Hedge Clippings | Friday, 19 November 2021
Interest Rates and Crypto - Another case of having to agree to disagree.
In case you think from the above headline that Hedge Clippings believes there's any correlation between interest rates and crypto, that's not the case. However, given that rates have flatlined for so long, or at least been going downhill for the past 30 years, and a chart of Bitcoin (or any of the 10,000+ other crypto currencies) makes the Himalaya's look flat, maybe the lack of correlation has more relevance.
What we are referring to is that the views of the RBA on the direction of interest rates, and the future relevance of crypto currencies, both seem to be out of step with the views of those outside the protective walls of the Bank's offices in Martin Place.
Since their latest board meeting the RBA might have slightly adjusted their previous stance that rates won't rise until 2024, but they're pretty set in their view, and probably with good reason: Any significant rate rise will stop the economy dead in its recovery tracks. Their argument seems to be that the current inflationary pressures are short term, caused by pandemic induced supply chain issues and shortages. Once this inflationary "bulge" works its way through the economy, it will be back to the status quo. In any event, an early rate rise won't fix the shortage of labour, materials or container ships.
Out on the street, the bond market is not so sure, with 10 year bond yields almost doubling in the past 12 months. If the market is correct, the property market may be facing some interesting times.
Meanwhile the RBA's view on crypto currency seems to be out of kilter with the street as well. Toby Richards, the RBA's outgoing head of payments policy, says the bank views crypto is a fad, and it is set to fade away. He covered his options slightly by saying there are "plausible scenarios" where a "range of factors" could see speculative demand for crypto assets unwind. Which sounds like having a bet each way.
Even CBA's CEO Matt Comyn's views are different - the bank having bought a stake in crypto exchange Gemini, while also supporting the idea of central bank digital currencies, and presumably in due course one issued by the CBA as well.
Which also sounds like he's also having a bet each way.
Meanwhile the interest in crypto by investors and/or punters, young and old, sophisticated or otherwise, is on the rise, with some "experts" - possibly talking their own book - claiming 20% of the Aussie population are trading them. Volatile they may be, but to many we suspect that's half (or more) of the attraction.
Bitcoin, the daddy of all cryptos, is currently trading at US$56,016, down from $68,990 earlier this month, but up from its 52 week low of $16,235. In the meantime, it reached $61,195 in early March, before halving by June - whereupon it doubled again.
Speculative - undoubtedly, but therein lies the attraction to many, a Fear of Missing Out (FOMO) to others, and to the remainder, fear full stop.
FundMonitors.com is seeing a small but growing range of funds in the crypto space, ranging from ETF's investing in crypto related businesses, single funds and funds of funds, through to funds tracking single or multiple "coins". Strategies vary from simple (!) long only, long/short, through to technically complex but low risk arbitrage "market neutral" high frequency funds such as DAFM's Digital Opportunities Class, which in spite of the underlying asset's volatility, has yet to report a negative month and has returned 42% in the first 6 months of its existence*.
So the RBA's view is understandably one of caution, as it should be. But while the space is still evolving, and may be a fad to some, we very much doubt it is going away.
*Past performance is not guaranteed.
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