Compared to the stock market, the cryptocurrency market lacks fundamental data such as financial statements and disclosures. Because of this, investors often rely solely on price data and news. Although the macroeconomic and related indicators and news are particularly important, it is difficult for cryptocurrency investors to know what scenarios exist and what to look for.
Currently, not only the bitcoin market, but financial markets around the world are paying attention to U.S. Treasury yields. What is the U.S. Treasury bond rate that the market is watching?
Importance of US Treasury Bonds
US Treasury bonds are literally what the US government borrows money from. US Treasury bonds are issued by the US Treasury Department and are more secure than bonds issued by state or local governments. U.S. Treasury yields refer to the interest the Treasury pays when borrowing dollars.
US Treasury yields play several important roles. One is the basis for all bond rates. Other bond interest rates are generally higher than the US Treasury bond rates. In other words, if the U.S. Treasury rate rises, all other interest rates are likely to rise.
Second, it is positioned as the minimum rate of return for safe assets. The probability that the US government, which borrowed money, will go bankrupt is very low, so the US Treasury bond yield is the safest way to generate profits.
In general, 10 years or 10 years, the standard is often the product that the US government borrows money from.
The current 10-year interest rate has risen steadily since the beginning of this year and has risen to the 1.5% level. As U.S. Treasury bonds are the safest asset, many people buy them when the economy is unstable or high-risk, resulting in lower interest rates. Conversely, when expectations or signs of an economic recovery begin to emerge, interest rates gradually rise.
US Treasury Rate and Stock Market Correlation
Rising U.S. bond yields have a variety of effects on the market. First of all, it often has an adverse effect on the stock market. This is because, as the yield of treasury bond yields increases, bond yields rise higher than those from risky assets (stocks, etc.).
Eventually, the stock market is hit hard as investors prefer the bond market over the stock market. In fact, the NASDAQ market has been directly adjusted as the Treasury bond rate has risen.
However, as the rate of return on risky assets is still high now, a rise in government bond yields does not unconditionally lead to adverse effects on the stock market.
According to the Federal Reserve Bank’s Economic Statistics (FRED) chart, when stock performance is solid and stock prices rise, interest rates are not significantly affected by rising interest rates. However, in the case of a bubble in the stock price, interest rates and stock prices are inversely proportional.
How about Bitcoin? Bitcoin is regarded as a risky asset, so it is not very different from the movement of the stock price due to the increase in government bonds. In the end, a rise in the rate of return on safe assets and a rise in loan interest rates affects the bitcoin market.
However, just because bitcoin investors have a strong tendency to aggressively invest so that the return on investment in government bonds has increased, it does not mean that large amounts of money from the bitcoin market are transferred to the bond market. This is the difference from the stock market.
Bitcoin and leverage
Rather, Bitcoin’s movement is the basis for loan interest rates and bond yields, which are the basic attributes of government bonds.
Investors mainly use loans, etc.Structure that leverages other’s capital, such as borrowings, to increase the rate of return)Invest in assets by using. It’s like buying real estate, not buying 100% cash, but choosing a gap investment using a mortgage loan or charter.
Although there are not many derivatives or mortgage loan products in cryptocurrency, it is still a speculative market, so it enters a large proportion of leverage.
The high leverage ratio reminds us of the subprime financial crisis. In 2008, the financial market collapsed as a result of the interest expenses and liquidation costs due to leverage exceeded the upside potential of the housing market.
It is true that the price of the technology stock market or the bitcoin market has increased due to fundamental growth. However, it is undeniable that it has risen due to low interest rates and abundant liquidity. Therefore, it is important to remember both the upside due to leverage and the collapse due to leverage (as in the case of the financial crisis). For this, it is impossible to explain the bitcoin market without the interest rate.
Bitcoin market interest rate, margin cost
The current bitcoin market interest rate can be found in the futures exchange’s margin cost. A survey of famous futures exchanges such as Binance, FTX, BitMEX, and Bybit revealed that the margin cost was about 0.03% per day. The annual interest rate is around 10 to 12%.
Interest rates are already high, and the rate of return from the rise in the US Federal Reserve (FED) base rate is not significantly affected. However, if the U.S. bond rate rises by more than 1%, the annual bitcoin rate also has room to rise. To find out if you can afford it, you need to check the amount of open futures positions.
According to CoinGecko, the margin position of major futures exchanges is about 5 trillion won. The annual interest expense is about 500 billion won. It is estimated that the bond market between cryptocurrency institutions, including DeFi (decentralized finance), has also formed on a scale similar to the margin position. This is about 1% based on the total market cap of the cryptocurrency.
In order to proactively know the price direction of Bitcoin, we need to observe the Fed’s movement in the benchmark interest rate and the resulting change in the margin position.
For example, if the Fed raises interest rates, the daily loan interest costs also increase. This could lead to an overall decline in the bitcoin market if the proportion of margin positions being liquidated increases.
On the other hand, if there is no significant impact on the bitcoin price despite rising interest rates, it can be said that the bitcoin market has settled successfully.
Investors should remember the following:
Interest rates will ultimately rise as the Fed has undergone massive quantitative easing. In the end, investors How much is the leverage hit by rising interest rates?According to this, it is necessary to determine whether the bitcoin market will settle successfully or collapse as in the case of the financial crisis.
After studying computer science and applied mathematics at Carnegie Mellon University in the United States, he worked as a quant trader at Wall Street in the United States. He is currently working as a strategic director at Vibric, a digital asset manager. He wrote the book’Artificial Intelligence Investor Quant’.
For reports and press releases, [email protected]