How Will You Spend Your Helicopter Money?
Finnish lawmakers are ready for the nuclear option. A bill under consideration will hand out $900 to every citizen each month. In their desperate attempt to kick start economic activity, Finland will be the first developed nation to drop money from helicopters.
The theory is that each citizen will go out and spend their newfound wealth on goods which will spur inflation and economic activity. The poorer members of society will use this money on necessities, food and shelter. The economy will not magically produce more of these goods. Prices will rise and these members of society will be no better fed or housed than before. Only now they will clamor for additional free money to make up for the loss of purchasing power.
The wealthier members of society will watch the value of their savings decline. They will be searching for assets that can preserve their wealth. Real estate, gold, art, jewelry these are the conventional means of wealth preservation. Once these assets reach ridiculous prices, unconventional assets become attractive. Bitcoin tops my list as an asset that will gain favor amongst the wealthier members of society.
Lawmakers globally will watch and learn from Finland’s experiment with helicopter money. Citizens around the globe will demand that instead of handing free money to banksters, government’s hand cash directly to those most in need. Start hoarding now because as the helicopter money movement spreads, prices of conventional and unconventional means of wealth preservation will skyrocket.
The China Bitcoin Premium Is On The Rise
The most important indicator for Bitcoin is flashing green once again. Over the past two weeks, as the CNY weakened, the China Bitcoin premium rose. The premium is now approaching 5% as USDCNY flirts with 6.40. All hell will break lose if the Fed raises rates as expected. EM currencies globally have been getting the stick all year as the dollar surged higher. EM countries will descend further down the mercantilist path as they try to defend what market share they have left of world trade.
China will not sit idly by and watch their competitiveness erode vs. Europe, Japan, and South Korea. Unlike most safe haven assets such as Gold that are priced in dollars, Bitcoin is priced in CNY. The PBOC will gradually allow the market forces to take the CNY lower. Up until now, they have gently guided the CNY lower by intervening in the spot markets on a daily basis to stem the selling pressure.
Apart from China, citizens of other emerging markets whose currencies are rapidly depreciating will be scrambling to purchase assets to preserve what wealth they still retain. Argentina and Brazil are two markets where Bitcoin trading volumes will increase rapidly. Argentina’s central bank is out of USD and is set for yet another default. Brazil is experiencing a political crisis, an impeachment trial of the president is set to begin. Concurrently, Brazil’s economy is collapsing due to falling world trade and commodity prices.
For the reasons mentioned above, A Fed rate hike on December 16th is positive for Bitcoin. I still have doubts whether the Fed will follow through on their promise to normalise rates. The calls for a continuation of the 0% status quo are growing. Yellen might still get cold feet in the face of the growing dissent from the likes of the IMF, World Bank, and Bank of International Settlements. Pay close attention to any public comments from Fed governors. If they indeed back down from a rate hike, they will attempt to telegraph their intentions to the markets in the days ahead.
It’s Raining Coin
Goldman Sachs recently filed a patent for SETL coin. This crypto currency is meant to handle settlements of financial assets. Get ready for a slew of patent filings for various coins from major multinational banks. By now, most banks have an internal team working on various ways blockchain technology can help their business.
The banks certainly will not build tools and innovations on top of the Bitcoin protocol. Open source and decentralisation don’t jive with centralised rent seeking banks. They will each release their own coin aimed at performing similar functions. The battle of bank coins has begun.
Ultimately the regulators will choose the winner. After the GFC and the public outcry against the financial services industry, regulators will be loath to introduce radical changes to the financial system that might fail. As such, the various bank coins will be great PR exercises, but I highly doubt any real changes will be made any time soon.
Capturing The Liquidity Premium
The daily 100x Bitcoin future, XBT24H, is BitMEX’s most liquid product. The next most liquid product is the weekly 50x Bitcoin future, XBT7D. XBT24H exhibits a liquidity premium. The positive USD gamma associated with being long a quanto contract means that XBT24H usually trades at a higher annualised basis than XBT7D. Traders who wish to capture this liquidity premium while remaining price neutral should sell XBT24H and buy XBT7D.
XBT24H usually trades at the highest premium during the first 6 hours of trading. XBT7D re-lists each Friday at 12:00 GMT. From 12:00 GMT to 18:00 GMT buy XBT7D and sell XBT24H in equal quantities. Each day when XBT24H expires, re-sell the same number of XBT24H contracts plus an additional amount to hedge the profit made. Each day you will earn the premium of XBT24H over spot. XBT7D also trades at a premium, and each day you will lose money as XBT7D decays to the spot price.
The compounded return from selling XBT24H each day will be higher than the loss from XBT7D after 7 days. Using data from November 27th to December 4th, I calculated the net return from selling XBT24H each day over the first six hours, vs. the loss experienced by buying XBT7D on November 27th and holding until the December 4th expiry. The compounded return earned by selling XBT24H was 3.74%. The XBT7D loss was 1.74%, for a net return of 2%. Depending on the amount of leverage used, the return on equity will be much higher. Using 10x leverage on both legs equals a 10% return on equity per week. Annualised that’s 520% without taking any price risk.
For those who prefer not the trade directionally, this is a safer risk adjusted strategy that generates positive returns.
$400 was breached momentarily this weekend. Bitcoin on the USD exchanges is now range bound between $390 and $400, and on the CNY exchanges Bitcoin trades slightly above $400.
The price will climb alongside the China premium. FOMO buying has not occurred yet. The slow and steady rally is healthy. Against a positive global macro backdrop, Bitcoin will continue climbing to the all important $500.
BitMEX 100x Daily Futures, XBT24H: Buy XBT24H while spot is $390 to $395, with an $405 upside target.
BitMEX 50x Daily Futures, XBT7D: Buy XBT7D while spot si $390 to $400, with an $410 upside target.