Arthur Hayes warns of risks from unwinding the yen carry trade, linking Fed actions to a temporary economic boost that impacts Bitcoin and crypto markets.
The activities of the US Federal Reserve have been compared by BitMEX co-founder Arthur Hayes to a brief “sugar high” for the economy, with positive knock-on implications for cryptocurrencies.
Hayes makes a clear connection between recent moves made by central banks and the possibility of driving investors toward cryptocurrencies like Bitcoin BTC$59,951 and others in his most recent Medium piece.
Arthur Hayes specifically points out that if the US Federal Reserve “raises the quantity of money,” it might “derail the party” and lead to an unwind in the Japanese yen carry trade. This is because of the rate cuts that the US Federal Reserve has made.
Yen carries implications and trade.
In his piece, Hayes makes the case that while lower interest rates may temporarily support traditional markets, they will significantly impact fiat money and cryptocurrency assets.
Hayes points out that when the interest rate gap closes, the yen is expected to get stronger, which might cause volatility in the global market and force central banks to increase their balance sheet size.
According to Hayes, this increase in the balance sheet, or “real food,” would improve market liquidity and possibly raise the price of assets with limited supply, such as bitcoin.
Money convenience and a driver for cryptocurrencies
The yen carry trade technique is explored in detail in Hayes’ paper. Investors borrow yen, usually at low interest rates, to invest in higher-yielding opportunities in other currencies.
According to Hayes, the strategy becomes less appealing as central banks lower interest rates, which may result in a stronger yen and the unwinding of these trade positions.
“The fiat liquidity conditions could not be more favourable going into the final stretches of the third quarter. We have the following tailwinds at our backs as crypto hodlers:”
The Federal Reserve’s rate reductions, according to Nansen analyst Aurelie Barthere in an interview with Cointelegraph, were “one bullish driver for BTC.”
“…the largest risk is equities and their expensive valuations (22.5x fwd PE for the S&P 500). If we get a significant correction, this would tighten financial conditions for the economy and for risk assets like BTC, even with the Fed cutting rates.”
Bitcoin must surpass $70,000.
The cryptocurrency season won’t begin until Bitcoin and Ether (ETH) surpass their respective price milestones of $70,000 and $4,000, according to a post by Hayes on Substack on August 12.
“The combination of a dollar liquidity-inspired Bitcoin and Ether rally into year-end will create a strong foundation for the return of a sexy shitcoin soiree.”
According to Hayes’ prediction, Bitcoin will “quickly retrace the dump” caused by the strengthening of the yen, with $100,000 being the next stop, assuming $301 billion in T-bills are “net issued” by year’s end.