Those regularly bullying markets might want to know.
The number goes up and up. This could get inconvenient for those who got used to their omnipotence of bullying the markets in whatever direction they like, mostly up.
Yes, I am talking of central banks. Their interest rate policy became the only parameter worth trading. In this late phase of their power their actions move everything. Equities, Bonds, Commodities rise in sync every time the FED or ECB reassures to provide yet more liquidity, that is money for nothing (zero interest) or in exchange for bonds that no one else would buy at prices they do (called QE). They even invented a “Modern Monetary Theory” to justify perpetual control, mostly pumping of asset prices.
Markets breathe, even if provided with pure oxygen of abundant liquidity. Markets must sometimes exhale, that is fall for some time. This is tolerable to those in control as long as all assets do that in sync.
Otherwise things could spin out of control as owner of pumped assets would en masse switch to the asset which is not falling. The existence and prosperity of such asset would question the omnipotence of central banks. They are not new to this problem and learned some tricks.
The case of Gold
Gold used to endanger central bank’s omnipotence by offering an alternate store of value to that of the currencies they control. Some still believe this works. Decades of recent history shows, it does no longer.
Buying gold as a protection against failure of central banks is stupid, as central banks are the biggest holder of gold.
Those who own most of gold, are best positioned to control its price. They can frustrate gold bugs until they are becoming an ignorable minority, which they are.
The means of frustrating gold bugs are mainly:
- lend some gold at low or even negative interest to those willing to short sell it. Thereby they can repeatedly apply temporary downward shocks to gold market, without reducing their gold position.
- embrace futures markets and make physical holding inconvenient (e.g. delaying introduction of a Gold ETF as long as you can). Price can be bullied with futures once open interest of futures markets surpasses that of physical trading. Futures require margin only in form of any other successfully pumped assets, wich they have plenty.
The beauty of these means that they can be repeatedly executed without reducing gold holdings, thereby remain in control.
The case of Bitcoin
Should Bitcoin rise to significant value (means trillions of market cap) while other assets fall, then it could question if central banks are still in control.
Could they use the means they frustrate gold bugs to frustrate HODLer? Hardly, at least for now.
Since central banks do not own significant amount (likely none) of Bitcoin, they can not lend it to shorts. There is some danger that big pools of Bitcoin, that is e.g. exchanges might begin to lend Bitcoin so they earn interest on their balances. This could be avoided by requiring proof of reserves or using only joint custody, not letting full control (that is the only private key) at the custodian.
Bitcoin future markets are tiny compared to its “physical” markets, so the tail does not yet wag the dog. Open interest on CME over all maturities is today equivalent to 30k Bitcoin (and this is close ATH), that is ca. 20% of just Binance daily volume, so it is really insignificant.
Delaying Bitcoin ETFs is a deja vu of Gold’s case but is not that relevant as barriers of storing and moving Bitcoins are much lower than that of Gold. The Bitcoin spot market should remain more attractive even if there is widespread access to futures.
Added on 27. Jun 2019: Futures open interest on BitMEX is much higher than CME, but this is not applicable to my argument as BitMEX margins have to be funded with Bitcoin or other crypto and not with fiat collateral. Therefore those only in control of fiat can not use them to bully crypto markets.