Osho Jha is an investor, data scientist, and tech company executive who enjoys finding and analyzing unique data sets for investing in both public and private markets.
The week of March 9 was a ride regardless of what market you trade and invest in. Markets spiking up, markets spiking down, longs taking drawdowns, shorts getting stopped out on intraday bounces. While investor sentiment across markets was negative, there was also a sense of confusion as “there was nowhere to hide” in terms of assets. Interestingly, I’ve yet to speak with anyone who made a “real killing” in that week’s trading. The ones who fared best are the ones who moved out of assets and into USD/hard currency and now have many options as to where to vest that capital.
On March 12, Bitcoin having already traced down from $9,200 to $7,700 and then to $7,200 in the prior few days, plunged from $7,200 to $3,800 before spiking up and settling in the $4,800 to $5,200. The move tested the resolve of Bitcoin bulls who had expected the upcoming halving to continue to drive the price higher. Similarly, sentiment towards the crypto king and leading decentralized currency plunged with many pointing to Bitcoin’s failure to be a hedge in troubled times – something that was long assumed to be a given due to the “digital-gold” nature of Bitcoin. I, however, believe that these investors are mistaken in their analysis and that the safe haven nature of Bitcoin is continuing.
See also: Noelle Acheson – Why Bitcoin’s Safe-Haven Narrative Has Flown Out the Window
Earlier that week, I wrote a short post on my thoughts around the BTC drawdown from $9,200 to $7,700. In it, I pointed out that gold prices were also taking a drawdown along with stocks and rates. My suspicion was there was some sort of liquidity crunch happening causing a cascading fire sale of assets. This more or less played out exactly as one would expect, with all markets tanking later in the week and the Fed stepping in with a liquidity injection for short term markets. This liquidity injection included an expansion of the definition of collateral.
Repo Markets: the Canary in the Coal Mine
Having worked in both rates and equities, I’ve noticed that equities traders tend to ignore moves in rates and it’s, unfortunately, a waste of a very powerful signal. Specifically, “significant” or “odd” moves in short term markets signal shifts in the underlying liquidity needs for market participants. While repo markets have many intricacies and dynamics, here is a general outline of what they do and how one might use them.
For context, a repo (repurchase agreement) is a short term loan – generally overnight – where one party sells securities to another and agrees to repurchase those securities at a date in the near future for a higher price. The securities serve as collateral, and the price difference between the initial sale and repurchase is the repo rate – i.e. the interest paid on the loan. A reverse repo is the opposite of this – i.e. one party buys securities and agrees to sell them back later.
Repo markets serve two important functions for the broader market. The first is that financial institutions such as hedge funds and broker-dealers, who often own lots of securities and little cash, can borrow from money market funds or mutual funds who often have lots of cash.
This liquidity crunch and ensuing government intervention is laying the foundation for Bitcoin’s adoption as a safe haven asset.
The hedge funds can use this cash to finance day-to-day operations and trades, and money market funds can earn interest on their cash with little risk. Mostly, the securities used as collateral are U.S. Treasuries.
The second function for repo markets is that the Fed has a lever to conduct monetary policy. By buying or selling securities in the repo market, it is able to inject or withdraw money from the financial system. Since the global financial crisis, repo markets have become an even more important tool for the Fed. Sure enough, the 2008 crash was preceded by odd movements in repo markets, showing what a good indicator of the future repo can be.
The Fragility of Our Current Financial System
With equities selling off in larger and larger moves and the markets becoming more volatile, the Fed injected liquidity into the short term markets. While some headlines claim the Fed spent $1.5 trillion in a recent move to calm equities markets, those headlines are a bit sensationalist and are trying to equate last week’s actions to TARP (Troubled Asset Relief Program, which allowed the Fed to purchase toxic debt from bank balance sheets along with said banks’ stocks). And I say this as someone with very little trust in the Fed. This wasn’t a bailout but was a move to calm funding markets and the money is now part of the repo markets making it a short term debt.
See also: Despite Bitcoin Price Dips, Crypto Is a Safe Haven in the Middle East
Let’s take a step back and think…