By: Adam Sharp
Editor, The HIVE Newsletter
At its peak in November 2021, Bitcoin briefly traded over $65,000. One year later, on November 9, 2022, the price had dropped to around $15,800.
That’s a drawdown of about 75% peak to trough. Interestingly, Bitcoin also experienced a roughly 75% drawdown from the 2017 peak of ~$20,000 to a low of ~$5,000.
In the past few weeks, Bitcoin has rallied and is trading at around $24,800 as I write this on Feb 20, 2023.
So is this it? Is the bear market over?
Hopefully. But let’s not get overly confident here. Bitcoin is known for surprise reversals, extended periods of chop, head fakes, and generally humbling anyone who makes assumptions about near-term price action.
With that said, it’s certainly encouraging to see Bitcoin rally after a 75% drawdown from all-time highs.
Still Waiting on the Fed
It’s almost certainly not a coincidence that during Bitcoin’s 75% drawdown, the Federal Reserve raised interest rates by 4.5%.
I would argue that more than any other single factor, we need to keep an eye on the world’s most important central bank.
A new and sustainable Bitcoin bull market may require a clear shift in Fed policy towards easing, or at least a halt to hikes. In its latest meeting, the FOMC raised rates by just 0.25%, which may be indicative of a pivot or pause in the works.
As we discussed late last year, though, it may take a severe economic crisis to cause a true “pivot” in Fed policy. But thus far, the Fed’s rate hikes do not appear to have caused any critical damage.
We are, however, seeing some worrying signals. In Q4 of 2022 the US Federal government spent a record $213 billion paying the interest on our national debt.
Here’s an excerpt from a recent article by Gerald Dwyer, Professor of Economics at Clemson University.
The U.S. government spent a record US$213 billion on interest payments on its debt in the fourth quarter, up $63 billion from a year earlier. Indeed, a jump of almost $30 billion on the previous quarter represents the biggest quarterly jump on record.
Oof. Look at that spike. You can’t even call it a hockey stick. It’s too vertical.
America looks set to spend more than $1 trillion on interest costs alone in 2023. That’s about 20% of 2022 total federal revenues (from taxes and other sources).
The U.S. is spending more servicing its debt because rates rose rapidly, and the government has to issue new Treasuries constantly. For example, the yield on a 1-year Treasury note in February of 2022 was around 0.87%. Today it’s 4.8%. That’s a 5.5x increase in borrowing cost in a single year.
The average maturity on US debt is about 5 years. This essentially means all $31 trillion of debt will need to be “rolled over” within that time frame.
The longer rates stay near 5%, the higher those debt servicing costs will go. And, of course, they compound over time.
Dismally, it’s not just the Federal government we need to be concerned with. Companies and people are also highly indebted, and their interest costs are also soaring.
If you’re thinking “this doesn’t seem very sustainable”, the market is beginning to agree. Traders are now pricing in 0.50% of rate cuts in the second half of 2023. From Bloomberg:
Traders in the interest rate swaps market have concluded after the Federal Reserve rate decision that policy direction is set for a deeper dovish pivot from the middle of this year.
Swap contracts tied to this year’s Fed meetings show approximately 50 basis points of rate cuts are now firmly priced between the June policy peak of 4.90% to the 4.40% overnight lending rate tied to the December policy meeting.
The chart below, also from Bloomberg, shows that the market now expects significant rate cuts starting later this year.
Last week, Bloomberg Opinion Executive Editor Robert Burgess bluntly opined “The Federal Reserve is most likely done raising interest rates this cycle. It just wants everyone to believe otherwise.” Yep.
Back in October of last year I guessed that “the Fed will have to pivot at some point in the next 6 months.” I may have been a bit early on the call but remain convinced it’ll happen in the relatively near future.
I believe a pivot will happen even if inflation is still uncomfortably high, which it may well be. When a nation has such a large debt load, at the federal, state, corporate, and personal levels… Eventually they just have to cut rates.
Similar situations have plagued nations throughout history. When political leaders and central bankers are faced with a choice between a debt collapse and inflation, they almost always choose the inflationary (money printing) option.
If such a scenario does play out, the best forms of money will be scarce ones. Gold and silver have historically filled this role well. Bitcoin is a modern extension of the same idea. Scarce money, but made for the digital age.
Editor, The HIVE Newsletter
P.S. Now you know why my relatives don’t ask about Bitcoin at Thanksgiving anymore.