Overnight, Bitcoin continues to consolidate above the 30k level. Looking at the weekly chart, the previous day’s court ruling regarding XRP, which obtained a 2/3 non-security designation, turned out to be a mere “show of empty positivity.” It further depleted the market’s strength and brought everything back to square one, continuing the trend of slight decline. Short-term speculators have been repeatedly washed out, while long-term hodlers are unable to sell. Market liquidity is drying up, yet there is a lack of substantial catalysts for a significant change, resulting in the current awkward situation.
Regarding the harvesting of the US dollar in the global circulation, there are additional explanations in the internal reference material. Due to the Cantillon effect, every round of the circulation cycle brings pain to the world where liquidity is destroyed, while the United States emerges as the winner, gaining fresh dollars. The key issue is that all of this is man-made, not natural.
In the cycle of US dollar circulation, what is the position of Bitcoin? Does it belong to the world or to the United States? How does it benefit or suffer at the beginning and end of the expansionary cycle, and at the beginning and end of the contractionary cycle?
The Federal Reserve is the source of liquidity. The liquidity injected by the Federal Reserve flows into the United States through various channels and then spreads to the rest of the world. The United States can be seen as a small pond, while the world represents a larger reservoir. Of course, due to the United States’ position as the world’s largest economy, its pond holds a significant share compared to the rest of the world.
How does the Federal Reserve create liquidity? Through the Treasury Department. The Treasury Department issues debt, and the Federal Reserve provides liquidity by injecting money into the system. This is the mechanism for issuing debt-based US dollars.
At the beginning of an expansionary cycle, institutions that have access to US dollars go on a buying spree worldwide. Asset prices soar, surpassing the performance of the US stock market. The US stock market, however, faces pressure due to capital outflows.
Towards the end of the expansionary cycle, global asset prices have become inflated, and the US stock market has experienced significant gains. Excessive liquidity floods the entire world. It’s a moment of celebration for asset prices, and everyone believes in an eternal bull market.
At this point, the Federal Reserve begins to taper its liquidity injections, as it did towards the end of 2021.
At the beginning of a tightening cycle, not everyone realizes the situation immediately, and the impact of interest rate hikes directly affects the global economy. No matter how strong the leverage appears, it can be broken by high interest rates. The world experiences a synchronized deleveraging process, leading to a sharp decline in asset prices.
At the end of a tightening cycle, due to the siphoning effect created by the pump (Federal Reserve) on the global pool, the outflow from the world pool actually has a certain regenerative effect on US assets, such as the US stock market. The market exhibits a divergence, with the world experiencing a challenging environment while the US maintains its favorable position.
Furthermore, we have seen in the events that unfolded at the beginning of 2023 that the entire system is subject to significant human intervention. When the Federal Reserve failed to control the outflow of water and encountered stubborn players in the global pool, the water drawn was insufficient to support the bleeding of the US capital market, resulting in the collapse of the US banking industry. In such a situation, what could be done? The intertwined nature of the Federal Reserve and the Treasury Department within this system became evident. Powell and Yellen swiftly took action, jointly expanding the balance sheet and providing targeted liquidity injections to the US banking system. Additionally, the Federal Reserve quickly introduced the “BTFP” tool, a nuclear-level instrument that provided full endorsement to the US banking system through central bank credit.
Without delving into the causes and manipulations behind these facts, what we want to explore is which pool Bitcoin, as a new category of asset, will float in: the United States or the entire world?
If Bitcoin floats in the US pool, it would exhibit a pattern of initial decline during the expansion phase, a surge at the end of the expansion, a sharp decline at the beginning of the contraction, and a rise at the end of the contraction.
If Bitcoin floats in the global pool, it would follow a tide of rise, rise, fall, fall in accordance with the US dollar cycle (please note that the order we discuss here is expansion-contraction, which is reverse to the order discussed on Twitter, contraction-expansion).
Currently, we are at the end of the contraction phase, with the world still experiencing the painful scarcity of liquidity, while the US stock market has already displayed a vibrant scene of prosperity. As for Bitcoin, it has long emerged from the swamp of $16k in December 2022, crossing the watershed of $30k. However, Bitcoin is not as favorable as the US stock market. Bitcoin is half in the US and half in the world.
Perhaps this is why the CEO of BlackRock, Larry Fink, has been emphasizing that Bitcoin is international. It is neither American nor foreign—it is international.
If the Bitcoin spot ETF, which provides access to the US financial capital market, is approved and listed, connecting the pipeline of Bitcoin with the flow of water from the US pool, it would undoubtedly subject Bitcoin to greater buoyancy from the US pool.
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