Analysts ‘ stories about why Tesla and Bitcoin collapsed yesterday are numerous and varied, but one look at the Federal Reserve’s minutes is enough to understand that reducing quantitative easing to avoid wild asset bubbles is the real reason.
US Fed Tries to Rein in Tesla Inc. and Bitcoin
Although the Federal Reserve did not directly mention Tesla Inc. and Bitcoin, the central bank is clearly unhappy with the widespread talk of asset bubbles, and its officials are now all hinting at a reduction in bond purchases: the Fed is currently expected to buy up to $ 80 billion worth of Treasuries a month.
Since the minutes of the December meeting of the Federal Open Market Committee (FOMC) have already been published on January 6, the total capitalization of the cryptocurrency market has fallen by more than $ 200 billion, and the price of Bitcoin has fallen to $ 30,229, with altcoins also falling sharply. Tesla’s market capitalization also fell to $ 768 billion, and its stock price fell almost 8% from $ 880 to $ 811.
At the beginning of 2021, the stock market was compared to a happy slot machine: just close your eyes, choose a stock and see how your money grows. While the central bank has not explicitly said that it is concerned about rising prices for Tesla shares and Bitcoin, the subtext of last week’s FOMC speakers can be interpreted as an early sign that the Fed’s mandate for financial stability is beginning to have an impact on some policymakers who have so far been focused on achieving maximum employment and consumer price stability.
“Bond King” Jeffrey Gundlach, founder and CEO of DoubleLine Capital LP, said in a recent interview with CNBC TV that Bitcoin looks like a bubble ready to burst. The investor said that the cryptocurrency reached “bubble territory” when it exceeded $ 23,000, and he does not feel compatible with the current levels of the cryptocurrency.
Gundlach is not alone in his assessment. Scott Minerd, chief investment officer of Guggenheim Investments, tweeted today:
“Bitcoin’s parabolic growth is unsustainable in the nearest term”.
In addition to the above, Bank of America Corp also points to an impending bearish market correction in risky assets. Billionaire investor Mark Cuban tweeted today:
“Trading cryptocurrencies is exactly like the stock bubble on the Internet. Precisely! I think that BTC, ETH and some others will be similar to those that were created in the dot-com era, survived the burst bubble and flourished. These are the likes of AMZN, eBay and Priceline.”
Just a month ago, many expected the central bank to reverse its asset purchases and buy longer-term Treasury bonds. Judging by the statements of Fed officials in the FOMC minutes for December, this seems to have been sidelined, and the discussion has shifted to how best to reduce asset purchases.
Philadelphia Fed President Patrick Harker discussed the possibility of a cut while answering questions at a virtual event dedicated to the cut last week, he said:
“I can assume that this will happen at the very end of 2021, or at the beginning of 2022. But all this will depend on the course of the economy, which will depend on the spread of the virus. This can cause a market disruption if we try to do it too early. So I have a lot of degrees of caution about this, just to stay calm until we start to really see the economic recovery.”
Adding to the talk of tapering was Dallas Fed Chairman Robert Kaplan, who said that while he believes the COVID-19 pandemic will continue to weigh on the economy for most of 2021, the Fed should start thinking “when to start tapering.” Kaplan said:
“There will come a time when it will be much better for the economy and markets to abandon some of these extraordinary measures.”
Fed Vice Chairman Richard Clarida, however, fully meets the expectations of bond traders in previous months:
“My economic outlook is consistent with us maintaining the current pace of purchases for the rest of the year, and it may be quite some time before we think about reducing the pace of our purchases.”
Bitcoin, Tesla and Abbreviated QE
Why this prelude to the Fed’s decisions? But because as the Federal Reserve continues to buy government debt with printed money, inflation will rise along with government debt. As a result, it is expected that asset prices will continue to rise, and the dollar will continue to lose value. Beyond gold or silver, a new form of digital gold – Bitcoin-is gaining traction with mainstream investors as a defense against economic shocks.
As FOMC meeting minutes circulate and officials continue to hint at a reduction in quantitative easing programs, both Tesla and Bitcoin have now started to lose momentum and are taking a significant breather from their bullish forecasts. How directly this affected the markets is still in question at this stage, and it may just be the case that institutional giants are now taking some of their profits out of their Bitcoin investments after the BTC price was fixed at the beginning of 300%.
Comments from Fed officials about the reduction in asset purchases now call into question one of the strongest points of growth in risky assets over the past few months. Now the Fed wants to create a strong labor market and inflation reliably above 2% so that it can eventually operate outside the zero lower bound of interest rates. Whether it can do it, and how long it will take , is the real question.
At the moment, as the Fed seems to be moving towards taking control of financial stability, the central bank seems very unhappy with the current level of rampant speculation with asset prices, and expanding bubbles. The most obvious bubble assets are Bitcoin and Tesla. While the Fed did not specifically mention Tesla or BTC, central bank officials went on to say that could be a sign that they will seek to lock up these assets, which may have been the driving factor behind the recent decline of both Tesla and Bitcoin.
Did Elon Musk buy BTC with Michael Saylor’s plan?
Less than a month ago, the cryptocurrency world was fixated on a Twitter exchange between Elon Musk and MicroStrategy CEO Michael Saylor, who offered to share his plan for investing in Bitcoin. Has Musk accepted this offer, and is he even buying BTC all this time?
The exchange began shortly after the SpaceX founder posted a meme on Twitter dodging the temptation to buy Bitcoin. While the meme was mocking, Michael Saylor, who seemed to have started an institutional fight for Bitcoin by investing $ 425 million in it, recommended a way for Musk to invest in the Cue Ball.
Saylor tweeted, and suggested that Musk convert TSLA’s balance sheet to Bitcoin in the amount of $ 100 billion, which would serve as an example to other companies in the S&P 500.
For a company whose market capitalization at the time was estimated at about $ 658 billion – that’s a penny.
This suggestion was probably less than altruistic, since the CEO of MicroStrategy explicitly implied that a person like Musk could lead the mass adoption of Bitcoin among institutions, and set an example for other companies, which would ultimately increase the value of MicroStrategy’s own Bitcoin assets.
Elon Musk responded to Saylor’s question: “Are such large transactions even possible?”, after which Saylor immediately offered to “share his plan of action”, stating that in 2020 he invested $ 1.3 billion in Bitcoin.
And what happened next? Was that the end of it? Maybe not.
Institutional investors don’t buy crypto assets the way retail investors do, and about a week later, someone started buying huge amounts of Bitcoin using Saylor’s exact strategy.
Why can Elon Musk buy Bitcoins?
As more organizations turn to Bitcoin, institutional investors and speculators who trade large volumes of BTC are adopting a new method to hide the real size of their trades. This is done to reduce the risk of revealing your intentions in the market, whether bullish or bearish, which can cause an unfavorable price movement.
However, in the last week of December, Avi Felman, head of trading at BlockTower, noticed that someone (possibly an organization) had bought a significant amount of BTC on the US crypto exchange Coinbase. However, the order book only showed a standing order (purchase order) for 20-40 PTS. In fact, a large amount was acquired through a few small orders – a replicated strategy adopted by Michael Saylor, who also used the Coinbase exchange to purchase MicroStrategy for $ 1.3 billion in BTC.
Less than a week after the conversation between Musk and Saylor, on December 31, Avi Felman tweeted:
“Someone sat on a Coinbase bet of 20-40 Bitcoins and reloaded it from 26.8 – the same action in the order book as Saylor’s bet.”
The reason why Michael Saylor’s and possibly Elon Musk’s standing orders are being used has broader implications for what’s happening in the market. If an institution places a large order, it will also communicate its position to the rest of the market and is likely to cause an unfavorable price movement against the order. Having smaller orders is a way to make the market think that at lower price levels there is not much interest in maintaining price stability.
You may ask: why would a Mask keep the purchase of a Cue ball a secret? It’s very simple. While any major institutional – level purchase of BTC tends to drive the market crazy, in the case of Elon Musk, if the SpaceX founder were to announce his potential purchase of BTC, the cryptocurrency market reaction would be seismic.
On December 20, the day Elon Musk and Michael Saylor met, Musk made another tweet about the lesser-known altcoin Dogecoin. The Tesla founder said:
“One word: Doge.”
After this simple and playful tweet, the price of Dogecoin immediately rose by 25%, which indicates the influence of the founder of SpaceX on the markets.
At the time of communication with Michael Saylor, Musk’s net worth was estimated at more than $ 153 billion, and as of February 2019, it was reported that he personally had only about 0.25 BTC.
Musk is currently the richest man in the world, with an estimated fortune of $ 185 billion, but how much BTC does he hold is a mystery shrouded in darkness? At the moment, no official statements on behalf of Musk, Tesla Inc. or SpaceX about any Bitcoin purchases made.