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In essence, it has heretofore been assumed that the Fed would always be there to rescue markets. The tool chest includes quantitative easing, asset purchases and interest rate relief. But what happens if these tools do not work in the future? What happens if the market loses all confidence that continuously kicking the can down the road is only delaying an inevitable collapse, and that collapse starts to happen and cannot be stopped by any of the Fed’s tools?
A suitable form of insurance in this catastrophic event would have to be an asset that is not fiat based. It would be an asset that is “short” credit on all fiat currencies, that is not centralized, and that is portable and transferable over time and space on payment rails that are not controlled by the legacy financial system. Enter stage left: bitcoin.
A “put on a put” becomes a second derivative position. The Fed has essentially sold a put to the market. As the seller of a put, the Fed would use a technique called “delta hedging” in order to manage risk. If you recall from the explanation of “gamma” in “part one,” if the Fed is exposed to the gamma squeeze, in the event that the tools of the conventional Fed put do not work, and investors rush to exit traditional assets, what is the Fed to do? We argue that the Fed would have to buy the “put on the put,” i.e., the Fed would have to buy bitcoin.
This opens an interesting game theory conundrum. When the global markets (finally) figure out that all central banks are also counting on the Fed put, and since all other global central banks will fail before the Federal Reserve fails, then shouldn’t all other central banks commence buying bitcoin as soon as possible? Moreover, when the Fed does the same exercise and realizes it could be forced to buy bitcoin in a catastrophic leverage unwind — gamma squeeze — that cannot be stopped by any Fed fiat action, perhaps it would be wise to start buying bitcoin in the here and now, too.
A suitable form of insurance in this catastrophic event would have to be an asset that is not fiat based. It would be an asset that is “short” credit on all fiat currencies, that is not centralized, and that is portable and transferable over time and space on payment rails that are not controlled by the legacy financial system. Enter stage left: bitcoin.
A “put on a put” becomes a second derivative position. The Fed has essentially sold a put to the market. As the seller of a put, the Fed would use a technique called “delta hedging” in order to manage risk. If you recall from the explanation of “gamma” in “part one,” if the Fed is exposed to the gamma squeeze, in the event that the tools of the conventional Fed put do not work, and investors rush to exit traditional assets, what is the Fed to do? We argue that the Fed would have to buy the “put on the put,” i.e., the Fed would have to buy bitcoin.
This opens an interesting game theory conundrum. When the global markets (finally) figure out that all central banks are also counting on the Fed put, and since all other global central banks will fail before the Federal Reserve fails, then shouldn’t all other central banks commence buying bitcoin as soon as possible? Moreover, when the Fed does the same exercise and realizes it could be forced to buy bitcoin in a catastrophic leverage unwind — gamma squeeze — that cannot be stopped by any Fed fiat action, perhaps it would be wise to start buying bitcoin in the here and now, too.
