Have you prepared for the Next Bull Cycle?
When is the Next Bull Cycle for Bitcoin and Ethereum?
Signals
The Bank of England and HM Treasury begin work on a digital pound.
Earlier this week, the Bank of England (BoE) and HM Treasury announced that the joint Bank-HM Treasury CBDC Taskforce has begun preparatory work to issue a digital pound. Following the announcement, the BoE published a consultation paper and technology working paper to illustrate why and how a digital pound could be used. Additionally, the central bank provided data files that informed the CBDC Taskforce’s creation of the consultation and technology working papers. For background, the CBDC Taskforce was formed in April 2021 by Treasury Secretary Rishi Sunak, now the current Prime Minister.
The consultation paper provided many takeaways:
- The digital pound would not replace cash but will reduce the amount in circulation.
- The development roadmap indicates that issuance would occur no earlier than 2025.
- There are concerns over bank disintermediation and subsequent short-term interest rate spikes due to a decline in bank reserves.
- To prevent bank disintermediation, a £10,000-20,000 balance limit for individuals would be instituted.
- CBDCs are viewed as a means to interdict the proliferation and adoption of non-sterling digital forms of money in the UK and abroad.
Demand for the digital pound would increase the BoE’s balance sheet over time.
The last takeaway implies second- and third-order effects for monetary policy that resemble quantitative easing. Demand for the digital pound switches commercial bank deposits to digital pounds, which forces banks to borrow more reserves in money markets. This would drive up short-term rates relative to the Bank Rate and force the BoE to increase the supply of reserves through its Short-Term Repo Facility to keep short-term rates close to Bank Rate. An increase in reserves would result in an increase in liabilities on the BoE’s balance sheet matched by an increase in assets, resulting in an overall increase in the size of the balance sheet.
Historically, growth in a central bank’s balance sheet stimulates an economy through additional liquidity and incentivizing borrowing / lending activity. However, the BoE anticipates a digital pound will generate only “small changes in the level of reserves.” The BoE remains confident that it would have “mitigants in place to manage these balance sheet changes.” Yet, it admits that the composition and size of the balance sheet, once the digital pound is introduced, are “highly uncertain.”
BTC and ETH experience golden crosses, while their bearish trends begin to vanish.
A month ago, we published a report calling the market bottoms for bitcoin and ethereum. Since then, BTC and ETH have climbed 22% and 17%, respectively. Now that January’s digital asset rally has passed, we can examine the impact it had on long-term technical indicators to determine where these assets might be heading next.
Bitcoin crossed above its 50-SMA on January 4, its 100-SMA on January 12, and its 200-SMA on January 13. The 50-SMA ascended above the 100-SMA on January 25 and the 200-SMA on February 6. The 50-SMA’s cross above the 200-SMA materialized a golden cross on the daily chart. Over the last decade, roughly, golden crosses have foreshadowed positive returns.
