Bitcoin is going to benefit from the ongoing repo crisis in the US banking system, hinted Gabor Gurbacs of VanEck, a New York-based investment management firm.
The Digital Asset Strategist, who oversaw the drafting and filing of VanEck’s Bitcoin ETF application to Securities and Exchange Commission (SEC), on Thursday indicated that Fed’s plans to inject more money into the lending market could generate more demand for Bitcoin.
Exemplifying with a ZeroHedge report, Gurbacks noted how increased liquidity was already pushing the benchmark S&P 500 index higher. The US equities surged dramatically during the Wednesday session, shortly after the Fed – suddenly – announced that it would raise the lending amount to the market from $75nbn to “at least” $120bn daily. The announcement caught market participants off-guard, with a repo trader saying that he did not “see a reason to upsize the overnight operation so substantially.”
Gubar expressed that the money Fed would inject daily was more than the market capitalization of bitcoin, which currently sits near $135bn.
“Think about it for a moment,” he added cryptically.
> The #Fed to add *$120 billion* liquidity *per day* to repo markets.
> That is a massive 60% increase in the overnight repo liquidity availability (from $75 billion to $120 billion).
> #Bitcoin’s market cap is $135 billion. Think about it for a moment.
— Gabor Gurbacs (@gaborgurbacs) October 24, 2019
“Buy BTC” Cries Grow Loud
Fed officials so far have denied that their injection of billions of dollars is to offer a soft cushion to the US economy as concerns related to negative-yielding bond markets, the US-China trade war, and weak manufacturing data grows among investors. Predictably, certain bitcoin maximalists have started treating the alarming macroeconomic scenario as a reason to “buy bitcoin.”
— TD Ameritrade Network (@TDANetwork) October 18, 2019
The sentiment follows a depleting trust in the banking system. The Fed issues debt to banks based on the belief that they would pay the money back. Nevertheless, if the faith fails anywhere – in case of banks running out of cash to back their obligations – they start pawning stocks or securities for hard money. They also begin seeking loans from other banks for as long as twelve hours, leading to what the world calls repurchase agreements or repo.
The real issue arises when banks stop lending money to each other, fearing one of them would collapse. That said, banks stop functioning daily on their deposits to continue their operations. Hence, they rely on the big boss – the central bank – to bail them out every day.
More injection of the US dollar into the financial system makes it weaker. Investors attempt to reduce their greenback holdings by offloading it onto neighbor markets – equities, safe-haven assets, etc.
Where Bitcoin Comes
Bitcoin’s fame as a non-sovereign, scarce currency makes people consider its potential to behave as a hedging asset. Nevertheless, the use-case remains highly speculative.
“Bitcoin is empowering because it provides a choice to opt-out of the traditional financial system,” writes Caitlyn Long, a Wall Street Veteran. “In light of the traditional financial system’s instability, despite all of Bitcoin’s drawbacks, I find that a powerful concept.”
The BTC/USD exchange rate has dropped by around 7 percent since the repo announcement.