How Trump Drove Up the Price of Bitcoin — For a Few Months at Least
A few friends, whom I consider well educated and financially literate, believe that the global liquidity environment was an important factor that led to the most recent Bitcoin bubble. When you print money, the theory goes, all the assets in the economy go up. A rising tide lifts all boats.
In other words, since the 2008-2009 financial crisis there has been such an enormous amount of quantitative easing that it spilled over into crypto, propping up prices to ridiculous heights amid broader yield compression and higher P/Es on stock buybacks, because “people had nothing left to buy.”
I previously thought there wasn’t much of a link between quantitative easing and crypto, in large part because crypto is such a niche market. But the chart below tells a different story.
In this chart I plot the evolution of Bitcoin and the S&P against the US monetary base and the Treasury general account (TGA). We'll come back to why the TGA is interesting later, but for the moment let's discuss how the monetary base can be used as a rough proxy of true liquidity conditions. Central banks take policy actions in order to massage the amount of money in the economy. Their primary tool is interest rates, but if times are really rough and central bank interest rates are zero or slightly negative, sometimes central banks have to resort to buying assets from the private sector. This drives a mechanical expansion of the monetary base — a technique this is typically viewed as more impactful than a mere interest rate cut.
In Japan QE hasn't been as effective as in the US, because the expansion of Japan’s monetary base hasn't flowed through to a pick up in demand for credit (you can lead a horse to water but you can't make it drink). In the US, however, the money multiplier (M2/MB) hasn't been steadily dribbling lower. In fact, it has been steadily increasing these last few years so I think that it’s an appropriate measure for liquidity.
Inspecting the overarching macro trends, I first noticed that during QE3 — announced September 2012 — both Bitcoin and the S&P were in strong bull markets. Bitcoin eventually went up 100 times in value, although to be fair it was still very niche at that stage, even at the end of the bull cycle having a market cap just shy of about USD $12.5 billion around the $1000 mark. Participants were mainly coders, futurists and well-informed venture capitalist type traders who could envision Bitcoin’s potential, so I think it's a stretch to infer a liquidity spillover effect then. Perhaps we can chalk that up to coincidence instead. Moving forward, however, we can clearly see that in late 2014 through 2015, the expansion of the monetary base stalled again. Stocks lacking the necessary monetary impulse lost momentum. Curiously, this does align with the extended cool-off period in 2014-15 for crypto.
What came next is particularly interesting. Two months into his first term, US President Donald J. Trump began to aggressively drain the Treasury general account. The TGA is basically the government's bank account at the central bank. Tax receipts flow into it and fiscal spending flows out of it, and it is funded via bond/paper issuance. If the government borrows more than it spends the balance goes up, and vice versa.
The TGA is effectively money that is not circulating in the economy, so as it goes up it elicits an effective monetary tightening while a decline is effectively a monetary stimulus. The thing is, the size of the drain was quite significant with the TGA going from $402 billion as of Jan, 25 2017 to just $23 billion by mid-March 2017. This certainly would have helped support the market and thereby reinforce Trump’s narrative of being a competent economic manager. In those critical first few months as President-elect, Trump wasn't draining the swamp, he was draining the TGA and injecting over $350 billion USD into the economy in a successful attempt to prop up stock market prices. Meanwhile, against a strong risk backdrop and with the benefit of a recent supply emission reduction via its second block halving in July 2016, Bitcoin soon pushed to new all-time highs.
Fast-forward to Q4 2017, and reality sets in around the US debt ceiling. Tax cuts passed by Congress have exacerbated the budget deficit and US Treasury Secretary Steven Mnuchin has to build up some runway in the general account in case of a meltdown. Bitcoin tops first, then stocks run out of steam as the combination of QT and a liquidity drain back into the TGA begin to bite. Although we know that the day-to-day correlation between the S&P and Bitcoin is low, it is interesting that their overarching trends have some similar properties which may be related to direct or indirect repercussions stemming from the broader liquidity backdrop.
So is liquidity important for Bitcoin? On a macro trend level, the answer appears to be yes. In fact, broader US monetary policy trend lines up with the cycles fairly well. Cryptocurrencies are a highly speculative asset class, and when times are good and you are sitting on solid paper gains in the traditional markets, you are probably more comfortable risking capital on crypto.
Scott Weatherill is chief dealer at B2C2 Japan and a former trader at Goldman Sachs.