This article is reprinted with permission from "Talking About Li", and the copyright belongs to the original author.
In terms of the cryptocurrency market, we can see different narratives or hype in each cycle. With the increasing out-of-circle effect of cryptocurrency concepts, the current market signals can no longer rely on a single piece of information, indicator, or data point. Instead, they fluctuate continuously amidst the interconnections or conflicts of various narratives, such as changes in Federal Reserve policies, fluctuations in U.S. Treasury bonds, macroeconomic data, geopolitical situations, and so on.
Overall, we are currently in a state of oscillation in the market.
In the short term, over the next month or so, the market may experience a new round of phase fluctuations. On one hand, this may trigger panic among some people again; on the other hand, the potential weakness or volatility may become an entry point for some.
In the medium term, although the Federal Reserve's policies may still bring some new unknown risks to the market, and the rising risk of inflation in the U.S. may lead to changes in the flow of investment funds, we remain optimistic about the market opportunities in the fourth quarter.
In the long term, since the beginning of this cycle, the volatility of the cryptocurrency market has not only depended on the flow of funds from institutions and retail investors but has also become more correlated with the health of U.S. Treasury bonds. If there are new changes in U.S. economic expectations, we may face larger-scale volatility, which will also extend the volatility cycle of the cryptocurrency market.
Specifically regarding Bitcoin, its volatility seems to be compressing compared to before, as we have not seen a monthly fluctuation of over 15% this year, as shown in the chart below.
With only four months left in the year, theoretically, it is not ruled out that we will see monthly fluctuations of 15% or even over 30% in the coming months. The current issue is that it is difficult to predict exactly when such large fluctuations will occur. However, regardless of the situation, the fourth quarter may be the last important opportunity for those who like to go long or short.
- Interest Rate Cuts and Inflation
A few days ago (August 22), Powell's speech was interpreted by many as dovish, and many media outlets also interpreted it as Powell hinting that the Federal Reserve would soon cut interest rates. If we take a closer look at his remarks, we can see that his speaking style is quite subtle. For example:
On the labor issue, Powell acknowledged that the current supply and demand for labor has slowed, creating a strange balance (synchronized slowdown on both supply and demand sides leading to stable unemployment rates), but significant downside risks are accumulating. Our understanding here is that there is currently a certain asymmetrical balance in the supply and demand risks in the U.S. labor market, which has not yet erupted. If this balance is broken, it may trigger a wave of layoffs (rising unemployment rates).
On the inflation issue, Powell mentioned that tariffs are currently pushing up prices, and this impact will continue to accumulate. However, he also emphasized that the Federal Reserve cannot allow expectations to lose their anchor (a firmly anchored inflation expectation is crucial for successfully reducing inflation and avoiding a significant rise in unemployment).
In summary, Powell believes there is some room for interest rate cuts, but he also emphasized that the timing and speed of rate cuts will depend on future data, the changing outlook, and the balance of risks. A rate cut does not necessarily mean the beginning of a loosening cycle.
From the recent market trends, it seems that the market has already digested the expectation of a likely interest rate cut in September to some extent.
Additionally, the Federal Reserve has made some changes to its policy framework, such as modifying the existing Flexible Average Inflation Targeting (FAIT) and returning to a balanced-approach model. This means the Federal Reserve has clearly sent a new signal, interpreting its 2% inflation target more rigorously, no longer tolerating high inflation, but returning to a framework of dynamic trade-offs between employment and inflation. In simple terms, the Federal Reserve has decided to shift from a short-term inflation target that can exceed 2% to a hard target of 2%.
Currently, the U.S. economic situation seems quite tangled. On one hand, core inflation shows signs of rebounding, and the labor market is weak (new job growth is slowing, and unemployment rates are rising). On the other hand, the fiscal deficit and debt burden continue to worsen, challenging the long-term sustainability of fiscal policy. To maintain spending, the U.S. may continue to fall into a cycle of "spending - borrowing - printing money." The Federal Reserve's policy space between curbing inflation and maintaining growth continues to be compressed.
In other words, the Federal Reserve is determined to maintain a 2% inflation target, but it may face several issues:
If the fiscal deficit and debt continue to expand, the market may question the U.S. credit and repayment capacity. Once fiscal control is lost, the market may doubt whether the Federal Reserve will be forced to tolerate higher inflation.
If the core PCE price index remains between 2.5% and 3% in the future, but the Federal Reserve frequently cuts rates due to economic pressure, the market may view the 2% target as merely nominal, believing that the actual inflation tolerance is higher.
If faced with political pressure, such as strong demands from Trump, if the Federal Reserve is forced to compromise, the market's long-term confidence in the 2% target may waver.
Let’s make a hypothesis: if the Federal Reserve's 2% inflation anchor loses market expectations in the future, it could trigger new credibility asset pricing risks, potentially resetting the valuations of credible assets like bonds and stocks to some extent.
In the long run, if such uncertainties arise, it will inevitably lead to further demand for alternative scarce assets, such as Bitcoin and gold, which may continue to serve as hedging tools for some funds. As we mentioned above, this could lead to greater levels of volatility in the cryptocurrency market in the future, while also extending the market's volatility cycle.
- U.S. Treasury Bonds, Institutions, and Bitcoin
The above mainly discusses interest rate cuts and inflation; next, let’s briefly talk about U.S. Treasury bonds.
I remember that last month (July 15), we wrote an article on the topic of "Institutional Capital and Crazy Bitcoin," which mentioned the changes in the funding structure of the cryptocurrency market. With institutions like MicroStrategy continuously buying, it has somewhat pushed up the prices of cryptocurrency assets in this cycle. However, the core operating strategy of these institutions is that they mainly use debt instruments to purchase Bitcoin.
To be more specific, the bonds issued by institutions like MicroStrategy are highly correlated with U.S. Treasury bond rates. U.S. Treasury bond rates are considered risk-free rates, and any corporate financing (issuing bonds or borrowing) must add a risk premium on top of this. When U.S. Treasury bond rates are low, they can more easily and at very low rates finance themselves to achieve low-cost borrowing for buying Bitcoin.
Regarding MicroStrategy's (MSTR) approach, we have previously analyzed it in some detail. Here, we will briefly review their specific financing methods, such as:
Issuing bonds for financing. This is a type of debt security (note) that can be converted into company stock at a predetermined price. Investors buy these bonds mainly because they see the potential for conversion into MSTR stock in the future (i.e., investors are more interested in the opportunity to profit from future stock conversion rather than the bond interest), as MSTR stock is highly volatile, which also gives its convertible bonds a higher premium space. Investors in MicroStrategy's convertible bonds are essentially creating a fixed income + equity option investment portfolio, where the fixed income aspect is anchored above U.S. Treasury bond rates, while the equity option aspect enjoys the dividends from the rise in MSTR stock price (and Bitcoin price). Therefore, its convertible bonds carry higher risks than U.S. Treasury bonds but also offer greater potential returns.
Issuing stock for financing. They mainly issue stock through secondary market offerings (Follow-on Offering), such as public offerings (the company issues new shares to the market) and ATM (At-The-Market, selling in batches in the secondary market).
Looking at MicroStrategy's Q2 2025 financial report, we can further understand some financing data: year-to-date (YTD), they have raised approximately $18.3 billion through capital markets, close to 81% of the total financing amount for the entire year of 2024.
The main difference between bond financing and stock financing is that bond financing requires regular interest payments and repayment of principal at maturity, but it does not dilute shareholders' stock. Stock financing does not require repayment of principal and interest but will dilute the ownership percentage of existing shares. Theoretically, issuing stock for financing is more favorable in a bull market, while issuing bonds for financing is more favorable in a low-interest-rate environment.
So far, through the above financing methods (including cash purchases and other means), MicroStrategy has bought and accumulated 632,457 Bitcoins, with an average purchase cost of $73,539, and the current total value is $6.98 billion.
Currently, the price of MSTR stock is $343, with a total market capitalization of $97.3 billion. Its NAV premium is 1.4, meaning the market is willing to pay 40% more for MSTR stock than the value of its Bitcoin holdings.
In summary:
1) On the stock side, if MSTR stock price rises → continue to issue more stock → use the financing to buy more BTC → stock price further rises due to BTC price increase. This cycle resembles a high-level leveraged play of "making money without any investment."
2) On the bond side, if the increase in BTC price > bond interest rate, then the company can achieve arbitrage, which is a form of low-cost leveraged arbitrage.
This raises another question: if the Federal Reserve cuts interest rates while inflation expectations rise, the long-term rates of U.S. Treasury bonds may increase because investors (funds) will require higher returns to hedge against future inflation, i.e., they need higher yields to compensate for the decline in future purchasing power.
We can provide a specific example to explain this: suppose the current benchmark interest rate is 5%. If the Federal Reserve cuts rates by 1% now, the short-term rate will drop to 4%. However, at the same time, the market expects inflation to continue rising by 2% over the next three years. Therefore, investors will require long-term bond yields to cover inflation and risk premiums, which could push long-term rates up to 5% or even higher. Of course, this is just a simple example; the actual changes in long-term U.S. Treasury bond rates will be more complex, depending not only on inflation expectations but also on growth expectations, global capital flows, and various other factors.
So, if one day, due to changes in interest rates or other reasons, the premium effect compresses to the point where these institutions reach the limits of balance sheet arbitrage, will the cryptocurrency market face a new moment of super-leverage bubble liquidation?
Before the cryptocurrency policy becomes clear and spot ETFs are officially launched, investing in stocks like MSTR is indeed a good choice. However, as time goes on, theoretically, the market demand for MSTR stock will continue to weaken. Additionally, as MicroStrategy continues to dilute its shares, the value of its stock will also decrease.
The continuously accumulating debt scale + increasingly diluted stock value + uncertainties in the future market environment (such as rising long-term interest rates) may impact the institutions' strategies, leading to some emotional reactions in Bitcoin's price.
Of course, the above considerations are from a long-term perspective (over the next few years). In the short to medium term, as long as Bitcoin's price continues to maintain an upward trend or remains relatively stable within a certain range, stocks of companies like MicroStrategy will continue to be hyped up. They can issue more stock (diluting shares) for new financing, then buy more Bitcoin, allowing this cyclical game to continue. At the same time, this institutional-level gameplay will also continue to transmit to other cryptocurrencies. For example, institutions like BitMine and SBET are actively driving up their stock prices through hype and large purchases of ETH.
For investors, it's not just about waiting for a bull market to make money; the bull market is more about realizing (selling) profits. Whether in a bull or bear market, as long as the market continues to exhibit volatility, potential opportunities will exist. Opportunities are not simply about choosing a target and waiting for it to rise; rather, it is essential to understand that volatility itself is an opportunity. The key is to leverage the volatility rather than passively waiting for an increase.
Related: U.S. Secretary of Commerce Howard Lutnick: Economic data will be released on the blockchain.
Original text: “Interest Rate Cuts, Inflation, U.S. Debt, and Bitcoin (BTC)”
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