Oddbean new post about | logout
 Bitcoin follows liquidity cycles, Bitcoin follows power law, or perhaps liquidity follows a power law?

The three indicators I follow are:

The dollar liquidity of the system given by the formula:

$= WALCL - (WDTGAL + RRPONTSYD)

Where: 

WALCL = The total assets of the Federal Reserve System.

WDTGAL = The General Account of the U.S. Treasury deposited at the Fed.

RRPONTSYD = Reverse repurchase agreements on Treasury securities sold by the Federal Reserve in reverse open market transactions.

WALCL if it grows gives liquidity to the dollar system because the Fed buys debt (among other things) and pours dollars into the system. 

WDTGAL if it grows it detracts from the liquidity of the system because it is the money in the U.S. Treasury's general account that is immobilized at the Fed.

RRPONTSYD if it grows it takes liquidity out of the system as these are operations in which the Fed temporarily sells Treasury securities with an agreement to buy them back later by temporarily taking money out of circulation in exchange for Treasury securities. 

The second indicator is the global money supply m2 given by the world's main central banks.

And the third indicator is MOVE, this index measures implied volatility in the US bond options market, similar to how the VIX index measures volatility in the stock market. When the MOVE index is high, it indicates that investors expect higher volatility in interest rates. This can lead to decreased liquidity in the bond market, as investors may become more cautious and less willing to buy or sell bonds in an uncertain environment. On the other hand, a low MOVE index suggests expectations of interest rate stability, which can increase liquidity by encouraging more buying and selling activity.

The perfect storm is for liquidity in the dollar system to soar, money supply m2 to increase and MOVE volatility to decrease.

As we can see m2 is rising, move volatility is falling and when rates fall it will fall even further, we just need the catalyst of dollar liquidity.

https://m.primal.net/KiOC.png 

On the other hand, the power law indicator indicates that we are close to the beginning of the next bullish cycle.

Since I do not have enough mathematical knowledge, I would like to know if it is really the liquidity of the international monetary system that follows a power law and not bitcoin.

https://m.primal.net/KiOE.png 

Although in both cases the result is the same, bitcoin is a proxy for global liquidity, bitcoin was created to penalize the issuance of money.