eligible collateral for the BTFP — the real problem is that the bank cannot grow its deposit base and then take those deposits and buy long-term government bonds.

The US Treasury

I know the media and markets are focused on when the US debt ceiling will be hit and whether the two political parties will find a compromise to raise it. Ignore this circus — the debt ceiling will be raised (as it always is, given the much bleaker alternative). And when it is, sometime this summer, the US Treasury has some work to do.

The US Treasury must issue trillions of dollars worth of debt to fund the government. The important thing to focus on is what the maturity profile of the debt sold is. Obviously it would be great if the US Treasury could sell trillions of dollars worth of 30-year bonds, because those bonds yield almost 2% less than <1-year maturing bills. But can the market handle that? Nope nope nope!

Source: TBAC

Maturity Profile of US Treasury Debt

Between now and the end of 2024, ~$9.3 trillion of debt must be rolled over. As you can see, the US Treasury has been unwilling or unable to issue the lion’s share of debt at the long-end, and has instead been funding at the short-end. Rut-roh! This is bad news bears because rates at the short end are higher than rates at the long end, which increases the interest expense.

Here we go.

Here is a table of the major potential buyers of US Treasury bills, notes, and bonds:

None of the major buyers want to or are able to purchase long-term USTs. Therefore, if the US Treasury tried to stuff the market with trillions of dollars worth of long-term debt, the market would demand a vastly higher yield. Imagine if the 30-year yield doubled from 3.5% to 7% — it would crater bond prices and mark the end of many financial institutions. That is because those financial institutions were encouraged by regulators to load up on long-term debt using almost infinite amounts of leverage. Y’all crypto folks know what that means: REKT!

US Treasury Actives Yield Curve

Janet Yellen is no fool. She and her advisers know it is impossible to issue the debt they need at the long end of the yield curve. Therefore, they will issue debt to where the demand is off the charts: the short end of the yield curve. Everyone wants to earn high short-term rates, which will probably be going even higher as inflation kicks back into gear later this year.

As the US Treasury sells $1 to $2 trillion of debt, yields will rise at the short end. This will further exacerbate the bank system problems, because depositors get a better deal lending to the government than to the bank. This in turn guarantees the banks cannot be profitable with negative NIM on newly issued loans, and therefore cannot support the government by buying long-term bonds. The circle of death is fast approaching.

The Fed

And now for the finale. Sir Powell has quite a mess on his hands. Every constituent is pulling his central bank in a different direction.

Cut Rates

The Fed controls/manipulates short-term interest rates by setting the rate on the RRP and IORB. Money market funds can earn a yield in the RRP, and banks can earn a yield in the IORB. Without these two facilities, the Fed is powerless to paint the tape where it wants.

The Fed could cut the interest rates of both facilities aggressively, which would immediately steepen the yield curve. The benefits would be:

  1. The banks become profitable again. They can compete with the rates offered by money market funds, rebuild their deposit base, and start lending long again to businesses and the government. The US banking crisis ends. The US economy goes gangbusters as err’body gets cheap credit again.
  2. The US Treasury can issue more debt with longer maturities because the yield curve is positively sloped. Short-end rates would fall but long-end rates would remain unchanged. This is desirable because it means the interest expense on the long-term debt is unchanged, but the attractiveness of that debt as an investment increases.

The downside is that inflation would accelerate. The price of money would fall, and the things the electorate cares about — like food and fuel — would continue rising in price faster than wages.

Raise Rates

If Powell wants to keep fighting inflation, he must continue to hike rates. For you economic wonks, using the Taylor rule, the US rates are still deeply negative.

Here are the negative consequences of continuing of raise rates:

  1. The private sector continues to prefer lending to the Fed via money market funds and the RPP vs. depositing money at the bank. US banks continue going bankrupt and getting bailed out due to a falling deposit base. The Fed’s balance sheet might not be warehousing the mess, but the Federal Deposit and Insurance Corporation (FDIC) is now chock-full of dogshit loans. Ultimately, this is still inflationary, as depositors get paid back in full with printed money, and they get to earn more and more interest income lending to the government rather than to the bank.
  2. The yield curve inversion continues, which removes the ability for the US Treasury to issue long-term debt in the size it needs.

I want to expand a bit more on the notion that raising rates is also inflationary. I subscribe to the point of view that the quantity of money is more important than the price of money. I am focused here on the quantity of USD injected into the global markets.

As rates go higher, there are three buckets in which global investors are receiving income in the form of printed USDs. The printed money comes either from the Fed or the US Treasury. The Fed prints money and hands it out as interest to those invested in the Reverse Repo facility or to banks who hold reserves with the Fed. Remember — if the Fed wishes to continue manipulating short-term rates, it must have these facilities.

The US Treasury pays out interest to debt holders in greater sums if it issues more debt and/or if interest rates on newly issued debt rises. Both of these things are happening.

Combined, the interest paid out by the Fed via the RRP and IORB and the interest paid on US Treasury debt is stimulative. But isn’t the Fed supposed to be reducing the quantity of money and credit via its quantitative tightening (QT) program? Yes, that’s correct — but now, let’s analyse what the net effect is and how it will evolve in the future.

Source: St. Louis Fed

As we can see, the effect of QT has been completely nullified by interest paid out via other means. The quantity of money is expanding even as the Fed shrinks its balance sheet and raises rates. But will this continue in the future, and if so, in what magnitude? Here’s my thinking:

  1. The private sector and US banks prefer parking money at the Fed, and therefore RRP and IORB balances will grow.
  2. If the Fed wants to raise rates, it must raise the rate it pays on money parked in the RRP and IORB.
  3. The US Treasury will soon need to finance $1 to $2 trillion deficits into the foreseeable future, and it must do so at higher and rising short-term rates. Given the maturity profile of the total US debt stock, we know that actual money interest expense can only mathematically rise.

Taking those three things together, we know that the net effect of US monetary policy is currently stimulative and the money printer is churning out more and more fiat toilet paper. And remember, this happens because the Fed is raising rates to fight inflation. But if raising interest rates is actually increasing the money supply, then it follows that raising interest rates actually increases inflation. MIND FUCKING BLOWN!

Of course, the Fed could increase the pace of QT to offset these effects, but that would require the Fed to at some point become an outright seller of USTs and MBS, on top of foreigners and the banking system. If the largest holder of debt is also selling (the Fed), UST market dysfunction will rise. This would spook investors and long-end yields would spike as everyone rushes to sell what they can before the Fed does the same. And then the jig is up, and we see what the emperor is workin’ wit. And we know it’s a teenie weenie.

Let’s Trade This

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Link to Cryptohayes Substack

The Denominator

(Any views expressed in the below are the personal views of the author and should not form the basis for making investment decisions, nor be construed as a recommendation or advice to engage in investment transactions.)

The economics of nightclubs and national banking systems have a lot in common.

Patronising a nightclub is a lot of fun. You get to listen to good music, hang out with your friends, and for some, find a mate. However, after all the fun is had, there is always a bill to pay — and sometimes it can be quite substantial. Absent an agreed upon set of rules on how the cost should be allocated, the conversation as to who pays and how much can get quite heated.

“I was only there for a little bit.”

“I only had one drink.”

“I didn’t bring any girls to the table.”

Your scrub friend (you know the one) will always use excuses to avoid being part of the denominator of people who must split the bill. Early on in my banking career, my tight group of friends (we call ourselves the Fam) had a chat one day at work to codify the “bottle rules.”

The bottle rules determined whether or not a member of the crew was a part of the denominator and thus had to pay an equal share of that night’s bill.

The rules were simple:

  1. Girls don’t pay.
  2. If you have one drink, you are in for the whole bottle.
  3. If you bring one girl to the table and she drinks, you are in for the whole bottle.
  4. If you bring a friend who is male, and he has one drink, he is in for the whole bottle and you pay his share.
  5. If you order champagne, you pay for that entirely by yourself. This rule is crucial. There is one member of the Fam whose ego always gets ahead of his willingness to pay on various occasions. One time a few years ago at 1 Oak in Tokyo, he got the maths wrong and thought a train of 6 bottles of Dom P could be had for the price of one. He ordered the train, felt like a baller, and then — after realising his maths error when presented with the bill — tried to charge the entire group for his folly. He got a stern rebuke from another friend and paid for it entirely on his own in the end.
  6. If you order a bottle at the end of the night right before the club closes, you pay for that entirely on your own. (The same champagne friend is frequently guilty of this infraction, too.)

And now to the more pressing issue of how banking systems allocate inevitable losses.

Nations love robust banking systems. A good banking system allows the savings of the citizens to be aggregated and lent out to the government and productive companies. In an ideal world, this lending creates economic growth.

However, banking systems get into trouble quite often because they are fractionally reserved — i.e., they lend out more than they have on deposit. Their willingness to lend out money they don’t have frequently lands them in situations where they are unable to fulfil all of their depositors’ withdrawal requests, particularly during times of stress. These situations usually arise after some combination of political pressure, profit motives, and/ or poor risk management cause the banks to suffer massive losses, typically stemming from poorly underwritten loans or loan losses driven by rising interest rates. A bank run ensues, and then the government has to decide who is responsible for paying the bill to drag its glorious banking system back into solvency.

Should some combination of depositors, shareholders, or bondholders bear the cost of bailing out the bank? Or, should the government print money to “save” the defunct bank and pass on the cost to the entire citizenry in the form of inflation?

The most well-run banking systems establish an agreed upon set of rules governing these types of situations before any crisis occurs, ensuring that everyone knows how a failed bank will be dealt with, eliminating any surprises. Because banking systems are believed by the financial and political elite to be so integral to a well-functioning nation state, it’s safe to assume that in almost every country, banks will always be bailed out. The real question becomes, which schmucks get included in the denominator responsible for paying to recapitalise the bank? Regardless of what division of costs has been agreed to prior to any bank failure, once a bank actually collapses, every stakeholder involved will always lobby the government to avoid being part of the denominator.

Bianco Research published a truly epic chart pack clearly illustrating the current and future disaster that is the US banking system. A few of their charts will be presented in this essay.

United States of America or United States of China

The US government is at a crossroads and has so far been indecisive about the kind of banking system it wants for Pax Americana. Does it want a decentralised system of small- to medium-sized banks who lend locally (i.e., the US banking system pre-2008)? Or does it want a centralised system of a few mega banks who primarily lend to the national champions, super-duper rich people, and Jeffrey Epstein (i.e., the Chinese banking system)?

Post the 2008 Global Financial Crisis, the pencil pushers in charge of banking regulations decided that they would create a two-tiered system. Eight banks were determined to be Too Big to Fail (TBTF) and given an unlimited government guarantee on their deposits.JP Morgan leads the pack, holding 16% of all US deposits. There is no risk in depositing to these mega banks. If a TBTF bank fucks up, the USG will print the money needed to make sure all depositors get their money back. Essentially, these 8 banks are state-owned enterprises for which the profits are privatised to shareholders, but the losses are socialised to the citizens. In return for this sweetheart deal, these eight banks were given a fuck-ton of new rules to follow. These mega banks then spent hundreds of millions of dollars on political campaign donations to help tweak those rules and achieve the most favourable set of restrictions possible.

Source: Open Secrets

Every other bank must weather the rough-and-tumble free market all on their own. All deposits are not guaranteed — and because of the risks involved, you would think that depositors should be clearly informed of exactly how these banks are lending out their money. Instead, depositors are left to decipher the banks’ purposely obtuse and misleading financial statements and arrive at their own conclusion regarding whether a given bank is well run.

All banks cater to different types of customers. The TBTF banks are geared towards servicing large corporations and super-rich individuals, and they are pros at securities lending and trading. TBTF banks are also conduits of the Federal Reserve (Fed) and US Treasury’s monetary policy, and they support the USG by buying lots of the country’s debt.

The non-TBTF banks, on the other hand, power the real engine of the US economy — that is, by providing loans to the small- to medium-sized businesses and loans to individuals of more modest means. They take the scraps the TBTF banks discard from the proverbial table, filling their loan books with commercial real estate, residential mortgages, car loans, and personal loans (just for example). Take a look at the next two charts that depict how integral a robust network of smaller non-TBTF banks are to the US economy.

While both cohorts of the US banking system are exposed to different types of credit risks via their respective loan books, they share the same interest rate risk. The interest rate risk is that if inflation rises and the Fed raises short term rates to fight it, the loans they underwrote at lower rates are worth less. That is just bond maths. (I discussed this phenomenon at length in my essay “Kaiseki”.)

When 3 banks failed within one week this March, the Fed and US Treasury hastily concocted a bailout scheme called The Bank Term Funding Program (BTFP). Under this plan, any bank that held US Treasury bonds (UST) or US Mortgage-Backed Securities (MBS) could give them to the Fed and receive 100% of their face value in newly printed USDs.

Given that the fiat-based fractional reserve banking system and the financial system of Pax Americana in general is a confidence game, the powers that be do not react kindly when the market calls bullshit on their antics. The financial markets rightly saw through the BTFP and recognised it as a thinly disguised way to print $4.4 trillion to “save” one portion of the US banking system. The market expressed its displeasure with this inflationary move by ramping the price of gold and Bitcoin. On the political front, various US elected officials did their best acting and cried foul at these banking bailouts. Con artists never like being called out, and the Fed & US Treasury realised that next time a bank(s) needed to get bailed out, it couldn’t be so obvious about what they were up to. That meant any tweaks made to the BTFP would need to be implemented surreptitiously. The tweak we are most interested in is related to the type of collateral that is eligible for the BTFP program.

From 11 March 2023 when the BTFP was announced, gold is up 5% (white) and Bitcoin is up 40% (yellow).

But first, it’s important that we understand what precipitated this tweak. The TBTF banks — as well as any bank that held a large percentage of its assets in UST or MBS securities — benefited from just the announcement of the BTFP. The market knew if and when these banks suffered deposit outflows, they could easily meet their cash needs by giving the eligible bonds to the Fed and getting back dollars. But the non-TBTF banks were not so lucky, because a large percentage of their assets were ineligible for BTFP funding.

In less than one financial quarter, the market saw through the BTFP and put stress on the non-TBTF banks. The market wondered, “who is going to pay the bill for the interest rate losses on their loan books if they can’t access the BTFP?” And that led them to ask themselves, “why would I own equity in a bank that can’t receive implicit or explicit support from the government?” That question is especially important as the recent First Republic bailout demonstrated that he “price” for the FDIC arranging a shotgun marriage between a failing non-TBTF bank and healthy TBTF bank is a complete wipeout of equity and bondholders. As a result, equity owners started dumping their stakes in the regional banks … a 99% loss is better than a 100% loss. Whoever sells first, sells best.

First Republic was the first post-BTFP casualty, and the way in which it was wound up gives us more clues as to who is in and who is out of favour with the USG. The politics of bank bailouts is toxic. Many plebes are pissed off that they lost their house, car, and/or small business in 2008, while the large banks got hundreds of billions of dollars-worth of support from the government and paid record bonuses. Therefore, politicians are loath to support optically obvious banking bailouts, especially since America is (in theory) a capitalist society where allowing companies to fail is supposed to be part of the system.

I’m sure US Treasury Secretary Janet Yellen got reamed out for the BTFP and was told that under no circumstances could the USG be seen bailing out additional failed banks. I imagine she was told the private market must find a solution for managing a non-TBTF bank failure — meaning that a tweak to the BTFP that would make any and all banking assets eligible for funding was off the table. A while back, US President Joe Biden told Jerome Powell — the Chairman of the Fed — that stopping inflation is his number one priority. Not wanting to go against the President’s wishes, the Fed could not lower interest rates enough to help stem the deposit outflow from these shaky banks while inflation was still at 5% (I will expand on this later in this essay). The two major financial arms of the government (Fed & US Treasury) could not alter their policies to effectively deal with this banking crisis for political reasons.

“I ran for president because I was tired of the so-called trickle-down economy. We now have a chance to build on a historic recovery with an economy that works for working families. The most important thing we can do now to transition from rapid recovery to stable, steady growth is to bring inflation down. That is why I have made tackling inflation my top economic priority.”

US President Joe Biden in a WSJ op-ed from May 2022

The Federal Deposit Insurance Corporation (FDIC), the US government body in charge of winding up failed banks, tried its best to bring together the TBTF banks to do their “duty” and purchase the loser banks. Unsurprisingly, these profit-motivated, government-backed enterprises wanted nothing to do with bailing out First Republic unless the government was willing to chip in even more. That is why, after many days and a stock price drop of 99%, the FDIC seized First Republic in order to sell its assets to meet depositor liabilities.

Note: A bank’s stock price is important for two reasons. First, a bank must have a minimum amount of equity capital to back its liabilities, aka skin in the game. If the stock price falls too far, then it will be in breach of these regulatory requirements. Second, a bank’s falling stock price prompts depositors to flee the bank for fear that where there’s smoke there’s fire.

In the 11th hour, just before markets opened on Monday 1 May 2023, the FDIC offered JPM, the largest TBTF bank, a sweetheart deal, and it agreed to purchase First Republic. The deal was so good that JPM CEO Jamie Dimon cooed on a shareholder call that the bank would recognise an immediate $2 billion profit. JPM, a bank with a government guarantee, refuses to buy a failed bank until the government gives it a deal so favourable that it makes $2 billion instantly. Where is Jamie’s patriotism?

Don’t let the numbers distract you from the important lesson of this bailout. The First Republic transaction illustrates the pre-conditions for getting nationalised via a purchase by a TBTF bank. Let’s walk through them.


Equity holders and bond holders get wiped out. A donut … A bagel … A goose egg. Capeesh?


If your bank has interest losses on its loan portfolio (which every single bank has), and these loans are ineligible for the BTFP, you must sell that stock IMMEDIATELY! You don’t want to get deaded by the FDIC. Short sellers are not responsible for the collapse in these dogshit bank stocks. It is long holders selling for fear of a 100% loss of capital if and when the FDIC steps in.


A TBTF bank with a government guarantee must purchase the failed bank by assuming its assets. The TBTF bank will only do this with additional government assistance provided by the FDIC.


In the First Republic situation, JPM got cheap loans from the FDIC, and the same agency bore 80% of any losses on the loan book. Essentially, it appears the government will only expand BTFP-eligible collateral if a TBTF bank buys a bankrupt bank first. This is clever, and most politicians and their constituents won’t realise that the USG expanded their support of the banking system without formally declaring it. Now the FDIC’s balance sheet will be bloated with potential losses from failed bank loan books and low interest loans to TBTF banks. Therefore, Powell, Yellen, and the Biden administration cannot be easily accused of printing money to bail out a bank.

The Critical Assumption

If you believe that, when push comes to shove, US policy makers will always do what it takes to save the banking system, then you must agree that all deposits in federally chartered banks will eventually be guaranteed. If you don’t agree, then you must believe that some bank depositors will suffer losses.

To assess which side is more likely to be true, look no further than the banks that have failed so far in 2023 and how they have been dealt with.

Note: Technically Silvergate was not seized by the FDIC as it declared bankruptcy before failing completely.

In all circumstances where the FDIC seized the bank, depositors were made whole. Thankfully Silvergate, even though it declared bankruptcy, was still able to make depositors whole as well. Therefore, even if you are in a non-TBTF bank your money is most likely safe. However, there is no guarantee that if the FDIC seizes the bank a TBTF bank will swoop in and make depositors whole; there is also no guarantee that if a bank declares bankruptcy it will have enough assets to fully cover all deposits. Therefore, it is in your best interest to move all your funds over the insured $250,000 limit to a TBTF bank who has a complete government deposit guarantee. This will inevitably drive large deposits from non-TBTF to TBTF banks and further exacerbate the issue of deposit flight.

The reason US Treasury Secretary Yellen cannot offer a blanket deposit guarantee to all banks is that it requires an act of the US Congress. And as I argued above, there is no appetite for more perceived banking bailouts by politicians.

Deposit Outflows

Non-TBTF banks will continue to lose deposits at an accelerating rate.

First, as I argued above, in order to be 100% sure your deposit is safe, you must move your money from a non-TBTF bank into a TBTF bank.

Second, all banks will lose deposits to money market funds, which deposit money with the Fed and/or invest in short-term US Treasury bills. Think about it — you can earn almost 5% in a money market fund, or 0.50% as a bank depositor (see the above chart). If you could move your money and almost 10x your interest income using your mobile phone within the time it takes to consume a few TikTok videos, why would you leave your money on deposit at a bank?

Even if you can’t be arsed to figure out what a money market fund is and want to just leave your money in the bank, there’s no reason to do it at a non-TBTF at this point. The TBTF banks can lose deposits and you don’t have to care, because at the end of the day, the USG explicitly guarantees you will always get your money back. Non-TBTF banks are just plain fucked, and deposit outflows will continue to drive failures.

If inflation, interest rates, and banking regulations remain as they are right now, there is no scenario where every single non-TBTF bank does not fail. There will be a 100% failure rate. Guaranteed!

Ok … maybe that’s a bit aggressive. The only banks that would survive are those that operate in a fully reserved model. That means they accept deposits, and immediately deposit those funds with the Fed on an overnight basis. This is a super safe way to do banking, but unfortunately the Fed no likey this type of banking. They have denied applications for banks wishing to employ this business model for unknown reasons.

The Denominator

If my prediction about the ultimate fate of all non-TBTF banks is correct, then how much larger can the US money supply get? That is the real question. With the BTFP, we know that the potential expansion is at least $4.4 trillion (i.e., the amount of UST and MBS on US banks’ balance sheets which can be exchanged for cash at any point).

We also now know that the preferred sleight of hand of the Fed, US Treasury, and banking regulators is to heavily insist that a TBTF bank assume the liabilities of a failed non-TBTF bank. The TBTF banks undertake this public service by receiving cheap capital and loss absorption paid for with government-printed and American taxpayer money. Therefore, the money supply will in essence be expanded by the total amount of loans of non-TBTF banks, which is $7.75 trillion.

Note for Ned Davis Research subscribers: I encourage you to look at the report ECON_51 to verify my $7.75 trillion number.

As a reminder, the reason why these loans must be backstopped is because deposits fled. As deposits flee, the bank must sell loans for much less than face value and realise a loss. The realisation of the loss means they fall below regulatory capital limits and, in the worst case, do not have enough cash left over to pay out depositors in full.

The only way all non-TBTF banks don’t go bankrupt is if one of the following things happens:

  1. The Fed cuts rates such that the yield of the reverse repo facility or three-month T-bills drops below the 2% to 3% range. The 2% to 3% range is an estimation of the blended yield of the banks’ loan portfolio. The Fed might cut rates either because inflation is falling, or they want to prevent further stress on the US banking system. Banks can then raise deposit rates to match or slightly exceed what money market funds can offer, and bank deposits will grow again.
  2. The BTFP eligible collateral is expanded to any loan on a US bank’s balance sheet.

Option 1 loosens financial conditions and risk assets like Bitcoin, gold, stocks, real estate, etc., all pump.

This is a decline in the price of money.

Option 2 enlarges the amount of money that will eventually be printed. And again, this is only supportive of risk assets that are outside of the banking system. That means that gold and Bitcoin pump, and stocks and property dump. Stocks drop because bank credit disappears and companies are unable to finance their operations. Property is outside of the financial system, but it is so expensive in nominal dollar terms that most buyers must finance purchases. If mortgage rates remain high, no one can afford the monthly payments, and prices fall.

This is an increase in the supply of money.

Either way, gold and Bitcoin are going up because either the supply of money increases, or the price of money decreases.

But what if the price of money continues to increase because inflation refuses to slacken and the Fed continues raising rates? Just last week, Sir Powell continued stressing that the Fed’s goal is to slay the inflationary beast, and he followed it up by raising rates by 0.25% in the midst of a banking crisis. In this case, non-TBTF banks will continue going bankrupt as the spread between money market funds and deposit rates grows which causes depositors to flee, and that results in bankruptcy eventually leading to their loans being backstopped by the government anyway. And as we know, the more loans the government guarantees, the more money must eventually be printed to cover losses.

The only way the money printer doesn’t go brrr is if the USG decides it will let the banking system actually fail — but I have full confidence that the US political elite would rather print money than right size the banking system.

Many readers might think to themselves that this banking issue is purely an American thing. And given that most readers are not citizens of Pax Americana, you may think this does not affect you. Wrong! Due to the USD’s reserve currency status, most nations import American monetary policy. More importantly, many non-US institutions such as sovereign wealth funds, central banks, and insurance companies own USD-denominated assets. Like it or not, the USD will continue to depreciate against hard assets like gold and Bitcoin, as well as useful commodities like oil and copper. You are in the denominator too, just like a red-blooded Jane Doe American schmuck.

Boom Boom Boom

If inflation stays high and the Fed continues raising rates — or even just keeps them where they are today — then more banks will fail, we’ll see more TBTF bailouts, and the government will continue to support the creation of larger and larger TBTF banks. This would expand the supply of money and gold, and Bitcoin would rally.

If inflation falls and the Fed cuts rates quickly, eventually, banks would stop failing. But, this would reduce the price of money, and gold and Bitcoin would rally.

Some may ask why I didn’t consider the outcome where the banks survive long enough for their low interest rate loans to mature, and be replaced by loans underwritten at a much higher yield. Depositors are not going to wait 12 to 24 months earning basically 0% at the bank vs. 5% in a money market fund. Tap tap, slide slide, and in less than 5 minutes your deposit base is gonzo, courtesy of your slick mobile banking app. There is just not enough time!

You just can’t lose owning gold and Bitcoin, unless you believe the political elite is willing to stomach a complete failure of the banking system. A true failure would mean that a large swath of chartered banks fold. This would stop any and all bank lending to businesses. Many businesses would fail, as they would be unable to finance their operations. New business creation would also decline in the absence of bank credit. House prices would plummet as mortgage rates spike. Stock prices would dump because many companies gorged on low-interest debt in 2020 and 2021, and when there is no longer affordable credit available to roll over their debt they would go bankrupt. Long-dated US Treasury bond yields would surge without the support of the commercial banking system buying bonds. If a politician reigned during a period in which these things happened, do you think they would get re-elected? No fucking chance! And therefore, while the various monetary authorities and banking regulators may talk a big game about no more bank bailouts, when the shit really hits the fan, they will dutifully press dat brrrr button.

Therefore, it’s Up Only! Just make sure you are not the last sucker in the Western financial system when the bill comes. Get your Bitcoin, and get out!

Exit Liquidity

(Any views expressed in the below are the personal views of the author and should not form the basis for making investment decisions, nor be construed as a recommendation or advice to engage in investment transactions.)

Repeat after me …

“I Will not be exit liquidity!”

Being someone’s exit liquidity means you’re one of those schmucks who is buying or holding when the smart or connected folks are selling. In the context of this essay, exit liquidity refers to the unfortunate plebes who have been — and continue to be — on the losing side of the economic arrangement that is the US dollar’s reserve currency status.

The debate over whether the USD can be replaced as the global reserve currency is a heated one. On the one hand, some vocal elites of Pax Americana are incredulous that any country could step up to the plate and hold the world economy on its shoulders (America, Fuck Yeah!). On the other hand, there are increasing signs that certain corridors of trade are de-dollarising, and actually have been for some time.

  1. LNG deals between France and China invoiced in CNY
  2. Brazil and China to trade with each other using no dollars
  3. BRICS explores creating new currency

Even the mighty French are tired of being America’s towel garçons and mademoiselles. French President Macron recently said that he believes his nation needs to reduce the “extraterritoriality of the US dollar.”

Reserve currency status comes with benefits, but it also foists certain costs upon the host nation. The primary benefit is clear — the host nation gets to print currency at will to pay for real goods. But that benefit is not distributed equally amongst the citizens of the empire. Though it has maintained its status as the wealthiest nation in the world, America’s levels of wealth inequality are currently among the worst in the developed world — and the situation continues to get worse and worse. The costs of being the reserve currency are felt acutely by the vast majority of the population that owns little to no financial assets. Below are a few distressing charts from Pew Research.

While even some former vampire squids are starting to acknowledge that the country’s role as the issuer of the global reserve currency is weakening the country overall, the most common retort to their concerns is, “well, who or what could possibly replace the dollar?” Many might erroneously suggest that China is itching to promote the CNY / Yuan / Renminbi as the dollar’s replacement, given that it’s the second largest economy globally. But, those who are sceptical that anyone besides the US can handle the gig will respond by trotting out some hard truths about the Chinese economy, including the fact that the country’s capital account is closed, and that the vast majority of trade is still priced in dollars — with no signs of slowing. “What can you buy with the Yuan?” those sceptics will ask.

This debate raises a few highly pertinent questions that deserve further exploration, including:

  • Is de-dollarisation actually underway, and to what extent?
  • Is the dollar’s role as the global reserve currency good for the majority of Americans at this particular time in history?
  • Does China actually want to be the issuer of the global reserve currency?
  • What currency or currencies will eventually replace the dollar, given that history has taught us that all empires come to an end eventually?

These questions are critical to predicting how financial policy around the globe might develop as the influence of Pax Americana continues its natural decline. You’ll be shocked to hear that I think crypto is a key part of the conversation, too — but more on that in a bit.

Forming a view on whether de-dollarisation is a thang is extremely important, as it should drive how you save your wealth. This is especially important if you are a citizen of the West. Even if your country issues its own form of fiat toilet paper, you are still an American vassal, courtesy of your flag’s military and economic alliances. Your capital is at risk of being expropriated as the American financial elites struggle to stay in power while their empire crumbles beneath them. Do you really want to fuck around and find out what a rabid dog will do when cornered? Are you going to let yourself become exit liquidity?

Maybe after reading this, you’ll think to yourself, “well, I’m actually a card-carrying member of the financial elite, so this doesn’t really apply to me. In fact, this arrangement will probably benefit me!” That might be the case in the short-term, but ask yourself this … would you want to be a noble in King Louis XVI’s court on the eve of the French Revolution? Does the political situation between the polarities of political power in America point to cohesion, or is there seething rage lurking just beneath the surface, ready to explode when handed the right match? Your meticulously coiffed head is probably feeling mighty heavy on those shoulders of yours, but don’t fret — I’m sure some righteous woke or proud boy warrior would happily remove it for you.

Before I get to the end game, though, it behoves us to understand the simple economics that underpin the ongoing discussions around de-dollarisation. Many people do not understand how the flows of capital and trade work, and thus are driven to the wrong conclusions. So bear with me, as I’m going to start by going deep on the fundamental economics that support my assertions. And if your TikTok-addled brain can’t focus for 30 minutes, I suggest you save yourself the trouble and just open up a new tab, Google “ChatGPT-4,” and ask our future AI overlords for a summary of this essay.

Mirror, Mirror on The Wall

A currency is said to be the global reserve currency when the majority of international trade is priced in said currency. To help us better understand the economic impacts of a global reserve currency, I am going to present a simplified global economy of two actors: the US (global reserve currency issuer and consumer of goods) and Asia (which is composed of China and Japan, who produce goods).

Europe, and specifically the UK, isn’t a part of the conversation because it destroyed itself over the course of two world wars (from 1914 to 1945). America picked up the pieces and quickly became the richest nation globally. It opened its markets and allowed countries outside of the Soviet Union’s sphere of influence to sell it stuff.

China and Japan (aka Asia) are lumped together because they both pursued the same mercantilist economic policies to achieve growth. Asia financially repressed savers so that heavy industry could get cheap capital to build manufacturing capabilities. Asia then undervalued its currencies vs. the USD and suppressed workers’ wages so that goods would be extremely cheap for Americans purchasing them with dollars. This strategy was easy for Asia to implement because, well — let’s just say that if you’re thinking about trying to start a workers’ union in China or Japan, I wouldn’t recommend the “fuck around and find out” approach. Following WW2, these policies made Asia so rich that it became the largest economy globally.

In this simple model, the US buys stuff from Asia in dollars. Asia uses those dollars to buy energy and raw materials from the rest of the world, so it can produce more stuff for the US. Asia now has a lot of excess dollars that it earned from selling stuff, and it can do two things with those dollars:

  • Option 1: Buy dollar-denominated assets.
  • Option 2: Sell dollars in exchange for local currencies and give some of the earnings back to workers in the form of higher wages.

Option 1 keeps Asia’s currencies undervalued from a purchasing power perspective and allows Asia to keep on making and selling cheap stuff. Option 2 is desirable for the workers in Asia, who would be able to consume more because they would have higher wages and/or could buy imported goods cheaper. But, Option 2 does not favour Asia’s large corporate industrialists, because if the prices of their goods approached American price levels — driven by increased labour costs and an appreciating exchange rate — then they would sell fewer goods.

The post-WW2 global economy would not be in its current shape (that is, with America running a trade and capital deficit vs. Asia) without the following being true:

1. America has an open capital account. That means anyone with dollars can buy assets inside America in any size they like. A foreigner can buy US-listed stocks, US-incorporated companies, US real estate, and US government debt. If this weren’t the case, Asia would have nowhere liquid enough to invest its large amount of dollar income. If Asia wasn’t allowed to invest its dollar income in the US, then Asia’s currencies would appreciate and wages would increase. That is just maths.

2. America has little to no tariffs on imported goods. No country practises truly free trade, but America has always made it a priority to offer as close to free trade as possible. Without little to no tariffs on Asian stuff, Asia would not have been able to sell things to Americans for cheaper than American companies could produce domestically.

As trade rose after WW2, Asia needed an increasing amount of dollars, irrespective of whether the domestic American economy required a larger money supply. The more stuff Asia sells, the more commodities it must buy (in USD). If America is unwilling to provide more dollars to the world through its banking system (e.g., via loans from its private sector banks), then the dollar skyrockets in value vs. all other currencies because there are not enough dollars around to facilitate the increased level of global trade. For those who are perennially short in dollars due to their USD borrowings, a supercharged dollar is the kiss of death.

This presents a very big recurring problem in American politics. Having the global reserve currency means that the Federal Reserve (Fed) and Treasury must print or provide dollars by whatever means necessary whenever the global economy demands them. However, increasing the amount of dollars globally can stoke the fires of inflation, which hurt voters domestically.

In whose interests do the domestically elected politicians typically act? The foreigners who need cheap and plentiful dollars, or the Joe-six packs who want a stronger dollar to repel the terrible effects of inflation? As much as the politicians want to help the average American, the health of the entire world’s economy — along with America’s desire to remain the global reserve currency issuer — typically take precedence. So, when asked, the dollars are almost always provided. And if not, a global financial crisis ensues.

To give two recent examples, consider the Mexican Peso Crisis of 1994 and the Asian Financial Crisis of 1998. In both circumstances, US banks that were flush with deposits — many of which were from foreigners with lots of dollar earnings — lent to foreign countries in order to earn more yield and fully deploy the insane amount of capital they had on deposit. The sheer volume of dollars that needed to find a home caused malinvestment abroad. But the music was playing, so err’body had to get up and two-step.

In both instances, the Fed started raising short-term rates because the US economy needed tighter monetary conditions domestically. The rise in rates caused the banks to slow down lending abroad. Many of these loans were of dubious quality, and without a continuous flow of cheap dollars from banks, the foreign borrowers became unable to service their debts. Trade faltered as companies who depended on this dollar funding started going bankrupt in Mexico and Asia, respectively. The banks had to recognise their bad loans, which put their solvency at risk.

The Fed and Treasury are now facing a hard decision. The domestic economy needed tighter money, but putting the American people first would also put US banks in harm’s way due to their international loan portfolios. Y’all already know what happens when financial policymakers face a choice between supporting the people or the banks, so you can guess the rest — the Fed and the Treasury eventually caved and lowered rates to bail out the US banking sector. Of course, there were some elected officials that hooted and hollered about how unfair it was to their constituents to bail out banks that gave bad loans to foreigners, but the American economic model necessitated this policy response.

American banks will always have a deposit base larger than the domestic lending opportunities because foreigners flood the banks with cash earned by selling stuff in dollars. Banks will always lend too aggressively and sacrifice tomorrow to boost earnings today. The Fed and Treasury will always bail out the banks because they must in order to prevent a financial crisis that makes the dollar more expensive and lowers its supply globally. When banks contract dollar lending en masse to repair their balance sheets, it removes dollar credit globally, which in turn pushes up the price of dollars and lowers their supply.

So, we just walked through the impact that the dollar’s role as the global reserve currency has on the American banking system. But what about American financial assets?

Asia doesn’t just deposit dollars with US banks. They also buy stocks, bonds, and property.

The wealthiest 10% of Americans own 90% of all stocks. The global reserve currency arrangement benefits them significantly. The Fed will never let the banking system go bust, which means it will always print money to fill holes bigger than Sam Bankman-Fried’s legal bills. This printed money causes financial asset prices to increase. The wealthy also benefit because foreigners provide constant buying pressure in the stock, bond, and property markets.

If the 10% benefits, what about the other 90% of Americans?

For-profit American companies must do everything they can to maximise revenue and minimise costs. For companies that make real stuff (as opposed to software), labour is one of their biggest costs. Sir Elon recently binned 75% of Twitter’s work force and the company’s software continued working. Imagine if General Motors fired a similar percentage of its staff. How many cars would make it off the factory floor?

But remember, this is America — so manufacturers have to find some way to keep juicing those margins. Wouldn’t it be great if American companies could relocate their factories outside of America to capitalise on cheap labour in Asia, which intentionally undervalues its currencies and suppresses the wages and negotiating power of its labour? And wouldn’t it be great if those companies could then produce all their products cheaper abroad, and then sell them back in America at a cheaper price with no import tariffs? Surprise, surprise — that’s exactly what happened. Corporate profit margins went up, and union membership declined in tandem with the decimation of the American manufacturing base.

Chart on the Effects of Globalisation

Global Trade and Services Volume (white)

S&P 500 Index (yellow)

Case Shiller US National Home Price Index (green)

Manufacturing Value Added as a % of US GDP (magenta)

As you can see from this chart, financial assets like stocks and property received a significant boost from globalisation. The more the world trades, the more dollars need to be recycled into the US. US labour did not receive the same benefits, though, as evidenced by the lone falling purple line, which represents the share of manufacturing value added as a % of US GDP. Basically, if you’re an American, you’re much better off learning financial engineering than how to engineer the actual making of goods.

This historical chart from NDR clearly shows that US corporate profit margins are at the highest they have been since the 1950’s. However, in the 1950’s, the US was the world’s workshop (since everyone else was destitute after the ravages of WW2). In 2023, China occupies that role — and yet US companies are still enjoying profit margins that are similar to those experienced during the height of the US’ manufacturing prowess.

Corporate executives are rewarding themselves with generous stock options packages. These chieftains are also rewarding shareholders (which includes themselves) with stock buybacks and dividends, all the while decreasing CAPEX. This has resulted in CEOs making 670x more than the average worker, on average. Take a gander at the below charts for a fuller understanding of the pay distortion of American firms.

The good manufacturing jobs vanished, but hey — now you can drive an Uber, so no harm, no foul, right?! I’m being a bit flippant, but you get the point.

This outcome is guaranteed to continue — and likely worsen — so long as America continues to covet its role as the issuer of the global reserve currency. In order to maintain its seat on the currency throne, America must always treat capital better than labour. It must allow Asia to invest its dollars in financial assets. Capital invested in the stock market demands a return. And capital will demand that executives continue to raise profit margins by reducing costs. Reducing costs necessitates replacing expensive domestic labour with cheap foreign labour. If America does not treat capital this way, then there is no incentive for Asia to sell goods in dollars (since it wouldn’t be able to buy or invest in anything with those dollars).

If America resorted to pro-manufacturing mercantilist policies, then America / Asia trade would need to be conducted in a neutral reserve currency. And by neutral, I mean a currency that isn’t issued solely by one country. Gold is an example of a neutral reserve currency.

The current trade arrangement has benefited the financial elite who run America, but it has also been a boon to the general populations of Asia, who have been rebuilding their countries after a devastating global conflict. Which brings us to the next important question — is there any reason Asia would want to change this relationship?


In some respects, China and Japan have very similar cultures and economies. They are collectivist — i.e., the wellbeing of the community is considered more important than the individual’s. The stated goal of both Chairman Mao and the post-WW2 Liberal Democratic Party (LDP) that ran Japan was to rebuild their respective countries. The message to the plebes of both nations was essentially, “bust your ass, and we can get wealthy together as a country.” That is a gross oversimplification, but the end result was that these two countries became the 2nd and 3rd largest global economies in under a century.

These countries got rich, and the average Zhou / Watanabe enjoyed a much better standard of living than pre-WW2. Of course, labour in general did not receive the full benefit of the countries’ rising overall productivity, but again, the goal was never for the individual to flourish at the expense of the group.

So, as Asia looks at how far its current economic arrangement has gotten them, and then looks at the US’s precarious current position, they have to be asking themselves, “is being the reserve currency issuer even something we should be striving for?”

Does Asia want to have free trade?

No. Asia wants to raise the standard of living of its locals by selling stuff to rich Americans. It doesn’t want money flowing out of the region to purchase imports. The whole reason Asia got rich is that it restricted foreigners from selling things at an attractive price to locals. On paper, Asia is a member of the World Trade Organisation and is committed to free trade. In practice, there are a variety of ways in which Asia constrains the ability for foreign products to compete domestically on an equal playing field. America is perfectly happy to turn a blind eye to this, because the financial elites that control the country are the same cohort that own the companies that benefit from cheap goods and labour from abroad.

Is Asia for sale?

China’s capital account is closed. Foreigners are allowed to invest in a very limited subset of Chinese assets. There are specific quotas for the level of foreign ownership in the stock and bond market. Majority foreign ownership of most companies is not allowed. Even if you had a bunch of CNH (offshore Yuan or CNY), you couldn’t buy anything with it in size like you can in America.

Japan’s capital account is open — or at least, that’s what they claim. Japan has very polite ways of discouraging foreign ownership. Companies place a bigger emphasis on social stability — i.e., providing jobs for more people than they need — over turning a profit. There is also a high degree of cross-company ownership, which restricts the ability of minority investors to influence corporate direction. As a result, returns on Japanese equities are much lower than in the US.

As readers know, I love skiing in Japan. A foreign property owner there told me that during COVID, while the foreigners were away due to travel restrictions to enter Japan, one town passed a policy lowering the building density allowed on undeveloped land. This lower density regulation makes it practically impossible to build a hotel or large apartment block. This primarily impacts foreigners, who bought land in hopes of developing hotels and selling high-end condos. The locals will be perfectly happy if no additional visitors come and ruin their bucolic ski fields. There are more than enough hotel beds for the domestic Japanese visitor. Capital wants in, but society says no.

Bubble Gum

The US, China, and Japan are all grossly indebted. If you count the present value of future mandatory entitlements (US Social Security and Medicare), all three nations sport debt-to-GDP ratios of over 200%. The difference between the US and Asia is that a large part of US debt is owned by foreigners, whereas Asia is largely indebted to itself. This does not alter the likelihood that the debt will be repaid, but it does influence the speed at which the reckoning occurs.

When debt must be repaid quickly, a financial crisis ensues. If the debt is primarily concentrated at the sovereign level, this accelerated repayment of debt leads to outright default and regime change. You can look at the history of Argentina to better understand how this tends to play out politically.

China and Japan know they are overleveraged. However, because capital cannot come and go freely, the authorities have a lot of latitude in determining who bears the losses and how quickly those losses are realised. Japan experienced the severe bursting of a property and stock market bubble in 1989. The policy response was to financially repress savers using quantitative easing and yield curve control, and that remains Japan’s policy to this day. Its banking system and corporate sector has deleveraged over the past 30 years. There has been little to no growth over that time period, but there has been no social upheaval, either, because the costs of the bailout are being amortised over a longer period of time.

China’s property bubble has kind of burst. Real Chinese growth is likely between 0% to 2%, not the advertised 6% to 8%. The communist party is now undergoing the painful political process of assigning who bears the losses for a gargantuan amount of malinvestment and its associated debt. But, China is not going to have a financial crisis so severe that it shakes the people’s faith in the party and causes them to seek the overthrow of Xi Jinping. That’s because China will do the same as Japan and subject the population to decades of little to no growth and financial repression. They can do this because there is low foreign ownership of their debt, and capital cannot come and go freely from China.

Even after 30 years, Japan is still mired in debt. China tried to tame its property market, but the financial stress brought on by that policy proved too great to bear, forcing them to revert to their original plan of “extend and pretend.” Given the current state of both countries, Asia will not open its capital accounts and allow foreign hot money to come and go, since it would only serve to further destabilise China and Japan’s financial systems. Take note — trapped Asian capital is the exit liquidity that pays the price for over indebtedness (since it experiences financial repression and little to no growth).

A note about financial repression: I define financial repression as the inability to earn a rate on savings via government bonds that meets or exceeds the rate of nominal GDP growth. For example, if government bonds yield 3% but the economy is growing at 5% then savers are financially repressed to the tune of 2%. The citizens lose income that the government gains. And these gains are used to inflate away government debt.


I confidently assert that Asia does not want to be the issuer of the global reserve currency. Asia is unwilling to accept the necessary pillars of a global reserve currency:

1. Asia does not want to allow foreigners to own any assets they wish in any size they like.

2. Asia does not want to disenfranchise labour to a significant extent vs. capital.

3. Asia wants to deleverage on their own time scale, which means foreigners cannot be allowed to own a large amount of government debt or other financial assets like in the US, nor will foreign capital be allowed to come and go as quickly as it pleases.

But just because Asia is unwilling to enact the policies needed for it to become the issuer of the global reserve currency, doesn’t necessarily mean that Asia wants to keep accumulating and trading dollars.

Regime Change

De-dollarisation is getting a lot of reps in the current conversation around the future of the global economic arrangement. However, the concept of de-dollarisation is not some new phenomenon. I have a couple of charts from Joe Kalish, the chief global macro strategist for Ned Davis Research, to illustrate my point.

Remember my simple global economic model: Asia earns dollars by selling stuff to America. Those dollars must be reinvested in a dollar-valued asset. US Treasuries are the largest and most liquid asset that Asia can invest in.

2008 was the apex of dollar hegemony. Right on schedule, the American banking sector spawned yet another global financial crisis. The response, as always, was for the Fed to print money to save the US dollar banking system. Holders of US Treasuries don’t like being shat on repeatedly. The amount of money printed in the ensuing decade was so egregious that holders of Treasury bonds started dumping en masse.

What did the producer countries start buying instead? Gold. This is an extremely important concept to understand, as it gives us a big clue as to what asset is most likely to dethrone the dollar as the future currency for settling trade and investment flows between countries.

Gold as a percentage of emerging market (EM) central bank holdings bottomed in 2008 — i.e., at the same time the dollar was at its mightiest. Following the financial crisis, the global South decided it had had enough of being exit liquidity for Pax Americana and started saving in gold rather than treasuries.

Together, these two charts clearly suggest that de-dollarisation began in 2008, not in 2023. Huh — now that I think about it, Lord Satoshi also published the Bitcoin whitepaper in 2008… what a coinkydink.

Understanding the top-level economic movements of the last 15 years allows us to understand why and how China and Japan changed their behaviour. When your entire economic model is predicated on selling stuff to — and investing the proceeds in — America, you lose financial independence. Like it or not, the People’s Bank of China (PBOC) and Bank of Japan (BOJ) import the monetary policy of the Fed. That may seem bad enough on its own, but trillions of dollars of Asia’s wealth also depend on the good graces of American politicians. As Russia recently found out, rule of law and property rights are not ironclad.

I will focus this next part of my analysis on China, because Japan is a dutiful ally of the US. Just as one example, the US recently told Japan to increase their defence spending, and they obliged. Japan also hosts a large US military presence (even if the general population wishes the American GI’s would get the fuck out). As a result of this alliance, the BOJ and Ministry of Finance typically do what they are told when the Fed and/or US Treasury make strong suggestions about Japan’s monetary policy.

China, on the other hand, is in a bind. China still earns hundreds of billions of dollars per year exporting stuff to the US (and the world in general). China also holds trillions of dollars’ worth of US Treasuries and other dollar-denominated financial assets. Even though China owns a significant chunk of America, she is still listed as a strategic competitor of Pax Americana. But, China can’t just ditch the dollar, because China doesn’t want a bunch of foreigners flush with CNY to destabilise its financial system. Nor can it just market sell its treasuries, as it would get a terrible price for them.

As a result, China must work through a multi-step process to safely de-dollarise — not to replace the USD with the CNY as the global currency, but to simply lower its economic reliance on the US. The process goes something like this…

The first step is for China to start paying its major trading partners in CNY. As Saudi Arabia’s largest customer of oil, it makes sense for China to pay in CNY — and the same is true for all of its purchases from large energy exporters. If the energy input to the Chinese economy is priced in CNY, it requires China to “save” fewer dollars, which it previously used to buy energy. China has already begun to implement this step.

From there, the energy exporters can spend their CNY on Chinese manufactured goods. After almost 50 years of modernisation, China is the workshop of the world, and it produces just about everything a country might need.

If there is a large enough imbalance in trade between China and its trading partners, the difference can be settled in gold. China has a very liquid physical gold/CNY market located in Shanghai. If you don’t want to hold CNY, you can purchase gold futures contracts for physical delivery. This is super important because China allows the gold market to soak up any trade imbalances. If this gold link were absent, China would have to permit greater ownership of CNY denominated stocks and bonds. I explained earlier why China does not want to allow foreigners to own Chinese financial assets in size.

To further incentivise its largest trade partners to invoice in CNY when trading with China or Chinese companies, the PBOC will begin to aggressively roll out the e-RMB, a central bank digital currency (CDBC) that it has been testing since 2020. The e-RMB will allow instant, free, and zero-risk payments across the global South, which will replace the USD as the “hard” currency in places like Africa. Why fuck around with the intrusive banking system of your former colonial oppressors and slavers, when you can use a currency sponsored by a nation that just wants to trade and not get involved in your politics?

The goal of the e-RMB is to replace the USD in trade with China’s largest non-aligned trading partners. China doesn’t need or want to convince staunch US allies to drop their use of the dollar. China will still trade in dollars, but the size of China’s dollar earnings abroad will fall dramatically. With fewer dollars to invest, China can reduce the need to engage with the Western financial system. As China’s treasury holdings mature over time, China can sell these dollars and acquire gold. A recent disclosure points to an already steady rise in the official gold holdings of China.

Political Risk

One of the reasons investors previously favoured “developed markets” — and especially the US — was the absence of political risk. Political risk is the risk that when power shifts from one ruling party to another, the incoming party jails the opposition, and/or changes rules and regulations enacted by the previous regime just because they are of a different party. As an investor in countries with volatile politics, you can’t focus on the merits of one asset vs. another when your attention is fully centred on political power dynamics. Rather than engage in this risky exercise, investors instead chose to place their capital in an environment with a stable political arrangement. Previously, that was the US.

Power has seamlessly transferred between Democrats and Republicans since the end of the American Civil War in 1865. American presidents are no less crooked than any other heads of state — but for the sake of the system, the elites have managed to pass the baton between themselves without much in the way of sour grapes. Former President Richard Nixon was impeached for breaking laws while in office, and his replacement President Gerald Ford pardoned him.

For many years, capital has had nothing to worry about with regards to American politics. That has changed. Former President Trump was indicted by a court in New York City for a variety of alleged crimes. Trump might be a born-and-bred New Yorker, but the city has no love for him. Whether or not there is merit to his charges isn’t important. What’s important is that half the country voted for him, and the other half did not. A political flashpoint has been created that will be extremely divisive. Regardless of whether Trump wins or loses, half the country will be upset and believe the system is corrupt to its core.

2024 is an election year, and as you know, the number one job of any politician is to get re-elected. If you thought Trump owned the media airwaves before, then this public trial is only going to cement him further as a permanent fixture in the 24-hour news cycle for $free.99. News about this trial is everywhere. It doesn’t matter where you are in the world — the mass market news media are talking about this story. Politics is always about name recognition, so if Trump decides to run for president, it’s nearly a guarantee he will be the Republican party nominee.

President Biden’s house is made of glass as well. Allegations about shady dealings of his spawn Hunter Biden might lead one of Trump’s acolytes to indict Hunter for something. It doesn’t really matter for what — the narrative is that Hunter is crooked and his daddy is protecting him. Following such a move, each side would have the other’s king in check.

Again, the question (at least for those looking to trade on the future of American politics) isn’t whether Trump or Hunter is guilty or innocent. The question is, will the American public sit idly by and watch their hero be impaled by their political enemy? Will the 90% of America that has watched their good jobs go to Asia and their cost of living skyrocket be docile in the face of yet another affront? Or could this political instability be the match that ignites them to start asking the hard questions about why the wealth of Pax Americana hasn’t flowed to their household? Keep in mind that this is a relative discussion. It is not about whether Americans are richer on average than a family in Sub-Saharan Africa. It is a question about how a family in Flint, Michigan bathing in toxic water feels vs. a family in Manhattan that shops at Whole Foods.

Are the leaders of the Democratic and Republican parties concentrating on protecting their respective Lords, or investors’ capital?

As a steward of your capital, you must ask yourself — “do I want to continue to hold assets in a regime with these political and financial issues? Or would I rather ride it out in the (relative) safety of gold and or crypto?”

The Financial Balkans

The future will feature various currency blocs, but no global reserve currency hegemon. Trade with the West will continue in dollars, trade with the rest will be in CNY, gold, rupees, etc. When the blocs have imbalances between them, they will settle in a neutral reserve currency. Historically, that has been gold, and I don’t believe that will change. Gold is a great global trading currency if you can transport bulky, heavy items. Governments are good at these kinds of logistics — it’s a bit more difficult for the average person to lug their gold savings around.

As the global financial system balkanises, there will be less demand for US financial assets. Mohamed ain’t buyin’ no 57th street penthouse in NYC when he just saw how Yevgeny got his assets stolen for sporting the same passport as Putin, the “devil’ incarnate. The global South, which used to produce stuff to sell to the world in exchange for fiat toilet paper dollars, will begin accepting other currencies instead. Without the foreign demand for stocks and bonds at the margin, prices will fall. The biggest impact will be that, without a new bout of money printing, US bond yields will need to rise (remember: as bond prices fall, yields rise).

The West cannot allow general capital flight from its markets to places like crypto or foreign stock and bond markets. They need you, the reader, as exit liquidity. The colossal debts accumulated since WW2 must be paid, and it’s time for your capital to be eviscerated by inflation. A capital flight would also definitely spell the end for the USD’s role as the global reserve currency.

As I mentioned in Kaiseki, the West cannot easily enact draconian capital controls because an open capital account is a prerequisite for the type of capitalism it practises. Even so, if the West starts to sense that a mass exodus of capital is on the horizon, it will almost certainly make it more annoying and difficult to pull money out of the system. If you believe my thesis, then you should start to see many of the world powers’ recent financial policy changes in a different light.

The West is making it harder to buy crypto and store it in a private wallet. You can read about Operation Choke Point 2.0 and the Wall Street Journal to get a better understanding of this dynamic. President Biden’s administration keeps hinting that they may try to block US investors from investing in various sectors of China. Expect other such restrictions on investing abroad so that capital can stay at home and get disembowelled by persistently high inflation created by aggressive money printing.

Since 1971, investing in dollar assets has become such a no-brainer trade that many investors have forgotten how to actually do financial analysis. Moving forward, gold and crypto will be in focus. They are not tied to a particular country. They cannot be debased at will by a central bank desperate to prop up their financial system with printed fiat money. And finally, as countries start looking out for their own best interests rather than serving as slaves to the Western financial system, central banks of the global South will diversify how they save their international trade income. The first choice will be to increase gold allocations, which is already underway. And as Bitcoin continues to prove it is the hardest money ever created, I expect that more and more countries will at least start to consider whether it is a suitable savings vehicle alongside gold.

Do not let the financial media present this as an either/or decision between the dollar and the yuan. Do not let the lap dogs of the empire convince you that due to certain “deficiencies” in the Chinese economy, there is no currency ready to dethrone the mighty dollar. They are playing at misdirection — in the coming years, the world will conduct trade in a multitude of currencies, and then save when needed in gold, and maybe sometime in the near future, Bitcoin.

Shapella’s Show

(Any views expressed in the below are the personal views of the author and should not form the basis for making investment decisions, nor be construed as a recommendation or advice to engage in investment transactions.)

As y’all know, I don’t fuck for free. While I love disseminating knowledge about macro and crypto for free on this blog, I gotta eat too. Bubbly water in the clerb ain’t cheap. In December of last year, I launched my crypto family office, Maelstrom. I hired BitMEX’s former head of corporate development, Akshat Vaidya, to run around the world looking for worthy crypto projects to invest in. Our goal is to invest in early stage projects that will deliver excess returns over just holding Bitcoin and Ether.

Moving forward, every once in a while, Akshat will grace readers with a thinkpiece on a crypto vertical that he is very excited about. Obviously, we are shilling our bags, but we’re also trying to educate the market on why the problems these projects are trying to solve are important to the goal of furthering decentralisation. Ultimately, we want to help power the teams that will completely destroy — *ahem* I mean, offer an alternative — to the parasitic, rancid TradFi financial system.

The below think piece speaks about the overall movement to decentralise validators of the Ethereum network. This space is super exciting, and I expressed a bullish view on the Ethereum Merge via increasing the percentage of Ether in my portfolio and purchasing LIDO (the governance token of Lido Finance). In the back of my mind, though, I always worried that Lido was not sufficiently decentralised, and that once the market started caring about this, the coin would tank. After Akshat invested in Obol and and explained his rationale for doing so, I knew it was time to dump my Lido position, which I did recently. Read on to understand our thought process in more detail.

Shapella’s Show: ETH Staking’s Coming Shake-Up

By: Akshat Vaidya, Head of Investments @ Maelstorm

“Not your keys, not your crypto” has been the industry’s motto for as long as I’ve been in this space. But time and time again, traders, customers, and even founders and name-brand fund managers continue to fuck this up. Far too many keep repeating the same mistake again and again, cycle after cycle, of giving up control of their private keys — resulting in billions of dollars’ worth of lost or stolen funds (from Mt. Gox to FTX, and everything in between).

Prior to DeFi Summer (circa 2020), clients typically lost funds on poorly managed or outright fraudulent CeFi exchanges. But in 2021–2022, this issue reared its head in a new way — with a number of so-called “decentralized” (but still ultimately custodial) cross-chain bridges compromised, to the tune of $2.5B (e.g., the $586MM BNB Bridge exploit). Once again, individuals that voluntarily gave third-parties access to their private keys got rekt, and were reminded once more that “code is law.”

Giving up access to our private keys — to either centralized or “decentralized” entities — is not a compromise any of us should have to make, given infrastructure capabilities inherent to blockchains. Yet here we are in 2023, playing with fire all over again in our collective thirst for easy ETH staking rewards.

Post-DeFi Summer, we have come to expect yield on our crypto — particularly on our ETH, and even more so now given recent Fed rate hikes. However, since setting up a validator is still hard [if you’re working on elegant solutions to help bring down technical barriers to solo-staking, ping me], customers have found themselves forced to make a false choice between using staking services that are dangerously custodial in nature, and simply letting their ETH sit idle. Worryingly, too many have chosen the former, entrusting their private keys to the likes of 1) fully centralized services like Coinbase, Kraken and Binance; and 2) proto-decentralized ETH liquid staking derivative (“LSD”) protocols like Lido Finance. To be fair, these custodial projects have served as important steppingstones towards the trustless, decentralized future of ETH staking. However, they also prioritized speed-to-market at the expense of exposing stakers to potentially substantial operator, regulatory and security counterparty risks.

Fortunately, that false choice ends starting now. The Shanghai-Cappella (“Shapella”) upgrade, set to take hold in the next 24 hours, will allow stakers to withdraw staked ETH for the first time (at a rate of 0.4% of total staked ETH per day). 18 million+ ETH (~15% of all ETH in circulation, worth tens of billions of dollars) is about to be unshackled from the previously mentioned risk-prone, custodial staking business models of the past. These incumbents have the most to lose in terms of their existing market share of staked ETH, and possibly the least to gain from the tens of millions of forthcoming ETH about to be staked over the coming years. And of these incumbents, Lido — the largest and first proto-decentralized LSD protocol — might be the biggest (slowly) ticking time bomb of them all.

Let’s unpack how Shapella might pave the pathway for Lido’s ETH staking dominance to crack.

Lido, which accounts for ~75% of all ETH locked in LSD protocols, and ~30% of staked ETH overall, is essentially built upon stakers’ faith in the trustworthiness of node operators:

To be clear — Lido works because node operators choose to play ball. Period.

If node operators, for whatever reason, are unwilling or unable to exit their validators in order to give you “your” ETH or “your” staking rewards, you’ve got a problem. Of course, there are meaningful steps Lido has taken to mitigate the risk that a major event — such as a hack compromising validator keys, or regulatory/legal action preventing node operators from releasing ETH — spirals out into a market panic. […At least by design. Lido’s entire redemption process will only be tested live, at scale, for the first time starting April 12th after Shapella, since it’s thus far been a one-way street]. But regardless, ultimately node operators can simply refuse to exit, effectively rendering “your” staked ETH illiquid and inaccessible for a period of time, with limited downside risks borne by node operators.

TL;DR: Lido’s revenue model (and that of its node operators) depends on you not only giving up your private keys, but also bearing the majority of the risk. All for just…4–6% yield on your precious asset. Sound familiar?

Fortunately, this is a risk none of us need to take anymore.

Lido was architected well before we knew what we do now — i.e., that withdrawal credentials sitting on the execution layer is not enough to make an LSD protocol non-custodial. We now know that it is not possible to simply create a smart contract-controlled redemption mechanism as a workaround. So, what if we could do it all over again post-Shapella? Knowing what we know now, how would we design Ethereum staking services that are both non-custodial and still scalable?

We launched Maelstrom, the family office of BitMEX co-founder Arthur Hayes, in December 2022, amidst the wreckage of numerous collapsed custodial business models, to invest in projects fixing what went wrong. We are backing teams committed to delivering on the full potential of blockchain — a scalable, privacy-enhancing, decentralized, non-custodial and interoperable stack of infrastructure capable of unleashing new trillion-dollar markets across various use cases.

To that end, we are starting with primitives, and investing in ETH staking infrastructure projects that 1) compete directly with the two risk-prone custodial business models described above (both fully centralized and proto-decentralized); and 2) those that are complementary with these same legacy incumbents to help them (as well as new entrants) further decentralize.

  • Maelstrom’s debut investment was in an early mover in that second category, a project that isn’t competing with either the Lidos or the Coinbases of the world, but rather tooling them to eliminate single points of failure. Obol Labs, an investment we closed in January this year, is helping solo-stakers as well as fully centralized, proto-decentralized and genuinely non-custodial [see next bullet] services alike further decentralize. Obol’s distributed validator technology (“DVT”) middleware allows validator keys to be “split” among multiple node operators, effectively creating a “multi-sig” validator that can be run simultaneously across a collection of machines. These multi-validators still “speak” as one to the Beacon chain, avoiding penalties or slashing, while improving redundancy, security, and decentralization across the ETH staking space. More here.
  •, on the other hand, is our first investment in a project aiming to bring about a stepwise evolution from the legacy custodial models of both Lido and Coinbase. is building one of the first genuinely non-custodial, delegated staking services for Ethereum (and other PoS networks in the future). In a post-Shapella world, where stakers are able to freely bounce from staking service to staking service to chase the highest yield, circumvents the impending race to the bottom by competing on something other than just APY. With, stakers generate and control their own keys throughout the staking process from creation to redemption, and can exit validators to claim their ETH back at any time, preventing node operator malfeasance. I.e., “your keys, your crypto.”’s non-custodial model reduces risks for all parties, including node operators who will no longer be required to keep wallets connected or rely on a trusted middle party for coordination. More on the mechanics here.

Maelstrom is building a long-term investment portfolio of infrastructure companies that will serve as the foundation of our trustless, decentralized future. Giving up your private keys is not a compromise you need to make in order to participate in any decentralized ecosystem. The existing, legacy players in ETH staking — be they centralized or proto-decentralized — had prioritized speed-to-market during this past crypto Summer. But storm clouds are swirling over these incumbents, as new projects offering trustless, truly non-custodial ETH staking solutions are being built and scaled this Winter. And with today’s Shappela upgrade, the shackles are finally coming off.


(Any views expressed in the below are the personal views of the author and should not form the basis for making investment decisions, nor be construed as a recommendation or advice to engage in investment transactions.)

Winter is over in North Asia. The warm weather, sunshine, and early blooming of the sakura announced the presence of Spring. After decamping from the beautiful mountains of Hokkaido, I spent my last weekend in Tokyo. 

One afternoon, after finishing a sumptuous lunch, I asked one of the very experienced staff members about a particular aspect of Japanese cuisine that had always puzzled me. My question: what is the difference between omakase and kaiseki? In both circumstances, the chef chooses the menu based on the tastiest seasonal food items. The staff member explained that the entire purpose of a kaiseki is to prepare you for the matcha tea ceremony. The chef is supposed to create a meal that prepares your body to receive the tea.

When you sit down for a kaiseki meal, the destination is known, but the path is not. This brought to mind the current situation vis-à-vis the world’s major central banks, and in particular, the Federal Reserve (Fed). Ever since the Fed started raising rates in March 2022, I have been arguing that the end result was always going to be a significant financial disturbance, followed by a resumption of money printing. It’s important to remember that it is in the best interest of the Fed and all other major central banks to perpetuate the continuation of our current financial system – which gives them their power – so actually cleansing the system of the egregious amount of debt and leverage built up since WW2 is out of the question. Therefore, we can predict with near certainty that they will respond to any substantive banking or financial crisis by printing money and encouraging another round of the very same behaviour that put us in that perilous position in the first place.

I and many other analysts have stood on our virtual soap boxes and predicted that the Fed would continue hiking until they broke something. No one knew exactly what would break first, but we were all certain that it would happen. And not to get too far ahead of myself, but some (including me) have maintained that a disruption in some part of the US financial system in 2023 was going to force the Fed to reverse the tightening cycle we’ve been in for the past year – and it would appear that we’re right on track.

Subsequent to my return to the jungle, I sat down for a deliciously spicy Sichuan meal with my favourite hedge fund manager. We caught up on personal matters, and then spent the majority of the dinner talking about the implications of the Fed’s new Bank Term Funding Program (BTFP). BTFP also stands for Buy The Fucking Pivot! I thought I understood the magnitude of what the Fed just did, but I did not fully appreciate just how impactful this policy will truly be. I will go into detail about what I learned a bit later in the essay – but suffice it to say, BTFP is Yield Curve Control (YCC) repackaged in a new, shiny, more palatable format. It is a very clever way to accomplish unlimited buying of government bonds, without actually having to buy them.

To fully understand why this BTFP program is so groundbreaking and ultimately destructive to savers, let’s go through how we got here. We must first understand why these banks have gone bust, and why the BTFP is a very elegant response to this crisis.

The Ides of March

The beginning of the end started in March 2020, when the Fed pledged to do whatever it took to arrest the financial stress brought about by COVID-19. 

In the West (and in particular, the US), COVID was some China / Asia thingymajig with a little street-fried bat thrown in. The elites proclaimed that nothing was wrong. And then, all of the sudden, folks started getting sick. The spectre of lockdowns in America began to rise, and the US markets started tanking. The corporate bond markets followed, freezing up shortly thereafter. Dysfunction spread quickly, creeping into the US Treasury market next. Backed into a pretty significant corner, the Fed moved quickly to nationalise the US corporate credit markets and flood the system with liquidity.

The US Federal Government responded by running up the largest fiscal deficit since WW2 in order to drop money directly into people’s bank accounts (in the form of stimulus checks – or, as I like to refer to them, “stimmies”). The Fed essentially cashed the checks of the government. The government had to issue a significant amount of new treasuries to fund the borrowing, which the Fed dutifully bought in order to keep interest rates near zero. This was a highly inflationary practice, but at the time, it didn’t matter because we were muddling through a once-in-a-generation global pandemic. 

Right on cue, a financial boom of epic proportions began. Everyone had stimmy checks to spend, rich and poor alike. And at the same time, the cost of funds for asset speculators dropped to zero, encouraging insane risk taking. Everyone was rich, and everything became an exercise in Number Go Up!  

The Bull Market 

Because the public had all this new money, the banks were flooded with deposits. Remember that when we purchase goods, services, or financial assets, the money doesn’t leave the banking system – it just moves from one bank to another. So, the majority of the newly-printed money ended up as deposits on some bank’s balance sheet. 

For large, systemically important, Too Big to Fail (TBTF) banks like JP Morgan, Citibank, Bank of America etc., the percentage rise in deposits was noticeable, but nothing ridiculous. But for small to midsize banks, it was enormous. 

The runts of the US banking establishment (sometimes called Regional Banks) had never been so deposit rich. And when banks take deposits, they use them to make loans. These banks needed to find somewhere to put all this new money in order to earn a spread, also called Net Interest Margin (NIM). Given that yields were either zero or barely above zero, depositing the money with the Fed and earning interest on their excess reserves would not cover their operating costs – so banks had to increase their earnings by taking on some level of credit and/or duration risk.

The risk of a borrower not repaying the loan is called credit risk. The highest-rated credit you can invest in (i.e., the credit with the lowest credit risk) is the debt of the USG – also known as treasuries – since the government can legally print money to pay back its debt. The worst credit you can invest in would be the debt of a company like FTX. The more credit risk a lender is willing to take, the higher the interest rate that lender will demand from the borrower. If the market believes the risk of companies not paying their bills is increasing, credit risk increases. This causes the price of bonds to fall.

By and large, most banks are quite credit risk averse (i.e., they don’t want to lend their money to companies or individuals they think are likely to default). But, in a market where the most obvious and safest alternative – investing in short-term USG debt – carried yields near 0%, they needed to find some way to turn a profit. So, many banks started to juice yields by taking duration risk.

Duration risk is the risk that a rise in interest rates will cause the price of a given bond to fall. I won’t belabour you with the maths for calculating the duration of a bond, but you can think of duration as the sensitivity of a bond’s price to a change in interest rates. The longer the time to maturity of a given bond, the more interest rate or duration risk that bond has. Duration risk also changes based on the level of interest rates, which means the relationship between duration risk and a given level of interest rates is not constant. This means that a bond is more sensitive to interest rates when rates rise from 0% to 1% than from 1% to 2%. This is called convexity, or gamma.

By and large, most banks limited credit risk by lending money to various arms of the USG (rather than risky companies), but increased their interest income by buying longer-dated bonds (which carry more duration risk). This meant that as interest rates rose, they stood to lose a lot of money very quickly as bond prices fell. Of course the banks could have hedged their interest rate exposure by trading interest rate swaps. Some did, many did not. You can read about some truly stupid decisions made by SVB’s management with regards to their hedging of the massive interest rate risk embedded in their government bond portfolio.

Let’s play this out. If a bank took in $100 of deposits, then they would have purchased $100 of USG debt such as US Treasuries (UST) or Mortgage Backed Securities (MBS). Nothing wrong with this asset liability management strategy so far. In practice, the ratio of deposits to loans should be less than 1:1 in order to have a safe margin for loan losses.

As the above chart depicts, US banks bought a fuck-ton of UST in 2020 and 2021. This was great for the USG, which needed to fund those stimmy checks. This was not so great for the banks, as interest rates were at 5,000-year lows. Any small increase in the general level of interest rates would lead to massive mark-to-market losses on banks’ bond portfolios. The FDIC estimates that US commercial banks are carrying an unrealised $620 billion in total losses on their balance sheets due to their government bond portfolios losing value as interest rates rose. 

How did banks hide these massive unrealised losses from their depositors and shareholders? Banks hide losses by playing many legal accounting tricks. Banks who have lent out money don’t want their earnings oscillating with the mark-to-market of their tradable bond portfolio. Then the whole world would catch on to the charade they are playing. That could dampen their stock price, and/or force their regulators to close them down for breaching capital adequacy ratios. Therefore, banks are allowed to mark a bond as “held to maturity” if they plan not to sell it before it matures. That means they mark a bond at its purchase price until it matures. Thereafter, regardless of what the bond trades at in the open market, the bank can ignore unrealised losses. 

Things are going well for the small banks. Their NIM is increasing because they are paying 0% interest on their customers’ deposits while lending those deposits out to the USG in SIZE at 1% to 2% (UST), and to American home buyers at 3% to 4% (MBS). It may not seem like much, but on hundreds of billions of dollars’ worth of loans, that is meaningful income. And because of these “great” earnings, bank stocks are soaring.

KRE US – SPDR S&P Regional Banking ETF

The ETF pumped over 150% off of the COVID March 2020 lows through the end of 2021.

But then, INFLATION shows up.

He Ain’t No Arthur Burns, He Be Paul Motherfucking Volker 

A quick history lesson on past Fed governors. Arthur Burns was the Fed chairperson from 1970 to 1978. Contemporary monetary historians do not look kindly on Mr. Burns. His claim to fame is that he was the Fed governor who refused to nip inflation in the bud early on in the 1970’s. 

Paul Volker was the Fed chairperson from 1979 to 1987. Contemporary monetary historians laud Mr. Volker’s commitment to slaying the inflationary beast his predecessor simped for. Mr. Volker is presented as bold and courageous, and Mr. Burns is presented as weak and feeble.

You know what’s sad? If you put a gun to my head, I could probably list every single chairperson the Federal Reserve has had since its inception in 1913. I couldn’t do that for other significant world figures. Kabloom!

Sir Powell wants to be more like Volker and less like Burns. He is very concerned about his legacy. Powell isn’t doing this job to get paid – he is most likely a centa-millionaire. It’s all about cementing his place in history as a monetary force for good. That is why when inflation shot up to 40-year highs following the pandemic, he put on his best Volker costume and marched into the Mariner Eccles building ready to fuck shit up.

In late 2021, the Fed signalled that inflation was a concern. Specifically, the Fed said that it would start raising interest rates above 0% and reducing the size of its balance sheet. From November 2021 to early January 2022, risky asset prices peaked. The pain train was ready to leave the station.

This current Fed tightening cycle is the fastest on record (i.e., the Fed raised interest rates by greater amounts more quickly than ever before). As a result, 2022 was the worst year for bond holders in a few hundred years.

Powell felt like he was doing what had to be done. Rich people’s financial asset portfolios were taking a backseat to reducing prices on goods and services for the majority of Americans who own zero financial assets. He wasn’t worried about some hedge fund being down massively on the year, or banker bonuses getting slashed. So what … eat the rich, the American economy was strong, and unemployment was low. That meant he could keep raising interest rates and dispel the notion that the Fed only cares about juicing financial asset prices to help rich people. What a fucking hero!!!!

But, trouble was brewing in the banking sector.

Can’t Pay

As a bank depositor, you would think that when the Fed raises interest rates, you would receive a higher rate of interest on your deposit.

The above chart from Bianco Research shows that deposit rates have lagged significantly behind higher money market fund rates, which move in lockstep with the Fed policy rate.

The TBTF banks did not need to raise deposit rates because they didn’t actually need deposits. They have trillions of dollars’ worth of excess reserves at the Fed. Their clients also tend to be larger corporate clients, whose deposits are sticky. The CFO of a Fortune 500 company isn’t going to ditch JP Morgan for some regional bank headquartered in Bumblefuck, America just to earn a few extra basis points. The CFO likes being taken out to Cipriani’s, not Applebee’s. Large corporations also receive other services from the mega banks – like cheap loans – in return for remaining loyal depositors.

The smaller banks could not raise deposit rates because they could not afford to. The interest rates on the UST and MBS bonds held by these banks paid less than the current Fed Funds Rate. That meant that if they were to raise interest rates on their loans to match the Fed, they would have a massive negative NIM. Instead, they just hoped depositors wouldn’t notice that they could get an almost risk-free 5% by pulling their money from the bank and investing in a money market fund. Obviously, that strategy didn’t work.

The outcome was that depositors fled the small banks and found a new home in much higher-yielding money market funds.

Source: Bianco Research

As deposits fled the smaller banks, they had to sell the most liquid things on their balance sheet. UST and MBS bonds are super liquid. However, because they were purchased in 2020 and 2021, when marked to market in late 2022 / early 2023, these bonds were worth massively less.

Game Over

The canary in the coal mine was the bankruptcy of Silvergate. Silvergate was a no-name Californian bank before management decided to pave their path to riches by becoming the most crypto-friendly bank in the game. In just a few years, Silvergate became the go-to bank for all the largest exchanges, traders, and holders of crypto who required USD banking services.

Their deposit base ballooned, and they invested their depositors’ money with the USG – which is typically one of the safest investments you can make. It wasn’t like they were dealing with dodgy companies or individuals like Three Arrows Capital; they lent money to the richest and most powerful nation in the world.

Silvergate’s crypto depositors’ decision to flee had nothing to do with a realisation that the bank’s assets – when marked to market – didn’t equal its liabilities. Rather, it was speculation regarding the relationship between Silvergate and FTX. Depositors didn’t want to fuck around and find out whether Silvergate in any way, shape, or form enabled (or even just knew about) the dodgy and potentially illegal activity emanating from FTX. So, they bounced, and the bank had to sell its loans and bonds at a loss to pay out. That is why Silvergate reported staggering losses of $754 million for 2022.

But the outflows didn’t stop. At some point, the market began to worry about whether Silvergate’s assets could be sold at prices high enough to pay back all depositors. The bank run started in earnest, and by the middle of last week, the bank had filed for bankruptcy protection.

Then, shit really hit the fan with the failed SVB rights issue. A rights issue is when, with the help of an investment bank, a company sells shares to large institutional investors at a discount to the current market price. The Financial Times did an excellent walkthrough of the transaction.

The SVB rights issue is interesting because of the sequencing of its execution. Goldman Sachs was the bank used to both bid on the portfolio of underwater SVB bonds, and coordinate the rights issue.

“Goldman Sachs bought more than $21bn worth of securities sold by Silicon Valley Bank last week – a transaction which triggered an ill-fated share sale also managed by the Wall Street investment bank.” 


The question is, why did SVB sell the bonds to Goldman first, and conduct the rights issue later? Once SVB sold the bonds, it had to recognise the loss, and it was apparent that the bank was probably in breach of regulatory capital requirements. It also had to disclose all of this to investors (i.e., the folks who might otherwise purchase the stock). Why would you purchase a bank stock if, moments before, it had announced that it had suffered massive losses and might be in breach of capital adequacy ratios? You wouldn’t, obviously, and nobody did. After the rights issue failed spectacularly, luminaries in the tech world instructed their portfolio companies to pull their money from SVB immediately – and a few days later, the bank was bankrupt.

The moral of this sad story is that the bungling of the SVB rights issue further sharpened the markets focus on the unrealised losses sitting on regional banks’ balance sheets. The market started asking more questions. Who else might be in trouble?

Well, it turns out, the entire US regional banking sector has some variation of the same issue as Silvergate and SVB. To recap why these banks are fucked:

  1.     Their deposit base ballooned, and they lent money during a time when interest rates were at a 5,000-year low.
  2.     As interest rates rose in response to the Fed raising its policy rate, the bond and loan portfolios of these banks nursed large, unrealized losses.
  3.     Depositors wanted to get paid more interest than they were getting from their regional banks, so they started leaving to invest in higher-yielding products like money market funds and short-term US Treasury bills. The banks couldn’t stomach these losses because they couldn’t pay the Fed Funds Rate to depositors, since the interest they were earning on their loan and bond portfolio on a blended basis was far less than that rate.
  4.     The market always knew this was going to become an issue eventually, but it took the failure of Silvergate and then SVB to fully drive home just how severe it was. And as a result, every single regional bank is now assumed to be on borrowed time.

Over the weekend, the whole world watched as crypto and tech bros sang the blues about their deposits in Silvergate and SVB. Circle’s USDC stablecoin depegged and began trading down below $0.90 on fears that it had significant exposure to Silvergate, SVB, and possibly Signature Bank. Many argued that this issue was not about crypto or tech, but that it pointed to a systemic problem that affected all banks not deemed Too Big to Fail. 

As a result, everyone knew that, come Monday morning when US equity markets opened, a lot more banks were going to be punished. Specifically, many wondered if a nation-wide bank run would ensue.


The Fed and US Treasury did not let a good crisis go to waste. They devised a truly elegant solution to solve a number of systemic issues. And the best part is, they get to blame mismanaged crypto- and tech-focused banks as the reason they had to step in and do something they would’ve had to do anyway.

Now, I will walk through the truly game-changing document that describes the BTFP. (Quotes from the document are in bold and italics, and below each is a breakdown of their practical implications.)

Bank Term Funding Program

Program: To provide liquidity to U.S. depository institutions, each Federal Reserve Bank would make advances to eligible borrowers, taking as collateral certain types of securities.

Borrower Eligibility: Any U.S. federally insured depository institution (including a bank, savings association, or credit union) or U.S. branch or agency of a foreign bank that is eligible for primary credit (see 12 CFR 201.4(a)) is eligible to borrow under the Program.

This is pretty self explanatory – you need to be a US bank to partake in the program.

Eligible Collateral: Eligible collateral includes any collateral eligible for purchase by the Federal Reserve Banks in open market operations (see 12 CFR 201.108(b)), provided that such collateral was owned by the borrower as of March 12, 2023.

This means that the financial instruments eligible for use as collateral under the program are largely limited to US Treasury debt and Mortgage Backed Securities. By setting a cutoff date, the Fed has limited the scope of the program to the total size of UST and MBS held by US banks (approximately $4.4 trillion).

Advance Size: Advances will be limited to the value of eligible collateral pledged by the eligible borrower.

There are no size limitations. If your bank holds $100 billion of UST and MBS, you can submit that total amount to be funded using the BTFP. This means that the Fed could in theory lend against the entire stock of UST and MBS securities held on US banking balance sheets.

The previous two BTFP paragraphs are so important to understand. The Fed just conducted $4.4 trillion of quantitative easing under another guise. Let me explain.

QE is the process whereby the Fed credits banks with reserves, and in return banks sell the Fed their UST and MBS holdings. Under the BTFP, instead of buying the bonds directly from the banks, the Fed will print money and lend it against the banks’ pledges of UST and MBS collateral. If depositors wanted $4.4 trillion in cash, the banks would just pledge their entire UST and MBS portfolio to the Fed in return for cash, which it then passes to depositors. Whether it’s QE or BTFP, the amount of money created by the Fed and put into circulation grows.

Rate: The rate for term advances will be the one-year overnight index swap rate plus 10 basis points; the rate will be fixed for the term of the advance on the day the advance is made.

Collateral Valuation: The collateral valuation will be par value. Margin will be 100% of par value.

The Fed’s money is priced at the 1-year interest rate. Given that short term rates are well above long-term rates, this means banks, for the most part, accrue negative interest over the life of the loan. Even though losses are bad, they get to exchange underwater bonds for 100% of their value, rather than recognising losses and going bankrupt. Err’body keeps their job, except for the poor sods at Silvergate, SVB, and Signature. The first shall be the last …

Advance Term: Advances will be made available to eligible borrowers for a term of up to one year.

Program Duration: Advances can be requested under the Program until at least March 11, 2024.

The program is stated to only last one year …when has a government ever given back the power that the people gave them during a time of crisis? This program will almost certainly be extended preemptively – otherwise, the market will throw a big enough fit to demonstrate it needs its fix of printed money, and the program will be extended regardless.

Implications of BTFP

Bigger than COVID QE

The Fed printed $4.189 trillion in response COVID. Right off the bat, the Fed implicitly printed $4.4 trillion with the implementation of BTFP. During the COVID money printing episode, Bitcoin rallied from $3k to $69k. What will it do this time?

Banks are Shitty Investments

Unlike the 2008 financial crisis, the Fed didn’t bail out banks and allow them to participate in the upside this time. The banks must pay the 1-year interest rate. 1-year rates are considerably higher than 10-year rates (also known as an inverted yield curve). The bank borrows short from depositors, and lends long to the government. When the yield curve is inverted, this trade is guaranteed to lose money. Similarly, any bank that uses the BTFP will need to pay more to the Fed than the interest rate on their deposits.

US Treasury 10-year Yield Minus US Treasury 1-year Yield

Banks will accrue negative earnings until either the yield curve is positively sloped again, or short-term rates drop below the blended rate on their loan and bond portfolios. BTFP doesn’t fix the issue that banks cannot afford to pay the high short-term rates that depositors could get in money market funds or treasuries. Deposits will still flee to those instruments, but the banks can just borrow from the Fed to plug the hole. From an accounting standpoint, the banks and their shareholders will lose money, but banks will not go bankrupt. I expect bank stocks to severely underperform the general market until their balance sheets are repaired.

House Prices Zoom!

30yr Mortgage Rate Minus 1yr Treasury Yield

Purchasing MBS will still be profitable for banks because the spread vs. 1-year rates is positive. MBS rates will converge to the 1-year rate as banks arb the Fed. Imagine a bank took in $100 of deposits and bought $100 of treasuries in 2021. By 2023, the treasuries are worth $60, rendering the bank insolvent. The bank taps the BTFP, gives the Fed its treasuries and gets back $100, but it must pay the Fed 5%. The bank now buys an MBS, which is guaranteed by the government, yielding 6%. The bank pockets a 1% risk-free profit. 

Mortgage rates will move in lock-step with the 1-year rate. The Fed has immense control over the short-end of the yield curve. It can essentially set mortgage rates wherever it likes, and it never has to “buy” another single MBS. 

As mortgage rates decline, housing sales will pick back up. Real estate in the US, just like in most other countries, is big business. As sales pick up because financing becomes more affordable, it will help increase economic activity. If you thought property would get more affordable, think again. The Fed is back at it, pumping the price of houses once more.

USD Strong to Very Strong!

If you have access to a US bank account and the Fed just guaranteed your deposit, why would you hold money in other banking systems without such a guarantee from the central bank? Money will pour into the US from abroad, which will strengthen the dollar.

As this plays out, every other major developed country’s central bank must follow the Fed and enact a similar guarantee in order to stem the outflow of banking deposits and weaken their currency. The ECB, BOE, BOJ, RBA, BOC, SNB, etc. are probably ecstatic. The Fed just enacted a form of infinite money printing, so now they can too. The issues in the US banking system are the same ones faced by every other banking system. Everyone has the same trade, and now – led by Sir Powell – every central bank can respond with the same medicine and not be accused of causing fiat hyperinflation.

Credit Suisse effectively just failed a few nights ago. The Swiss National Bank had to extend a CHF50 billion covered loan facility to CS to stem the bleeding. Expect a near failure of a large bank in every major, developed Western country – and I suspect that in each case, the response will be a blanket deposit guarantee (similar to what the Fed has done) in order to stave off contagion.

The Path to Infinity

As stated in the BTFP document, the facility only accepts collateral on banks’ balance sheets as of 12 March 2023, and ends one year from now. But as I alluded to above, I don’t believe this program will ever be ended, and I also think the amount of eligible collateral will be loosened to any government bond present on a licensed US banks’ balance sheet. How do we get from finite to infinite support?

Once it becomes clear that there is no shame in tapping the BTFP, the fears of bank runs will evaporate. At that point, depositors will stop stuffing funds in TBTF banks like JPM and start withdrawing funds and buying money market funds (MMF) and US treasuries that mature in 2 years or less. Banks will not be able to lend money to businesses because their deposit base is chilling in the Fed’s reverse repo facility and short-term government bonds. This would be extremely recessionary for the US and every other country that enacts a similar program.

Government bond yields will fall across the board for a few reasons. Firstly, the fear of the entire US banking system having to sell their entire stock of USG debt to pay back depositors goes away. That removes an enormous amount of selling pressure in the bond market. Second, the market will start to price in deflation because the banking system cannot return to profitability (and thus create more loans) until short-term rates decline low enough that they can entice depositors back with rates that compete with the reverse repo facility and short-term treasuries.

I expect that either the Fed will recognise this outcome early and start cutting rates at its upcoming March meeting, or a nasty recession will force them to change tracks a few months from now. The 2-year treasury note’s yield has collapsed by over 100 basis points since the onset of the crisis. The market is screaming banking system-sponsored deflation, and the Fed will listen eventually.

As banks become profitable and can once again compete against the government to attract depositors back, the banks will wind up in the same situation as they did 2021. Namely, that deposits will be growing, and banks will suddenly need to start lending out more money. They will start underwriting loans to businesses and the government at low nominal yields. And once again, they will be thinking that inflation is nowhere to be seen, so they won’t be concerned about rising interest rates in the future. Does this sound familiar?

Then, March 2024 rolls around. The BTFP program is set to expire. But now, the situation is even worse than 2023. The aggregate size of the banks’ portfolio of low-interest rate underwritten loans to business and low-interest rate government bond securities is even larger than it was a year prior. If the Fed doesn’t extend the life of the program and expand the notional of eligible bonds, then the same sort of bank runs we’re seeing now are likely to happen again. 

Given the Fed has no stomach for the free market in which banks fail due to poor management decisions, the Fed can never remove their deposit guarantee. Long Live BTFP.

While I’m sure that is abhorrent to all you Ayn Rand wannabes (like Ken Griffin and Bill Ackman), the continuation of BTFP solves a very serious problem for the USG. The US Treasury has a lot of bonds to sell, and less and less people want to own them. I believe that the BTFP will be expanded such that any eligible security, which are mostly treasuries and mortgages, held on a US banks’ balance sheet is eligible to be exchanged for fresh newly printed dollars at the 1-year interest rate. This gives the banks comfort that as their deposit base grows, they can always buy government debt in a risk-free fashion. The banks will never again have to worry about what happens if interest rates rise, their bonds lose value, and their depositors want back their money.

With the newly expanded BTFP, the Treasury can easily fund larger and larger USG deficits because the banks will always buy whatever is for sale. The banks don’t care what the price is because they know the Fed has their back. A price sensitive investor who cared about real returns would scoff at buying more, and more, and more, and trillions of dollars more of USG-issued debt. The Congressional Budget Office estimates the 2023 fiscal deficit will be $1.4 trillion. The US is also fighting wars on multiple fronts: The War on Climate Change, The War Against Russia / China, and The War Against Inflation. Wars are inflationary, so expect the deficits to only go higher from here. But that is not a problem, because banks will buy all the bonds the foreigners (China & Japan, in particular) refuse to.

This allows the USG to run the same growth playbook that worked wonders for China, Japan, Taiwan, and South Korea. The government enacts policies that ensure savers earn less on their money than the nominal rate of GDP growth. The government can then re-industrialise by providing cheap credit to whatever sectors of the economy it wants to promote, and earn a profit. The “profit” helps the USG reduce its debt to GDP from 130% to something much more manageable. While everyone might cheer “Yay growth!”, in reality, the entire public is paying a stealth inflation tax at the rate of [Nominal GDP – Government Bond Yield].

Finally, this solves an optics problem. If the investing public sees the Fed as cashing the checks of the government, they might revolt and dump long-term bonds (>10-year maturity). The Fed would be forced to step in and fix the price of long-term bonds, and that action would signal the beginning of the end of the Western financial system in its current form. The BOJ had this problem and implemented a similar program, whereby the central bank loaned money to the banks to buy government bonds. Under this system, the bonds never show up on the central bank’s balance sheet; only loans appear on the balance sheet, which, in theory, must be repaid by the banks – but in practice, they’ll be rolled over in perpetuity. The market can rejoice that the central bank is not moving towards 100% ownership of the government bond market. Long Live The Free Market!

Front Month WTI Oil Futures

The decline in oil prices and commodities in general tells us that the market believes deflation is coming. Deflation is coming because there will be very little credit extended to businesses. Without credit, economic activity declines, and therefore less energy is needed.

A decline in commodity prices helps the Fed cut rates because inflation will decline. The Fed now has the cover to cut rates.

Get Out

The most frightening outcome for the Fed is if people move their capital out of the system. After guaranteeing deposits, the Fed doesn’t care if you move your money from SVB into a money market fund earning a higher rate. At least your capital is still purchasing government debt. But what if, instead, you bought an asset that is not controlled by the banking system?

Assets like gold, real estate, and (obviously) Bitcoin are not liabilities on someone else’s balance sheet. If the banking system goes bust, those assets still have value. But, those assets must be purchased in physical form.

You are not escaping the insidious wrath of inflation by purchasing an Exchange Traded Fund (ETF) that tracks the price of gold, real estate, or Bitcoin. All you are doing is investing in a liability of some member of the financial system. You own a claim, but if you try to cash in your chips, you will get back fiat toilet paper – and all you have done is pay fees to another fiduciary.

For Western economies that are supposed to practise free market capitalism, it’s very hard to enact wide-ranging capital controls. It’s particularly difficult for the US, since the world uses the USD because it has an open capital account. Any outright ban on various means of exiting the system would be seen as an imposition of capital controls, and then there would be even less desire among sovereign nations to hold and use dollars.

It is better when prisoners don’t recognise they are in a cage. Instead of outright banning certain financial assets, the government will likely encourage things like ETFs. If everyone freaks out about the hyperinflationary impact of BTFP and pours money into GBTC (Grayscale Bitcoin Trust), it would have no impact on the banking system. You must enter and exit the product by using the USD. You can’t escape.

Be careful what you wish for. A true US-listed Bitcoin ETF would be a trojan horse. If such a fund were approved and it sucked in a meaningful supply of Bitcoin, it would actually help maintain the status quo rather than give financial freedom to the people.

Also, watch out for products through which you “purchase” Bitcoin, but cannot withdraw your “Bitcoin” to your own private wallet. If you can only enter and exit the product through the fiat banking system, then you have achieved nothing. You are just a fucking fee donkey.

Bitcoin’s beauty is that it is weightless and invisible. There is no outward manifestation of its existence. You can memorise a Bitcoin private key, and anytime you wish to spend money, you can just use the internet and transact. Owning a lot of gold and real estate is heavy and observable. Why did Gatsby get noticed when Daisy killed that poor person with his sports car? It was because it was an ostentatious vehicle that was instantly recognisable. Something similar could be said for a fuck-off large mansion, or a stash of gold that must be protected 24/7 by armed guards. These savings vehicles and related displays of wealth are an invitation to get robbed by another citizen – or even worse, by your own government.

There is obviously a place for fiat. Use it for what it’s good for. Spend fiat, save crypto. 

To Da Moon

As I left dinner with the hedge fund dude, I remarked how much more bullish I was on Bitcoin after speaking with him. The end game is here. Yield Curve Control is here. BTFP ushers in infinite money printing … globally.

The ensuing Bitcoin rally will be one of the most hated ever. How can Bitcoin and the crypto markets in general rally sharply after all the bad things that happened in 2022? Didn’t people learn Bitcoin and those associated with it are scumbags? Aren’t people afraid of the narrative that Bitcoin caused the failure of large banks, and almost consumed the US banking system?

The media is also likely going to push the narrative that this banking crisis happened because banks accepted fiat deposits from crypto folks. That is so farcical that I’m experiencing a deep belly laugh just thinking about it. It is patently absurd to think that it’s somehow the crypto industry’s fault that banks – whose job it is to handle fiat dollars – accepted fiat dollars from a cohort of entities related to crypto, followed (at least to our knowledge) all the banking rules, lent those fiat dollars to the most powerful nation in human history, and subsequently couldn’t pay back depositors because the central bank of the Empire raised interest rates and blew up banks’ bond portfolios.

Instead, what crypto did was once again demonstrate that it is the smoke alarm for the rancid, profligate, fiat-driven Western financial system. On its way up, crypto signalled that the West printed too much money in the name of COVID. On the way down, the crypto free markets quickly exposed a plethora of over-leveraged charlatans. Not even the FTX polycule had enough love to overcome the swift justice of the crypto free market. The stench from these reprehensible individuals (and those they did business with) drove depositors to take their hard-earned money to safer and (supposedly) more reputable institutions. In the process, it exposed for all to see the damage that Fed policy inflicted on the US banking system.

For me and my portfolio, I’m largely done trading stonks. What’s the point? I generally buy and hold and don’t trade around my positions that frequently. If I believe what I wrote, then I am signing myself up for underperformance. If there is a short-term trading opportunity where I think I can earn some quick fiat duckets and then take my profit and buy more Bitcoin, I will do it. Otherwise, I am liquidating most of my stock portfolio and moving it into crypto.

If I own any ETFs that are exposed to precious metals or commodities, I will sell those and buy and store the commodity directly if possible. I know this isn’t practical for most people, but I’m just trying to make clear how deep my conviction is on this.

The one exception to my disdain for stonks are nuclear energy-related companies. The West may pooh-pooh nuclear, but nations on the come-up are looking for cheap, plentiful energy to supply the good life to their citizens. Sooner or later, nuclear power will create the next leg higher in global growth, but it’s impossible for an individual to store uranium – so I therefore will do nothing to my Cameco position.

I must make sure my real estate portfolio is diversified across various jurisdictions. You have to live somewhere, and if you can own your home outright or with as little debt as possible, that is the goal. Again, you don’t want to be attached to the fiat financial system if you don’t have to be.

Crypto is volatile, and most goods and services demand payment in fiat. That’s fine. I’ll hold what I need to in cash. I’ll try to earn the highest short-term yield I can. Right now, that means investing in USD money market funds and owning short-term US treasuries.

My barbell portfolio of crypto + long volatility will remain. Once I have finished shifting things around, I must make sure I am adequately protecting my downside. If I do not have enough exposure to instruments that do well in a situation where governments decide to unwind the leverage embedded in the system (rather than continuing to pile on more), I must increase my investment in my favourite volatility hedge fund. Apart from that, the only major risk to my strategy as a whole is if there is a new source of energy discovered that is dramatically more dense than hydrocarbons. Of course, such a source of energy already exists – it’s called nuclear power. If policy makers were spurred on by their citizens to actually build the necessary infrastructure to support a nuclear-powered economy, then all the debt could be repaid with an amazing burst of economic activity. At that point, I wouldn’t make money on either my crypto or my volatility hedges. But even if there was the political will to build that infrastructure, it would take decades to accomplish. I would have more than enough time to rejig my portfolio for the age of nuclear energy.

Given the already-long length of this essay, I couldn’t go into great detail regarding my predictions for how the BTFP and copycat programs will pervert the global financial system. I hope that my predictions can be judged against reality as it unfolds. This is the most important financial event since COVID. In subsequent essays, I will review how the effects of BTFP are tracking against my predictions. I am cognizant that my incredible conviction in the upward trajectory of Bitcoin may be misplaced – but I must judge events as they actually occur, and if it turns out I am wrong, adjust my positioning.

The end was always known in advance. YCC is dead, long live BTFP! And now I shall let the matcha tea warm my soul, and gaze upon the beauty of the sakura.

The post Kaiseki appeared first on BitMEX Blog.

Dust on Crust

(Any views expressed in the below are the personal views of the author and should not form the basis for making investment decisions, nor be construed as a recommendation or advice to engage in investment transactions.)

As winter in the Northern Hemisphere draws to a close, I must depart my winter wonderland of deep fluffy powder and return to the steaming hot jungle. The transition to spring has begun, and what was once a guaranteed sublime shredding experience has quickly become much dicier. We are entering what is called the “dust on crust” segment of the ski season.

 During this transition period, temperature variation increases throughout the day, even reaching above-freezing on the days the sun is really shining. This causes the snow to melt during the day, and then re-freeze each night. If a fresh dusting of powder falls on this crusty layer overnight, then you wake to what looks like a beautiful snowpack – but when you get out there and your skis begin to carve, your legs scream out in agony as you fully engage them to power through the crud below for the first time in the season.

The crypto markets have a similar life cycle. From their sublime beginnings when Lord Satoshi first blessed the world with their teachings, his faithful have built many castles on top of dubious, crusty, and brittle foundations. At the moment, one of these foundations in particular – stablecoins, the connective tissue between the crypto and fiat financial markets – is the subject of much scrutiny and consternation. As concerns mount, it’s important that we revisit and remind ourselves of the raison d’etre of stablecoins. Only then can we understand why it remains important that they continue to exist, determine what the most appropriate form is for them to take, and identify how we can best remedy the current state of affairs.


Bitcoin comes into existence through the process of mining. Bitcoin miners expend energy and compete against each other to quickly solve a complex maths puzzle. The winner of this race is rewarded with newly created Bitcoin. This is one of a handful of ways to acquire Bitcoin.

The most common way to acquire Bitcoin is to purchase it from someone. In the beginning, the OG miners were basically the only folks you could buy it from (since circulation was so low and they were the ones effectively producing it). If you were buying some, you were (and still are) most likely using the US dollar, since it’s the global reserve currency. Therefore, the most widely quoted Bitcoin exchange rate was (and remains) BTC/USD.

As a fiat currency, USD must be held within the Western fiat financial system. Of course, you can use cash, but in a global economy where GDP is measured in trillions of USD, cash is not a practical means of exchange. This reality more or less necessitates that people looking to purchase Bitcoin use the Western banking system. Banks must be used to transfer USD from the buyer to the seller of Bitcoin.

The ultimate question is, how do we remove the need to use USD or any other fiat to purchase Bitcoin? Solving this riddle requires the majority of the world’s largest economic systems to pay for goods and receive wages in Bitcoin. This is the dream of any true Bitcoiner – and if we are successful, many will earn Bitcoin by working, and thus remove the need to use banking services. But for all our effort, there is still a chance that we will never reach this ultimate state. 

Right now, we are stuck in a sort of purgatory. We have escaped the hell that was the purely fiat financial world of pre-2009, but we have not yet ascended to heaven with our Lord Satoshi, where we shall sit gazing down on the dastardly fiat devil from on high.


What do we need to use fiat for within the crypto capital markets?

Moving Money In and Out

If you want to use Bitcoin as a financial asset and easily swap between it and a fiat currency like USD, you most likely use an exchange that can custody both your USD and BTC.

For the USD leg of a given transaction, the exchange requires a bank account. It is not easy for exchanges to obtain and retain bank accounts. Remember that, fundamentally, the whole goal of the righteous followers of Lord Satoshi is to create a parallel financial system that does not require the services of banks. You can see why banks might resist servicing crypto companies, when the ultimate aim of those companies is to syphon off a meaningful chunk of the banks’ business. The only real reason that some banks are willing to service crypto companies is because at the end of the day, banks are focused on maximising short-term profits, and crypto companies are willing to pay high fees while earning no interest on their fiat deposits. Basically, some managers are sacrificing the long-term profitability of the banking system to pad their bonuses for the next few years. 

The BTC leg of a given transaction is easy. Download BitcoinCore, and in a few hours you have a fully functioning financial system. You can accept Bitcoin and transfer it in a permissionless fashion.


Real traders and market makers are agnostic to the success or failure of Bitcoin (and crypto in general). They have to be, as it isn’t their job to take a medium- or long-term view. Their sole focus is to turn a profit by providing liquidity 24/7. 

One of the prerequisites of performing their role well is the ability to move between USD and crypto quickly and cheaply. But the Western banking system doesn’t make it easy for them, as it isn’t set up to move money quickly and affordably – regardless of whether you are trying to pass funds internally between depositors, or externally amongst banks. And given that banking is an oligopoly protected by government charters, there is zero incentive for banks to make an effort to become faster or cheaper.

Therefore, there arose a need among crypto traders to move their funds back and forth more quickly between USD and crypto. To solve this issue, traders realised that they needed to create a token on a public blockchain that could be moved around as easily as Bitcoin, but that would otherwise represent and have the exact same value as a US dollar. That way, they could easily move their money in and out of it and it would be functionally identical to moving in and out of USD – but without the need to wait on the slow-moving Western banking system. If someone created such a product, traders would be able to move their digital USD equivalent onto and off of exchanges nearly instantly and 24/7 for the cost of a few cents per transaction.


This led to the creation of stablecoins, which are tokens that exist on a public blockchain like Bitcoin or Ethereum, but that retain a value equal to exactly one USD (or one note of another fiat currency, although the largest stablecoins are USD-denominated). Tether was the first USD stablecoin, and it was issued on the Omni network in 2014 (which is hosted on top of Bitcoin). Today, USDT can be used and traded across a wide range of blockchains, such as Ethereum, Tron, and Binance Smart Chain.

Exchanges and traders flocked to USDT (and stablecoins in general) because it removed the need for each participant to obtain their own bank account to hold fiat. This allowed them to focus on what they came to crypto to do – which was to help create a new financial system, and not play patty-cake with bank officers who work 9 to 5 from Monday through Friday. So long as the Tether organisation could satisfy its banking partner and prove to them that Tether held 1 USD or USD cash equivalent (e.g., short-term US Treasury debt) for each USDT that it minted, then USDT could trade as if it was USD within the crypto capital markets. When USDT was tendered back to Tether to be redeemed, Tether would instruct its bank where to wire the equivalent USD it held in its accounts. 

Entire businesses were suddenly enabled because they no longer had to worry about opening and retaining a bank account. For example, Binance did not have a fiat bank account for many years, even as it rose to become the largest spot exchange globally. Even today, with Binance now allowing USD to be deposited via traditional banks, the exchange’s most liquid trading pairs are not vs. USD, but vs. other stablecoins such as USDT, BUSD, or USDC.  

Trading firms using stablecoins were also at an advantage because they did not have to worry about waiting on large incoming and outgoing USD wires from their corporate bank accounts. If they could get initial fiat capital exchanged for crypto or a fiat stablecoin, they could trade as much as they liked as quickly as they liked. And whenever they needed to retreat to the “safety” of fiat, they could pull all of their funds out into a stablecoin at a moment’s notice with almost zero cost.

The Goal

Today, stablecoins solve a very real pain point in the crypto capital markets. They may not totally line up with the core tenets of crypto – namely, they are not decentralised whatsoever – but the point of stablecoins is not to create a decentralised product where it isn’t needed. Instead, they are simply intended to provide a fiat tokenisation service the banks refuse to offer. 

Bear with me, as I’m going to go on a slight tangent here, but it needs to be said: not everything needs to – or even should – be decentralised. That’s why I believe overcollateralised stablecoins such as MakerDAO / DAI and algorithmic stablecoins such as TerraUSD are fundamentally unnecessary. But unfortunately (and to its peril), the market tends to conflate the real reason why stablecoins exist – i.e., to allow traders to quickly move between fiat and crypto – with the goal of the broader decentralisation movement, which is to create a decentralised alternative for any centralised institution or entity that threatens to create inequity for the masses. 

The reality is that we already have a decentralised alternative for exchanging value that curbs the risks of centralised banking. It’s called Bitcoin. Stablecoins aren’t meant to serve as yet another decentralised store of value – again, their purpose is to bridge the gap between centralised and decentralised finance.

The problem with today’s stablecoins isn’t centralisation. It’s that no reputable, established banking institution is willing to launch their own. If JP Morgan (JPM) – the best run commercial bank in the world – launched a suite of G10 fiat currency stablecoins, it would put USDT, USDC (Circle), BUSD (Binance), etc., out of business immediately. Unlike the companies behind some of our existing stablecoin options, no one doubts that Jamie Dimon’s outfit knows how to take deposits and redeem them when required. JPM also fully understands how to use a public blockchain and integrate the technology into a coherent workflow. The company’s internal blockchain group, Onyx, has been at it for many years. And most importantly, JPM is a Too Big to Fail bank that serves as a member of the Treasury Borrowing Advisory Committee (which advises the US Treasury). If there’s an issue and JPM can’t pay out, the Fed would print the money they need to make JPM’s customers whole.

JPM Coin would attract hundreds of billions of dollars of assets in all major currencies. All exchanges and traders would adopt it instantly. The only issue is that it would also destroy the trillions of dollars that the global banking system earns annually from its transaction and foreign exchange fees.

There would suddenly be no need to pay egregious bank fees to move your money. Just send JPM Coin over the Ethereum network, which would cost you a few dollars in network fees at most. Paying ridiculous spreads to switch between currencies – say, between USD and the Euro – would be a thing of the past, as you could freely and cheaply swap between USD JPM Coin and EUR JPM Coin. Curve would just stand up a JPM EUR/USD pool, and you could conduct FX transactions 24/7 for less than 0.01%.  

Of course, it wouldn’t be all bad for JPM, as they would benefit from the additional deposits. It could lend those deposits and earn interest on them with no risk to the Fed. But, it would destroy other banking partners’ businesses overnight, and materially dampen future earnings of the company. McKinsey in a 2022 report estimated that globally, banks stand to lose $2.1 trillion in annual revenue if a successful retail Central Bank Digital Currency (CBDC) is introduced.

That’s why no bank with an account at the Fed will ever launch a stablecoin unless the government instructs them to do so. It’s also why, at this stage of the industry’s development, there has been – and will likely continue to be – space for some non-bank entity to offer the stablecoin services that the crypto capital markets desperately require.


Given the recent banking tremors reverberating through the crypto space following Silvergate’s and various other banks’ decisions to stop servicing stablecoins such as USDC and BUSD, the industry must come together and create a new product.

The goal is to create a token that is worth 1 USD but does not require the services of the fiat banking system. 

The goal is not to create a decentralised fiat currency. MakerDAO is great, assuming it actually is decentralised, but for 1 USD of value it requires locking up >1 USD worth of crypto. It removes more liquidity than it adds, which is a net negative for the system. What we need is a mechanism that allows you to lock up 1 USD worth of crypto to obtain 1 USD worth of a stablecoin.

The Satoshi Nakamoto Dollar, NakaDollar, NUSD


For those of you who do not like maths, please accept my condolences in advance. I promise that when you are done reading this, you can go back to reducing your cognitive abilities watching TikTok thirst traps.

1 NUSD = $1 of Bitcoin + Short 1 Bitcoin / USD Inverse Perpetual Swap

A Bitcoin inverse perpetual swap (e.g., Ticker: XBTUSD on BitMEX) which is worth $1 of Bitcoin paid out in Bitcoin has the following payoff function:

$1 / Bitcoin Price in USD

If Bitcoin is worth $1, then the Bitcoin value of the perpetual swap is 1 BTC, $1 / $1.

If Bitcoin is worth $0.5, then the Bitcoin value of the perpetual swap is 2 BTC, $1 / $0.5.

If Bitcoin is worth $2, then the Bitcoin value of the perpetual swap is 0.5 BTC, $1 / $2.

This function has some interesting properties. 

As the value of Bitcoin in USD falls and approaches $0, the value of the swap in Bitcoin terms approaches infinity. This is a risk factor to the product, as there will only ever be 21 million Bitcoin. The Bitcoin value increases in an exponential fashion as the USD price declines. This means if the price of Bitcoin falls quickly, and the liquidity on the exchange where these derivatives are traded is thin, there is an increased chance of a socialised loss situation. I will address why this is important later.

As the value of Bitcoin in USD increases and approaches infinity, the value of the swap in Bitcoin terms approaches 0. This is extremely helpful, because it means if you have a fully funded position whereby at entry you deposit the exact amount of Bitcoin that the swap represents, there is no chance you can ever go bankrupt or get liquidated. 

Let’s prove this out quickly.

Assume that you would like to create a synthetic USD or 1 unit of NUSD, and the price of Bitcoin is $1, and each XBTUSD swap is worth $1 of Bitcoin at any price.

To create 1 NUSD, I need to deposit 1 BTC on a derivatives exchange (e.g. BitMEX) and short 1 XBTUSD swap.

Now the Bitcoin price falls from $1 to $0.1.

Value of XBTUSD Swap in BTC = $1 / $0.1 = 10 BTC

PNL of XBTUSD Swap Position = 10 BTC (current value) – 1 BTC (initial value) = +9 BTC (I’m making money)

I have 1 BTC deposited as margin with the exchange.

My total equity balance on the exchange is 1 BTC (my initial deposit) + 9 BTC (my profit from my XBTUSD position), and my total balance is now 10 BTC. 

The Bitcoin price is now $0.1, but I have 10 BTC, and therefore the USD value of my total portfolio is unchanged at $1, $0.1 * 10 BTC.

Now the Bitcoin price rises from $1 to $100.

Value of XBTUSD Swap in BTC = $1 / $100 = 0.01 BTC

PNL of XBTUSD Swap Position = 0.01 BTC (current value) – 1 BTC (initial value) = -0.99 BTC (i’m losing money)

I have 1 BTC deposited as margin with the exchange.

My total equity balance on the exchange is 1 BTC (my initial deposit) – 0.99 BTC (my loss from my XBTUSD position), and my total balance is now 0.01 BTC. 

The Bitcoin price is now $100, but I have 0.01 BTC, and therefore the USD value of my total portfolio is unchanged at $1, $100 * 0.01 BTC.

As you can see, as the price went up 100x, I did not go bankrupt.

This Bitcoin + Bitcoin / USD Inverse Perpetual Swap relationship is so fundamental and important that I must go through the maths every time I talk about it. This relationship allows us to synthetically create a USD equivalent, without ever touching USD held in the fiat banking system or a stablecoin that exists in crypto. It also does not encumber more crypto collateral than it creates in fiat value, like MakerDAO.


This is extremely important: rather than relying on hostile fiat banks to custody USD so that it may be tokenised, the NakaDollar would rely upon derivatives exchanges that list liquid inverse perpetual swaps. It would not be decentralised – the points of failure in the NakaDollar solution would be centralised crypto derivatives exchanges. I excluded decentralised derivative exchanges because they are nowhere near as liquid as their centralised counterparts, and their pricing oracles rely upon feeds from centralised spot exchanges. 


The first step is to create an organisation that exists both in the legacy legal system and as a crypto native DAO. The DAO must have a legacy legal existence because it will need an account on all the member exchanges.

The DAO would issue its own governance token: NAKA. There would be a finite amount of NAKA tokens created at inception. The first raise would be to fund a sinking pool, whose use case I will describe later, and to create an initial stock of NUSD supply. Subsequently, the NAKAs would be distributed from the DAO in exchange for the provision of liquidity across the DeFi ecosystem. E.g., NAKAs could be emitted to providers of NUSD vs. another asset liquidity on Uniswap or Curve pools. Also, if the NAKA token was in high demand, the DAO could decide to sell more NAKA to further bolster the size of the sinking fund. 

NAKA holders could vote on operational matters such as who the member exchanges are. Member exchanges would hold the BTC and short inverse perpetual swap positions that underpin the 1 NUSD = 1 USD exchange rate. The member exchange account would be in the name of the DAO. Member exchanges would need to at a minimum offer a Bitcoin-margined Bitcoin / USD inverse perpetual swap. There would need to be more than one member exchange, as the point is to involve as many stewards of the crypto ecosystem as possible, and reduce single points of failure.

NAKA governance tokens and NUSD would be ERC-20 tokens that live on the Ethereum blockchain.

For the purpose of the following examples, assume there are two member exchanges – BitMEX and Deribit. Both exchanges offer a Bitcoin-margined Bitcoin / USD inverse perpetual swap, XBTUSD.

The NAKA holders would also vote on how to distribute the net interest margin. The swaps historically have net paid interest to shorts – this is called funding, and most swaps pay funding every eight hours. Over time, the net equity balance of the DAO in USD terms would exceed the value of NUSD tokens outstanding. In accounting terms, the shareholder’s equity of NakaDAO would be positive and growing.

Authorised Participants (AP)

Only a few firms or individuals would be allowed to create and redeem NUSD directly from the DAO. 

I envision the following requirements to become an AP:

  1. Have a fully verified account on each member exchange.
  2. Meet any identity verification requirements of the DAO.

NUSD would trade at an explicit (e.g., NUSD / USD) or implicit (e.g., BTC / NUSD that is at a premium or discount to BTC / USD) value vs. a fiat USD. If NUSD is trading at a premium, APs would create 1 NUSD at a rate of 1 NUSD = 1 USD, and sell 1 NUSD and receive more than 1 USD in order to earn a profit. If NUSD is trading at a discount, APs would buy 1 NUSD for less than 1 USD, and redeem 1 NUSD and receive 1 USD in order to earn a profit.

NakaDAO BTC/USD Spot Price Feed

The DAO would need to have its own opinion on what the USD value of Bitcoin is on a spot basis. This would inform how many swaps are needed to properly create units of NUSD.

Each member exchange has their own view on what the spot price of BTC/USD is.

Spot Price = Sum (Member Weight * Member BTC/USD Spot Index)


BitMEX Weight = 50%

Deribit Weight = 50%

BitMEX BTC/USD Spot Price = $100

Deribit BTC/USD Spot Price = $110

NakaDAO BTC/USD Spot Price = (50% * $100) + (50% * $110) = $105


An AP wishes to create 100 NUSD.

NakaDAO BTC/USD spot price is $100.

There are two member exchanges (BitMEX and Deribit) each with a weighting of 50%.

$100 at a BTC/USD price of $100 is equivalent to 1 BTC.

If each XBTUSD swap is worth $1 of Bitcoin at any price, then to have swaps worth $100 notional I need a quantity of 100 swaps.

On each member exchange, the AP would need to have the following:

0.5 BTC margin available = 50% * 1 BTC

Short 50 XBTUSD swaps = 50% * Short 100 XBTUSD Swaps

A block trading messaging protocol like Paradigm would be used to cross the Bitcoin and swaps between the DAO and the AP.

This is what happens when the AP and the DAO cross on both exchanges:

AP ERC-20 Address:

Receives 100 NUSD ERC-20 tokens

AP on BitMEX:

Loses 0.5 BTC margin

Closes 50 short XBTUSD swaps or Opens 50 long XBTUSD swaps

AP on Deribit:

Loses 0.5 BTC margin

Closes 50 short XBTUSD swaps or Opens 50 long XBTUSD swaps

DAO on BitMEX:

Gains 0.5 BTC margin

Opens 50 short XBTUSD swaps

DAO on Deribit:

Gains 0.5 BTC margin

Opens 50 short XBTUSD swaps

DAO Treasury:

Increases NUSD liability by 100, meaning it issued 100 NUSD

A fee would be paid by the AP to the DAO in order to create NUSD.


An AP wishes to redeem 100 NUSD.

NakaDAO BTC/USD spot price is $100.

The AP must possess 100 NUSD on an ERC-20 address.

A blocktrading messaging protocol like Paradigm would be used to cross the Bitcoin and swaps between the DAO and the AP.

AP ERC-20 Address:

Sends 100 NUSD to the DAO’s wallet address

AP on BitMEX:

Gains 0.5 BTC margin

Opens 50 short XBTUSD swaps

AP on Deribit:

Gains 0.5 BTC margin

Opens 50 short XBTUSD swaps

DAO on BitMEX:

Loses 0.5 BTC margin

Closes 50 short XBTUSD swaps

DAO on Deribit:

Loses 0.5 BTC margin

Closes 50 short XBTUSD swaps

DAO Treasury:

Decreases NUSD liability by 100, meaning it burned 100 NUSD

A fee will be paid by the AP to the DAO in order to redeem NUSD.

As you can see, creating and redeeming moves NUSD, BTC, and swaps between the AP, the DAO, and their respective accounts on the member exchanges. There are no movements of USD which require the services of banks. 

NakaDAO Balance Sheet:


Bitcoin and short inverse perpetual swaps held on the member exchanges.


The total amount of NUSD issued.

To verify that the NakaDAO is not playing funny with the money, we would need an Ethereum blockchain explorer like, and attestations from the exchanges on the DAO’s Bitcoin balance and the DAO’s total open short swap position. Then, using the simple maths described above, we can compute the DAO’s shareholder equity and ensure assets are greater than or equal to liabilities.

As I mentioned above, the swaps have historically net paid interest to shorts. The interest is in Bitcoin, and therefore, the Bitcoin held at the member exchanges should grow. If that is the case, when you net assets and liabilities, there would be a surplus. There would also be periods where shorts net paid funding, and in that case there could also be a deficit. 

NakaDAO Sinking Fund:

There are three risks that I will now cover. As I walk through these risks, remember that the initial sinking fund and subsequent sales of NAKA governance tokens can help address any capital shortfalls.

Risk 1: Member Exchange Loses Bitcoin 

The member exchange could lose customer Bitcoin deposits for a variety of reasons. The most likely culprits are probably insider theft or an external hack. Either way, the sinking fund must be employed to help make up the difference. 

Risk 2: Negative Funding

When funding is negative, short swap holders pay interest to the longs. This could cause the balance of Bitcoin to fall to such a degree that 1 NUSD is synthetically worth less than 1 USD. This will be clear as the DAO assets will be worth less than the liabilities. At that point, the sinking fund must be employed to help make up the difference.

Risk 3: Socialised Loss

As I described above, when the price of Bitcoin falls, the short swap holder has an unrealised profit. Given that the margin currency is in Bitcoin, and the value of the Bitcoin a long swap holder owes increases exponentially as the price falls, in some cases the longs would be unable to pay what they owe the shorts. This is when the exchange would step in and either reduce the profit of the shorts, or close a portion of the shorts’ position. Either way, once the correct ratio of Bitcoin to short swap is re-established, the DAO may be short on Bitcoin because it was not paid out in full or allowed to keep its total desired position. At this point, the sinking fund must be employed in an attempt to make up the difference.

Industry Buy-in

The ecosystem of large, centralised exchanges should support this type of stablecoin for a variety of reasons – and in doing so, they should denominate all their crypto-to-fiat pairs as crypto-to-NUSD. This would create an inherent demand amongst traders to create and hold NUSD, with holding NUSD becoming a prerequisite for trading crypto.

Using NUSD vs. other bank-dependent stablecoins would remove the anxiety many traders face regarding whether the stablecoin they are using will exist tomorrow, next month, next year, etc. Extinguishing that anxiety would allow for more trading because traders would no longer be worried that they might get stuck with a bunch of stablecoins that they cannot redeem for 1:1 of their USD value.

Using NUSD vs. other stablecoins would remove a central pillar of crypto FUD. I’m fucking sick and tired of reading about how such and such stablecoin is a ponzi scheme, and once someone exposes them or their bank ditches them, the whole crypto house of cards will come tumbling down. The repetition of this FUD keeps traders away, and we can easily eradicate it for good.

Wide adoption of NUSD would stop every large exchange from racing to create its own stablecoin in search of a competitive advantage. If most of the large players were member exchanges, then everyone would benefit from the growth of NUSD. It would be substantially more beneficial than the current state of affairs, which features a multitude of USD stables. Imagine how fucked up it would have been if Sam Bankman-Fried had succeeded in fooling people to trust his FTX organsation with even more USD in order to back a stablecoin. Believe it or not, FTX was in active discussions seeking the relevant approvals to launch such a product. Thankfully, the polycule blew up before they had the chance to steal even more people’s money.

We Have the Power

Crypto exchanges and their depositors are rightfully very wary of any centralised entity holding their wealth. Financial regulators around the world now have a real-world example of what happens when crypto fiat deposits scurry in a hurry – Silvergate is fucked because it didn’t properly risk manage a swift exit of its crypto deposits. It doesn’t matter that Silvergate is a US-regulated bank. Do you want to fuck around and find out how the banking bankruptcy process works first-hand? Fuck no – you’re going to pull your money out to a banking institution that is perceived as safer at the first hint hint of danger.

The failure of a small, backwater bank run by a bunch of muppets is one thing. The facet of the USD stablecoin ecosystem that scares the Fed and US Treasury the most is this: what if the nearly $100 billion worth of US Treasury bonds, bills, and notes that Tether, Circle, and Binance collectively hold had to be disposed of in a few trading days to meet redemption requests? Liquidity in the US Treasury market is much lower than it has been historically due to banking regulations put in place after the 2008 Great Financial Crisis. It is no longer profitable (or possible) for banks to provide the same depth of liquidity in the US Treasury market as they used to. And therefore, in these times of heightened volatility and lower liquidity, a $100 billion market order dump of these bonds would cause some serious market dysfunction.

USD fiat stablecoins simply won’t be allowed to scale to the size needed to take crypto trillions of dollars higher in market cap (assuming you believe total crypto market cap is positively correlated to the total amount of USD stablecoins outstanding). It is just too risky to the US financial system to have all those dollars in the hands of organisations that must immediately liquidate their debt holdings to make good on their promises to their customers. And so, while the three majors (USDT, USDC, BUSD) might continue to exist, there is a ceiling on how large they can grow their deposit base in aggregate.

The reason why these large stablecoins hold large amounts of US Treasury debt is because it pays interest and is almost risk-free in USD terms. The stablecoin issuers pay no interest to holders of the stablecoins themselves. This is how they generate revenue.

But this is not a reason for concern. We, the crypto faithful, have the tools and the organisations needed to support $1 trillion or more worth of NakaUSD outstanding. If this solution were embraced by traders and exchanges, it would lead to a large growth in Bitcoin derivatives open interest, which would in turn create deep liquidity. This would help both speculators and hedgers. It would become a positive flywheel that would not only benefit the member exchanges, but also DeFi users and anyone else who needs a USD token that can be moved 24/7 with a low fee. 

It is my sincere hope that a team of motivated individuals starts work on such a product. This is not something that should be owned (e.g., via large governance token holdings), or led by any of the large, centralised exchanges. If I see any credible, independent team working on a similar product, I will do all that is in my power to help them bring it to fruition.

The post Dust on Crust appeared first on BitMEX Blog.

Curve Ball

(Any views expressed in the below are the personal views of the author and should not form the basis for making investment decisions, nor be construed as a recommendation or advice to engage in investment transactions.)

World War 3 has already begun, whether the mainstream media and political elite wish to acknowledge it or not – it’s just not being fought using the same methods or in the same theatres of war as the last two. Instead, three nuclear superpowers (USA, Russia, and China) are sparring against each other on the physical battlefield through proxies (Ukraine), in cyberspace, in finance via sanctions, in semiconductors via virtual embargos, in space via satellites, and in mental health (largely via social media). Tick tock … 

In every war, the side that has won has always been the one that was able to most efficiently marshal resources towards its production of instruments of war. And given that everything produced by humanity depends on energy, all wars are won and lost on the availability of energy. Since WW2, that has meant hydrocarbons.

Don’t let the acolytes of Her Climate Royal Highness, Greta Thunberg, mislead you into thinking hydrocarbons such as oil, natural gas, and coal don’t matter. If these things didn’t matter, the Middle East wouldn’t be such a geopolitically important place, and small city-states would not be permitted to host the FIFA World Cup in 40-degree Celsius heat using air-conditioned mega-stadiums built with mostly imported foreign labour.

Given that we are in a global conflict, the question is, if there were some major disruption in the availability of hydrocarbons that caused their global price to double or triple overnight, how would the major powers wield their weapons of monetary policy in response? To that end, some of the superpowers at war (and their fair-weather friends) are major swing energy producers – so it’s safe to assume that energy would be weaponised to inflict damage on those who do not produce enough of it domestically. And building off that premise, as investors, our directive is to forecast how Bitcoin would respond to such a scenario – because Bitcoin is pure energy converted into a digital monetary instrument via the mining process.

For this essay I will focus on oil’s supply, demand, and price as a proxy for global energy. What would happen to the price of Bitcoin in the medium-term if oil ramped 2x to 3x overnight? To answer this question, we must guess at what the major global financial powers would do in response. The countries/economic blocs in question are the United States (US), European Union (EU), China, and Japan. Together, these territories account for a large percentage of the global economy – and more importantly, their central banks enact monetary policy that, in the aggregate, determine how loose or tight financial conditions are globally.

Here are a few examples of realistic potential situations that could cause a rapid rise in the price of oil:

  1. Israel and/or Saudi Arabia decide to bomb a piece of critical infrastructure in Iran, and Iran finally decides to escalate by closing the Strait of Hormuz.
  2. Russia, Saudi Arabia, and/or other large oil producers decide to materially reduce their production of oil.
  3. Critical refineries and/or oil and gas pipelines are taken offline due to deliberate sabotage. (This has already happened to the vital natural gas Nord Stream I and II pipelines between Russia and Germany.)

Of all these hypothetical scenarios, the first one seems the most likely to occur at this stage. Given the news that Iran has recently reached 84% enrichment of uranium, it’s probably safe to assume that Israel and Saudi Arabia are currently assessing whether increased military action against the Iranians is warranted.

Primer on Global Oil Supply and Demand

Before we jump into the meat of the analysis, I want to set the stage with some useful information on the global oil market. I will be using the shorthand “mm b/d” to stand for a million barrels per day. 

Hydrocarbons – i.e., crude oil and its refined products – are so important to modern life because they are so energy dense. For all the hype around electric vehicles, gasoline and diesel (which power the majority of global vehicles) are close to 100 times more energy dense than lithium-ion batteries. This is why breaking our addiction to hydrocarbons, if it ever happens, will take much longer and be much more expensive than is commonly expected. Oh, and by the way – guess what powers those charging stations? Natural gas and coal-fired power plants. You just can’t escape hydrocarbons.

Oil Playa’s Ball:

Source: EIA

The US is the largest global producer and consumer of the sticky-icky. Given that all economic activity is energy transformed, it is no surprise the US is the world’s preeminent economic superpower. It doesn’t have to rely on importing a significant amount of the oil needed to power its economic juggernaut, giving it a leg up on some of its economic enemies. But if those foes could devise a means of becoming self-sufficient, they could threaten the US’s throne. That’s why the combination of cheap Russian energy with the manufacturing prowess of Germany and China petrifies the US political establishment – and it’s why a rapprochement between those three musketeers must be prevented at all costs. The most obvious risk to global oil supplies is a blockade of the Strait of Hormuz. 

It would be relatively trivial for Iran to disrupt the maritime flow of oil using anti-shipping mines and fast boats. At that point, the Emperor (US President Biden) would call upon House Harkonnen (the US Navy) to restore the flow of spice (ahem, oil). It would not be easy to restore flows because Iran would only need to damage a few civilian vessels to make passage through the strait uneconomical due to the elevated cost of maritime insurance insurance (or potentially making it impossible to secure such insurance at all). The US, on the other hand, would need to deliver a knockout blow so firm that it restores global confidence that civilian commerce can continue with little to no risk. This is the definition of asymmetric warfare.

If the strait is blocked, the next question is whether it can be bypassed. 

The Strait of Hormuz is the world’s most important oil chokepoint because of the large volumes of oil that flow through the strait. In 2018, its daily oil flow averaged 21 million barrels per day (b/d), or the equivalent of about 21% of global petroleum liquids consumption…There are limited options to bypass the Strait of Hormuz. Only Saudi Arabia and the United Arab Emirates have pipelines that can ship crude oil outside the Persian Gulf and have the additional pipeline capacity to circumvent the Strait of Hormuz. At the end of 2018, the total available crude oil pipeline capacity from the two countries combined was estimated at 6.5 million b/d. In that year, 2.7 million b/d of crude oil moved through the pipelines, leaving about 3.8 million b/d of unused capacity that could have bypassed the strait.” 

Source: EIA

To summarise, blocking the Strait of Hormuz removes approximately 17.3mm b/d from the global markets. Of that amount, only 3.8mm b/d can be rerouted via pipeline to the Red Sea, which leaves a net global deficit of 13.5mm b/d. That is approximately 13.6% of daily global demand, according to 2022 data from the EIA. The marginal barrel of oil which determines the last price would immediately become extremely expensive, as all other supplies would be spoken for. Woe be the nation that must bid in the spot market for that marginal barrel. Usually, it is the poorest flags that are most affected. We would likely see an outcome similar to how nations such as Pakistan experienced brownouts because they lacked the natural gas needed to generate electricity and couldn’t afford to pay whatever it took like the rich Europeans.

The US

Even though the US is the largest oil producing nation, they are still a net-energy importer. That means that US consumers pay the global price of oil. Also important is the fact that oil companies are private, for-profit companies, which are therefore free to sell their refined product to whoever will pay the most in the global market. The US does not have state-owned firms that must sell domestically first. Because the US consumer pays the global price, US foreign policy is very focused on securing a pliant Middle East via military force. Since I entered this universe in 1985, the US has fought two wars in Iraq, a war in Afghanistan, participated in a civil war in Syria, and generally offered overt and covert support to a variety of “moderate rebels” who have participated in armed conflict throughout the Middle East. A pan-Arab coalition of Middle Eastern nations focused on securing the highest price for their oil for the betterment of their citizens – rather than killing each other – is to be prevented at all costs.

If a major amount of oil is taken offline for whatever reason, the rise in price will directly affect US consumers. Thankfully, the US has ample reserves of untapped oil deposits should there arise the political and financial will to drill, baby, drill.

US untapped (aka proved) energy reserves

(all charts and info from the EIA)

Year-end 2021 shale reserves: 393.8 trillion cubic feet

The US imports 2.8mm b/d from the global market. If the US were able to bring 2.5% of its proven 41.2 billion barrels online, it would achieve a year’s worth of energy self-sufficiency. At that point, US politicians give zero fucks what happens over in Sand Land. 

To take this thought experiment a bit further, what if the elite politicians were able to ride roughshod over the anti-drilling forces and go all in on energy production? Then, the US would become the swing energy producer of the world, supplanting Saudi Arabia. For a modern global civilisation that requires hydrocarbons to exist, that is an immense power. It begs the question of whether the US might actually welcome a closure of the Strait of Hormuz, as it does the following:

  1. Knocks out the ability for Saudi Arabia to ship most of its oil to the global market – especially to its number one customer, China. US President Biden and Saudi Crown Prince MBS ain’t BFFs no more after Biden called Saudi Arabia a ‘pariah’.
  2. Provides the political cover to restart extensive domestic oil drilling in the US – which, as I will subsequently argue, allows the Fed to start printing money again.
  3. Cements the US as the global swing producer of oil, which gives the US immense global power over the price of energy. Such power would remove the need for the US to undertake far-flung military options to suppress its foes. Instead, the President could play “Red Light / Green Light” with the supply of oil to certain countries, enabling the US to force compliance with American diktats.

And so, as the not-so-covert operations of Israel and Saudi Arabia against Iran ratchet higher in the wake of Iran’s increased uranium enrichment, there’s a chance the US might stand back and do nothing to stop the violence.

A quick aside on how rapidly the political opposition to drilling would disappear should the price of oil spike: the current US administration is trying to seem green by hamstringing the domestic energy industry’s ability to drill for more oil. But, look at what the current administration did in the Fall of 2022 facing 40-year-high inflation:

They dipped into the energy cookie jar and depleted the country’s strategic petroleum reserves. That drove gasoline prices lower, which hit right as voters headed into the ballot box.

At some point, the reserve must be replenished, but that’s a problem for the next election cycle. Even if the government ends up covering their short at higher prices, the political issue of energy inflation right before a national election was mitigated … Mission Accomplished!

The point of this example is to show that the current crop of politicians is likely to allow their green credentials to wilt quickly if it means reducing the price of gas for their constituents. So, if oil supply in the global market suddenly shrinks, it means they’ll probably be willing to ditch policies which prevent additional drilling for oil.  

Such a situation would make it more politically palatable to return to the well(s), but countries would also then run into the issue of needing to figure out how to pay for the additional CAPEX required for drilling. Drilling for oil is extremely capital intensive. Not only do you have to build the machinery and facilities to explore and then drill, but you also must continuously improve your methods to either find more oil fields or increase the efficiency of existing wells. That is why most of the companies that do such work are publicly listed companies. They can tap the deepest pools of global liquidity in the reserve currency of the world.

To estimate the magnitude of all public and private energy companies’ combined annual CAPEX, I calculated the total 2022 CAPEX for all constituents of the SPDR Energy ETF (XLE US), which came out to $89.47 billion. This ETF includes giants such as ExxonMobil and Chevron, two of the largest energy producers globally.

 Given that the price of oil is extremely volatile, energy companies routinely resort to borrowing money to finance the stupendous amount of cash they must spend each year just to stay in the game. And therefore, when money is cheap (or even free), these companies can drill and pump more oil. That is one of the major reasons the US was able to dramatically increase its domestic production of oil via shale deposits from 2010 to 2020.

US shale production grew dramatically from 2010 to 2018. At the same time, US 10-year treasury yields were at their lowest in decades, and total US non-financial corporate debt outstanding doubled.

IMF Total US Outstanding Non-Financial Corporate Debt

US 10-Year Treasury Bond Yield

But when oil prices rise, the orthodox central banking playbook says to raise interest rates to cool demand, which lowers consumption of energy, and hopefully brings down prices. Global investors in US Treasuries (UST) count on the Fed to tighten policy to maintain the purchasing power of USTs vs. oil.

 The problem in this wartime, high-oil-price scenario is that the only way the US is going to get more oil domestically is by encouraging domestic companies to raise CAPEX, which will necessitate higher borrowing. But, these companies cannot borrow affordably when interest rates are high and rising. And this is why I believe that the Fed would have to lower interest rates and loosen financial conditions in such a situation, even as the international price of oil rose. With cheaper money in plentiful supply, domestic US energy companies could provide the cheap energy the US needs in the face of diminished global supply. While the trained economists at the Fed might initially baulk at such a policy, the politics will trump whatever nonsense they learned at their elite universities. In wartime, the Central Bank does whatever the politics of the moment dictate, independence be damned.

The EU

EU member states like Italy and Germany might produce some bad ass cars (like Lambos and ‘rarris), but these sexy motor chariots can’t move without gas. The EU is woefully deficient in energy – so from their perspective, the green energy transition makes sense. However, wind and solar are just not consistent and cheap enough once you factor in all the externalities faced by the poor countries supplying the raw materials needed to build wind turbines and solar panels. Also, it’s not windy or sunny all the time.

For the purposes of this discussion, when I refer to the EU, I am not including the United Kingdom (UK) or Norway. This is important, and I will explain why shortly.

Europa provides some truly depressing statistics for our baguette- and cheese-eating friends.

In 2020, the EU imported roughly 10.2 mm b/d of oil. They must import that quantity because domestic production was only 0.43 mm b/d in the same year. The below chart outlines where the EU imported most of its oil from that year.

There are few major issues with the places from which the EU sources most of its energy. As we know, Russia has been cancelled, and the EU no longer makes direct purchases of Russian oil. But in 2020, Russia accounted for ~26% of all imports. That alone is a massive hole to fill – but it gets worse.

Let’s assume supplies from Saudi Arabia and Iraq are taken offline because they cannot ship the crude via the Strait of Hormuz and the pipeline to the Red Sea is full. That knocks out another ~15% of the EU’s imports. So, taken together, the war with Russia and Middle Eastern disruptions would combine to knock out a little over 40% of total EU oil imports. 

Putting our common sense caps on for a minute – a piece of apparel I know is currently in short supply in Brussels – the EU in this situation would become very dependent at the margin on its “allies” (i.e., Norway, the US, and the UK). The reason I lump these three in one group is because they are all culturally similar (all are majority Judeo-Christian derivative societies), and they are all members of NATO.

Norway has the capacity to pump a lot more oil into the EU if the EU is willing to pay for it. As I described above, the US has a vast amount of untapped proven oil reserves whose output could be sold on the global market at “mates’ rates” to their allies. And finally, the UK’s Oil and Gas Authority estimates that the North Sea contains between 10 to 20 billion barrels of oil. All that is needed is for the politicians to allow the major energy companies of each of these countries to explore, develop, and pump this oil.

UK Oil and Gas Authority

The EU doesn’t have much in the way of untapped proven oil reserves that are just waiting to be commercialised. Therefore, the political question is twofold: first, will the EU restore friendly relations with Russia in order to resume their oil imports? And second, if EU/Russian relations continue to sour, how will the EU pay for increased energy from Norway, the US, and the UK, all of whom are outside of the EU’s currency union?

I have some assumptions. Given the current political rhetoric of the elites in charge of the EU, I don’t believe they can return to the warm, energy-filled bear hug of President Putin, even if the war in Ukraine ends immediately. The US would not allow it (Pulitzer Prize winning journalist Seymour Hersh alleges the US and Norway deliberately sabotaged the Nord Stream I and II pipelines to cement Europe’s energy dependence on its supposed Western “allies”), and EU politicians are not typically willing to go against Washington’s wishes. In addition, EU politicians are likely unwilling to stomach a large-scale curtailing of the bloc’s energy usage – particularly one large enough to offset the removal of Russian and Middle Eastern crude oil, since such a significant reduction in energy usage would inevitably be accompanied by a double-digit economic crash. Just look at how EU politicians have already resorted to handing out energy goodie bags to their voters to shield them from the rising cost of all forms of energy, rather than requiring them to make hard sacrifices.

Given the above, my belief is that the ECB will be called upon to print EUR, which can then be used to pay for increased imports of Norwegian, US, and UK oil. But, I also think that those three countries will not be so generous as to accept EUR for their oil. It’s a trash currency from a region with no population growth, expensive and unproductive labour, and no energy. Instead, I expect they will require the ECB to print EUR, sell the EUR for USD in the global FX markets, and then pay for the oil. This would weaken the EUR vs. the USD, which would be bad in the sense that imported energy costs would rise for the EU, but would be good in the sense that a weaker EUR would cheapen EU goods’ exports.

In addition, to help finance the Western energy companies supplying them with oil, the ECB will likely use some of its newly printed EUR to purchase those companies’ equity and debt – enabling the companies to increase CAPEX and pump more oil. Of course, printing money doesn’t solve the root issue of a lack of domestic energy supplies. But, if EU politicians are unwilling to re-engage with Russia and improve their relationships with their non-aligned former colonies, then the EU’s only choice will be to get pummelled by their Western “allies” and pay for the privilege with printed fiat money.


Japan is just fucked. They import almost 90% of their energy needs. Sadly, according to the EIA, as of 2020 Japan had only 44 million barrels of domestic proven oil reserves. The best Japan can do is restart all of its nuclear reactors, but even that won’t be enough to shield the land of the setting sun from the impacts of super-duper expensive hydrocarbons.

Japan imported 94.4% of its oil from the Middle East, which was 2.57mm b/d. If shipping said oil is not possible due to a closure of the Strait of Hormuz and/or the Strait of Malacca, only two countries can feasibly bridge the gap due to Japan’s geographic location: Russia and the US.

Even though Japan fully supports the US in its proxy war against Russia, its lack of energy necessitated resuming purchases of “dirty” Putin oil in January of this year. Unfortunately, that only amounted to 0.0-2mm b/d, or 0.9% of its total monthly oil imports. In a pinch, Russia won’t be able to be the swing producer for both Japan and China. This means that Japan would be fully reliant on remaining in the good graces of the US in order to replace its Middle Eastern supply. As I mentioned earlier, the US has plenty of spare proven oil reserves to supply … at the right price.

So, where oh where shall Japan get the money to pay for US oil?

The BOJ has a money printer, and they definitely aren’t afraid to use it. The BOJ can pay for its American oil in two ways. First, the central bank can help fund the expansion of US oil production by using its printed Yen to invest in equity and/or the debt of US energy companies. And second, the BOJ must also continue manipulating the price of Japanese Government Bonds (JGB) so that the Ministry of Finance can afford to pay its ballooning USD oil import bill.

The most natural way to pay for imports from a particular country is to have exports to the same destination. But, “reshoring” is the new trend. Companies and governments don’t want far-flung supply chains. They are willing to bring manufacturing production back home and hand power back to labour. Remember – US President Biden is a staunch supporter of unionised labour. That means there is less opportunity for Japan to sell the US goods in order to pay for oil. Printing money is the only way. This logic applies to Europe as well.

The US don’t take no EUR, nor JPY. That means the Yen will continue to weaken against the USD, and freshly printed Yen will be sold for USD in order to pay for oil.


There are no easy answers for China. They don’t have much domestic untapped energy reserves. According to a 2021 SCMP article, China had only 280.7 million barrels of additional proven oil reserves as of 2017. They are very reliant on Middle Eastern oil shipped through the Strait of Hormuz and the Strait of Malacca. They are at war with the US and therefore cannot expect any help from the US or its allies. And building overland pipelines from either the Middle East or Russia takes time, and these pipelines must cross through a variety of other nations who may throw up obstacles to obstruct said pipelines’ safe completion.

Nearly one-third of the 61% of total global petroleum and other liquids production that moved on maritime routes in 2015 transited the Strait of Malacca, the second-largest oil trade chokepoint in the world after the Strait of Hormuz. Petroleum and other liquids transiting the Strait of Malacca increased for the fourth time in the past five years in 2016, reaching 16 million barrels per day (b/d).” 

Source: EIA Today in Energy, 2017

 The EIA estimates China’s oil consumption averaged 14.76mm b/d in 2021. China domestically pumps 4.0mm b/d, which means they must import 10.76mm b/d. China unfortunately receives most of these oil imports via sea – primarily through the Strait of Malacca, which I talked about above. China desperately needs to diversify its oil supplies away from maritime delivery to delivery via overland pipeline. 

Currently, there are two major pipelines (Atasu-Alashankou and ESPO) connecting China and Russia. Combined, approximately 1.273mm b/d can transit through these pipelines into refineries in China. (The stated total capacity of the two pipelines is 55 MMtpa, which I converted to a mm b/d equivalent.)

Below is some scary arithmetic for the Party:


mm b/d

Oil Consumption


Oil Production


Total Imports



Imports via Pipeline


Imports via Sea



% of Imports via Sea


The US Navy’s bread and butter is patrolling sea lanes. It would be relatively trivial for the US to shut the Strait of Malacca. On paper, Singapore is a neutral country, friends with both China and the US. However, Singapore purchased over $27.4 billion worth of American weapons from 2017 to 2021. It remains an open question how Singapore would respond to any provocative actions in the strait if they originated from the country responsible for supplying its military hardware.

Reality dictates that, in the face of higher energy prices, China would need to dramatically reduce its energy consumption while building more overland pipelines to Central Asian energy producers. Telling your plebes to curtail their lifestyles in order to save energy is not an easy conversation. No Western politicians have been able to pull it off successfully – just look at how quickly so-called climate-focused politicians in the West resorted to coal, nuclear, and wood burning to keep their people from having to make hard sacrifices when they stopped buying Russian energy.

That said, the Chinese Communist Party (CCP) just demonstrated they are perfectly willing to place immense hardship on their comrades because … well, because the government said so. Remember the Zero-COVID policy of 2020 to 2022? The CCP locked down a country of 1.4 billion people in service to a policy which everyone knew would never prevent the spread of a highly transmissible virus. Xi Jinping expended enormous political capital to maintain said policy, and was willing to target outright economic contraction to achieve his goal. This begs the question: was Zero-COVID just a dress rehearsal for a longer lock down in the near future, as WW3 escalates and energy must be conserved?

If China needed to dramatically slow its economic growth to buy itself time to shore up its energy supplies, the Party would likely be perfectly willing to execute said policy. Given that Chinese growth is debt-financed, the PBOC would be called upon to tighten financial conditions. In this scenario, I would expect interest rates to rise and credit to tighten materially. Any available credit would be funnelled to firms that could help build infrastructure to pipe Middle Eastern and Russian oil into China. Chinese state-owned energy firms would also be called upon to use their expertise to help the Russians upgrade their current and planned oil wells. After the Ukraine war broke out last year, many Western oil and gas services companies left Russia. Russia became very dependent on China’s knowhow to elevate its production to levels not seen since the fall of the Soviet Union in 1989.


I learn so much when I write these essays. I started out with the opinion that the US would suit up and inflict pain on Iran should they close the Strait of Hormuz. But after conducting the research for this article, I now believe that a severe contraction in the supply of Middle Eastern oil to the world would disproportionately benefit the US.

The US and its unofficial colony, Canada, currently supply 26% of the world’s oil. The US has a vast amount of untapped proven oil reserves just waiting to be liberated by a drill bit. If the tension in the Middle East boiled over into outright conflict, the US could in short order become the world’s most powerful and plentiful crude oil swing producer without having to fire a single bullet or Tomahawk cruise missile.

There just isn’t enough oil in the world that is easily and profitably accessible aside from in North America. As a result, the EU and Japan would have no choice but to prostrate themselves financially by printing money to buy whatever oil the US would give them. All three countries/economic blocs would need to reduce the cost of money in order to either produce or consume more oil. Only the PBOC would have to tighten monetary conditions, because the US would not bail China out of its energy shortage when they are at war.

With the EU and Japan firmly on-side vis-a-vis US foreign policy, an integration of the Eurasian landmass can be stymied. The manufacturing knowhow of Europe cannot access the cheap energy of Central Asia, and Japan hems in Russia and China from a naval perspective, denying them both access to the deep blue sea (i.e., the Pacific Ocean).

Four Square

TL;DR – if energy suddenly became much harder to come by and prices rose dramatically as a result, we could expect each country to respond as follows:

  • US – goes from tightening to loosening monetary policy
  • EU – goes from tightening to loosening monetary policy
  • BOJ – no change to current loose monetary policy
  • POBC – goes from loosening to tightening monetary policy

 On balance, the net outcome in the face of an energy shock would be a global loosening of monetary policy. 

Back to Bitcoin

As the hardest form of money ever created, Bitcoin will likely respond positively to looser global monetary conditions. As the amount of fiat money rises alongside inflation for the plebes of the world, monetary instruments with a fixed supply – like Bitcoin – by definition become more valuable in fiat money terms.

 That is quite easy to see, but remember – the Bitcoin network also requires energy to operate. Miners expend energy to validate transactions. If global energy prices are rising, this becomes more expensive. Will countries allow Bitcoin miners to continue to use cheap power, or will they requisition said energy resources because times are tough? At the margin, I believe many countries who net consume energy will pressure utilities to either jettison miners or charge them a lot more for electricity. Say bye bye to cheap hydro in Nordic countries, the US, and Canada.

That’s only one side of the story, though. There are still many net-energy producing countries that may want to continue producing the same amount of energy, but for a variety of reasons, cease supplying said energy to the world market. For example, stopping and starting oil and well production is expensive because of the required cleaning and prepping of equipment, and build-ups of gases can also permanently impair wells. This means there is no easy “on/off” switch for an oil well. In many cases, it is better to just pump at full capacity at all times. Bitcoin is the perfect way to store said energy, because mining is purely a function of consuming electricity powered by whatever is the cheapest form of energy available. Anecdotally, I know a wealthy Indonesian family that owns large, coal-fired power plants and “saves” excess power produced in the form of mined Bitcoin. Many months back when I last spoke to the patriarch, he claimed they represented close to 5% of global hash power. 

How Many Barrels of Oil Can One Bitcoin Purchase

Bitcoin trades globally and has grown its energy purchasing power over time, as the above chart illustrates.

Miners in the West could be forced to move to non-aligned countries that are producing much more energy than they wish to export. But, it doesn’t necessarily spell the end for Bitcoin if many of the large, publicly-listed miners must find new places to operate. Similar to how the ban on mining in China just meant more mining in the US, Canada, and Europe, a ban on mining in the US, Canada, and Europe could mean more mining in Venezuela, Angola, and Algeria. 

The Trade Setup

Even if you agree with my arguments, it doesn’t mean the price of Bitcoin is going to behave positively immediately following an oil price spike. The global investing public will react extremely negatively to such a situation, because it points to a major escalation in the global conflict. When countries lack access to cheap energy, they show no qualms about using military might to take it from someone else – and war is not a good thing for financial markets. I would expect a correlation 1 moment, in which all risky assets – including Bitcoin – get rugged at the same time.

But after that, I believe countries’ monetary policy response will quickly start to differ from what textbooks say should happen (i.e., monetary conditions will loosen, rather than tighten). This will happen very rapidly – and therefore, assuming my hypothesis is correct, I do not expect Bitcoin to stay down for long. In fact, I expect Bitcoin will re-emerge as non-correlated to general equity prices. The elevated global liquidity will be targeted very specifically at increasing energy production, and Bitcoin has proven itself to increase in energy purchasing power over time.

The point of this essay is to provide a mental framework for a situation that occurs frequently during wartime – a lack of affordable energy – so that if such an energy price spike happens and you need to move your money quickly, you at least have a theory to fall back on. You can measure current events and market response against your hypothesis, and any deviations can then help inform a thoughtful response to the fast-moving markets. The worst thing you can do is jump to the first conclusion bandied about by the mainstream financial press trying to tell you how to think about the oil price spike. Usually, the market’s initial reaction is the result of conclusions drawn from simplistic analysis, but this reaction is typically proven wrong in the medium- and long-term as the second-, third-, and fourth-order consequences become apparent.

The longer WW3 persists, the more likely it is that some sort of trigger will set off a secular rise in energy prices. This can happen all at once, or slowly over time. Either way, I hope that my arguments allay any concerns about how Bitcoin would perform in a high-priced energy regime.



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