Efficient Market Hypothesis and Bitcoin Stock-to-Flow Model

By PlanB


Bitcoin Stock-to-Flow (S2F) model was published in March 2019 [1]. The model has been well received by bitcoiners and investors. Many analysts have verified the cointegrated S2F model and confirmed bitcoin price predictions [2][3][4].

The S2F model also received critique. The best steel man argument against the model comes from the Efficient Market Hypothesis (EMH). The argument states that the model is based on publicly available information (S2F, bitcoin’s supply trajectory) and therefore the analysis and conclusion must be already priced in.

In this article I share my point of view on S2F model and EMH. I analyze arbitrage opportunities, risk & return model and derivatives markets.

Stock to Flow Model

S2F model was published as a bitcoin valuation model, inspired by Nick Szabo’s concept of unforgeable scarcity and Saifedean Ammous’ analysis of S2F [1][5][6]. S2F is a measure of scarcity. The power law relation between S2F and bitcoin price over time captures the underlying regularity of bitcoin’s complex dynamic system of network effects as described by Trace Mayer [7].

S2F model is a power law function fitted on Oct 2009 —Feb 2019 monthly data: BTC price =0.4*S2F ^3 (where S2F=1/inflation rate). A later model on 2009–2019 yearly data yields higher predictions: BTC price =0.18*S2F ^3.3

Nick Phraudsta was the first to verify (or better “not falsify”) the S2F model, and he added cointegration analysis, indicating that the correlation is likely not spurious [2]. Marcel Burger verified both S2F model and cointegration, with several addition statistical tests[3]. Manuel Andersch was the first institutional investor (BayernLB) to verify S2F model and cointegration [4].

Efficient Market Hypothesis

EMH is a well known theory in financial economics. EMH is based on ideas of Friedrich Hayek (1974 Nobel prize) and others. According to Hayek markets are information processing systems, delivering the best possible price discovery [8].

EMH is formally described by Eugene Fama (1973 Nobel prize) and comes in three flavors [9]:

  1. Weak EMH: historical price data is already priced in and cannot be used to make profits. Technical Analysis (TA) and Time Series Analysis (TSA) does not work.
  2. Semi-strong EMH: public news from media outlets like MSNBC, Bloomberg, WSJ and research companies is already priced in and cannot be used to make profits. Fundamental Analysis (FA) does not work.
  3. Strong EMH: even inside information can not be used to make a profit, because all information is already priced in.

Most investors and economists agree that modern financial markets are reasonably efficient (i.e. they accept weak and semi-strong EMH), however they reject strong EMH.

Following EMH, S2F model should be priced in, because it is based on publicly available data (S2F).

Risk & Return

To be honest, I have never used EMH directly in my 20+ years experience as an institutional investor managing a multi-billion Euro balance sheet. In practice we assume EMH, and use a risk & return model.

Assuming EMH

Some people argue that bitcoin markets are not efficient, but I do not agree. In the old days you could buy bitcoin at one exchange in USD and sell it shortly afterwards at another exchange in EUR or JPY and convert it back to USD at a profit, arbitrage was possible. Those days are gone, as the table below shows (13 Jan 2020, 20:00 GMT prices):

BTCUSD = 8100
BTCEUR = 7300
BTCUSD/BTCEUR = 8100/7300 = 1.11
EURUSD = 1.11

BTCJPY = 885.000
BTCJPY/BTCUSD = 885.000/8100 = 109
USDJPY = 109

Perhaps there is still some money to be made with big computers, fast communication lines and high-frequency trading (HFT) algorithms, but there are no easy arbitrage opportunities.

We can safely assume that the $150B bitcoin market with $10B daily transactions is reasonably efficient.

Risk & Return Model

Assuming EMH does not mean that you can not make money. You just have to take risk. EMH and non arbitrage lead us to risk & return models.

Harry Markowitz (1990 Nobel prize) introduced an early risk & return model with his famous Portfolio Theory (PT)[10]. William Sharpe (1990 Nobel prize) published his well known Capital Asset Pricing Model (CAPM)[11]. According to Markowitz and Sharpe all returns can be explained by risk.

This is a simplified risk & return model (without correlation or exotic math):

It is crucially important to understand this chart, so let’s dive into it.

The x-axis of this chart is risk (maximum annual loss) and the y-axis is return (average annual return).

The chart shows three classic assets: bonds, gold and stocks. Bonds have the lowest risk 8% and the lowest return 6%. Gold has higher risk 33% and higher return 7.5%. Stocks have the highest risk 40% and the highest return 8%.

Key insight is that returns can be explained by risk alone, consistent with EMH. If you encounter an asset above the line, a first reaction could be that it is a great investment opportunity. A better reaction (from an EMH and non arbitrage point of view) would be that it is too good to be true. We are probably missing risks (or have miscalculated risk) and should try to bring the asset back on the line. Quantifying risk (volatility) is difficult, and indeed the expertise of quants of financial institutions. If an investor calculates that risks are lower than the market prices in, and if he exactly knows why the asset is above the line, then and only then should he decide to invest.

Bitcoin is literally “off the chart”: 200% return, 80% risk. Because I can not plot it on the chart, I resized it to a 1% bitcoin plus 99% cash investment. This bitcoin investment is far above the line: 8% return, 1% risk (note that you can’t loose more than 1%, even if bitcoin drops 99%, because you only invest 1%). So my first reaction is: the market sees risks that are not in the data. Here is a list of some possible risks:

  • Risk that bitcoin dies
  • Risk of governments making bitcoin illegal and prosecuting developers
  • Risk of fatal software bugs
  • Risk of exchange hacks
  • Risk of 51% attacks by centralized miners
  • Risk of miner death spiral after halving
  • Risk of hard forks

From an EMH and risk & return perspective, all these risks should be in the price data. But these risks are not in the data. According to EMH and the risk & return formula in the chart, 1% risk should give 5.5% + 6.2% * 1% = 5.6% return. And the data shows that 1% bitcoin + 99% cash had 8% return last 11 years.

It seems that these risks have been overestimated by the market, and that bitcoin really was a great investment opportunity, in line with S2F model.

Derivatives markets

Let’s look at what derivatives markets are telling us about the future.

Option markets show no spike at or after next halving:

Source: https://twitter.com/skewdotcom

Same story for futures market: slightly higher prices in the future, but no spike at or after the halving, indicating nothing special will happen at the halving:

Source: https://www.theice.com/products/72035464/Bakkt-Bitcoin-USD-Monthly-Futures/data?marketId=6137544

This is interesting because S2F model predicts much higher prices after the halving. How should we interpret this?
I think the simple answer is that the market currently overestimates future risk, like it overestimated risk last 11 years. The efficient bitcoin market not only discounts the fundamental value of scarcity (S2F model), but also all these risks:

  • 42% of investors see bitcoin futures as the biggest risk (whales and governments manipulating the price of bitcoin with ‘paper bitcoin’, spoofing and wash trades).
  • 16% still fears miner capitulation after the halving.
  • 15% fear selling pressure from scams.
  • I know from discussions with institutional investors that their biggest fear is government making bitcoin illegal.
  • Another risk frequently mentioned by institutional investors is “the next bitcoin”, a new (government/central bank backed) coin replacing bitcoin.

Note that without all these risks bitcoin’s value would be much higher, possibly in line with S2F model.

As time progresses, some of these risks will not materialize and disappear from the list. Take miner capitulation for example. I do not think miner capitulation is a big risk, but 15% of investors thinks it is. If hashrate does not decrease after the next halving, the risk of miner capitulation disappears and bitcoin price will rise because the risk is gone.


Bitcoin S2F model was introduced in March 2019 and verified by many others.

EMH implies that S2F and the model predictions should be already priced in by the market, because S2F model uses publicly available S2F data.

Current bitcoin markets are indeed reasonably efficient because easy arbitrage opportunities are not possible.

Historical risk & return data of bonds, gold, stocks and bitcoin, shows that bitcoin markets overestimated risk. Bitcoin return was not in line with risk, but very much in line with S2F model. Bitcoin options and futures markets do not expect rising prices at or after next halving. It is possible that markets still overestimate future risks.

My conclusion is that bitcoin markets are indeed reasonably efficient and price in S2F model, but also overestimate risk. Therefore, I prefer using S2F model over a classic risk & return model to predict future bitcoin price.

So I assume EMH and would definitely pick up that bitcoin!


[1] PlanB@100trillionUSDModeling Bitcoin’s Value with Scarcity, Mar 2019

[2] Nick Phraudstra, Falsifying Stock-to-Flow As a Model of Bitcoin Value, Aug 2019

[3] Marcel Burger, Reviewing “Modelling Bitcoin’s Value with Scarcity”, Sep 2019

[4] Mannuel Andersch (BayernLB), Is Bitcoin outshining gold?, Sep 2019

[5] Nick Szabo, Bit Gold, 2008

[6] Saifedean Ammous, The Bitcoin Standard: The Decentralized Alternative to Central Banking, 2018

[7] Trace Mayer, The Seven Network Effects of Bitcoin, 2015

[8] Friedrich Hayek, The Use of Knowledge in Society,1945

[9] Eugene Fama, Efficient Capital Markets: A Review of Theory and Empirical Work, 1970

[10] Harry Markowitz,Portfolio Selection, 1952

[11] William Sharpe, Capital Asset Prices: A Theory of Market Equilibrium under Conditions of Risk, 1964

Ten Jan 14 One-line News

  1. The trading volume on CME on the first day amounted to $2M (it took Bakkt 1 month to pass the $1M mark).
  2. Visa is buying Plaid that serves Coinbase and Abra (for $5.3B).
  3. Binance blocked the account of a Russian client at the request of the Ukrainian police.
  4. The judge has invalidated the decision to collect 500,000 BTC from Craig Wright.
  5. IBM will launch a blockchain application for farmers to track coffee supplies.
  6. Austria’s financial regulator has ordered cryptocurrency companies to register.
  7. The court ordered Telegram to disclose TON financial data.
  8. The SEC demands to collect >$16M from ICOBox.
  9. Dutch ABN Amro bank announced 0% interest.
  10. On this day, dozens of “predictions” were published that BTC will reach the $100k level faster than previously thought.

Deloitte: an analysis of the impact quantum computers might have on the Bitcoin blockchain

Since Google announced that it achieved quantum supremacy there has been an increasing number of articles on the web predicting the demise of currently used cryptography in general, and Bitcoin in particular. The goal of this article is to present a balanced view regarding the risks that quantum computers pose to Bitcoin.

How many Bitcoins could be stolen now if sufficiently large quantum computers were available?

Imagine that someone manages to build a quantum computer today and is therefore able to derive private keys. How many Bitcoins will be in danger?

To answer this question, we analyzed the entire Bitcoin blockchain to identify which coins are vulnerable to an attack from a quantum computer. As explained in the previous section, all coins in p2pk addresses and reused p2pkh addresses are vulnerable to a quantum attack. The result of our analysis is presented in the figure below. It shows the distribution of Bitcoins in the various address types over time. As can clearly be seen in the graph, p2pk addresses dominated the Bitcoin blockchain in the first year of its existence. Interestingly, the number of coins in p2pk addresses has stayed practically constant (circa 2M Bitcoins). A reasonable assumption is that these coins were generated through mining and have never been moved from their original address.

As p2pkh was introduced 2010, it quickly became dominant. Most of the coins created since then are stored in this type of address. In the graph we see that the number of Bitcoins stored in reused p2pkh increases from 2010 to 2014, and since then is decreasing slowly to reach the current amount of 2.5M Bitcoins. This suggests that people are generally following the best practice of not using p2pk address as well as not reusing p2pkh addresses. Nevertheless, there are still over 4 million BTC (about 25% of all Bitcoins) which are potentially vulnerable to a quantum attack. At the current price this is over 40 billion USD!

Figure 1: The distribution of Bitcoins that are stored in address that are vulnerable to quantum attacks. This graph shows that about 25% of all Bitcoins are vulnerable to a quantum attack and that there is an equal number of vulnerable p2pk and p2pkh coins. Note that reused Segwit coins are presented in the graph but are otherwise not mentioned in the article.

What can one do to mitigate the risk of Bitcoins being stolen by an adversary with a quantum computer?

In the previous section we explained that p2pk and reused p2pkh addresses are vulnerable to quantum attacks. However, p2pkh addresses that have never been used to spend Bitcoins are safe, as their public keys are not yet public. This means that if you transfer your Bitcoins to a new p2pkh address, then they should not be vulnerable to a quantum attack.

The issue with this approach is that many owners of vulnerable Bitcoins have lost their private keys. These coins cannot be transferred and are waiting to be taken by the first person who manages to build a sufficiently large quantum computer. A way to address this issue is to come to a consensus within the Bitcoin community and provide an ultimatum for people to move their coins to a safe address. After a predefined period, coins in unsafe addresses would become unusable (technically, this means that miner will ignore transactions coming from these addresses). Such a drastic step needs to be considered carefully before implemented, not to mention the complexity of achieving consensus about such a sensitive issue.

Is the Bitcoin blockchain inherently resilient to quantum attacks now and in the future?

Let’s assume for a minute that all owners of vulnerable Bitcoins transfer their funds to safe addresses (everyone who lost their private key ‘magically’ finds them). Does that mean that the Bitcoin blockchain is no longer vulnerable to quantum attacks? The answer to this question is actually not that simple. The prerequisite of being “quantum safe” is that the public key associated with this address is not public. But as we explained above, the moment you want to transfer coins from such a “safe” address, you also reveal the public key, making the address vulnerable. From that moment until your transaction is “mined”, an attacker who possesses a quantum computer gets a window of opportunity to steal your coins. In such an attack, the adversary will first derive your private key from the public key and then initiate a competing transaction to their own address. They will try to get priority over the original transaction by offering a higher mining fee.

In the Bitcoin blockchain it currently takes about 10 minutes for transactions to be mined (unless the network is congested which has happened frequently in the past). As long as it takes a quantum computer longer to derive the private key of a specific public key then the network should be safe against a quantum attack. Current scientific estimations predict that a quantum computer will take about 8 hours to derive a typical Bitcoin private key, which means that Bitcoin should be, in principle, resistant to quantum attacks (as long as you do not reuse addresses). However, as the field of quantum computers is still in its infancy, it is unclear how fast such a quantum computer will become in the future. If a quantum computer will ever get closer to the 10 minutes mark to derive a private key from its public key, then the Bitcoin blockchain will be inherently broken.

Closing remarks

Quantum computers are posing a serious challenge to the security of the Bitcoin blockchain. Presently, about 25% of the Bitcoins in circulation are vulnerable to a quantum attack. If you have Bitcoins in a vulnerable address and believe that progress in quantum computing is more advanced than publicly known, then you should probably transfer your coins to a new p2pkh address (don’t forget to make a secure backup of your private key).

In case your own Bitcoins are safe in a new p2pkh address, you might still be impacted if many people will not (or cannot) take the same protection measures. In a situation where a large number of Bitcoins is stolen, the price will most likely crash and the confidence in the technology will be lost.

Even if everyone takes the same protection measures, quantum computers might eventually become so fast that they will undermine the Bitcoin transaction process. In this case the security of the Bitcoin blockchain will be fundamentally broken. The only solution in this case is to transition to a new type of cryptography called ‘post-quantum cryptography’, which is considered to be inherently resistant to quantum attacks. These types of algorithms present other challenges to the usability of blockchains and are being investigated by cryptographers around the world. We anticipate that future research into post-quantum cryptography will eventually bring the necessary change to build robust and future-proof blockchain applications.

Via Deloitte.com

Twitter is funding decentralized social media standard

Ultimately Twitter would become a client of this standard. 

According to the Twitter CEO, to build the decentralized social media standard might take a few years, but the company will keep supporting the development until it’s done and beyond.

Apparently, Mr. Dorsey understands that the major changes in the Internet are inevitable. Phenomena like monopolization and fake news are impossible to properly deal with. Social media have shifted from content hosting to recommending and further to misdirecting attention while focusing too much on controversy and outrage.

Several blockchain startups are working on decentralized social media. Examples are Bittubers.com and Voice.com. Several messaging applications are also using decentralization to become more private.

High Anticipation for CME Bitcoin Options Launch on Jan. 13

Institutional interest in Bitcoin-related contracts appears to be building and market measures indicate high anticipation of the launch of CME Group Inc. options on Jan. 13, according to JPMorgan Chase & Co.

While a consortium known as Bakkt, which includes New York Stock Exchange parent Intercontinental Exchange Inc., began offering options last month, volumes and open interest have been “rather small,” strategists led by Nikolaos Panigirtzoglou wrote in a note Jan. 10. Given the dominance of CME in trading Bitcoin futures on regulated exchanges, this new offering may change things, they said.

“There has been a step increase in the activity of the underlying CME futures contract” over the past few days, Panigirtzoglou wrote, noting that open interest has increased 69% from year-end, and that the number of large open-interest holders has grown. “This unusually strong activity over the past few days likely reflects the high anticipation among market participants of the option contract.”

Introduction of new Bitcoin contracts has a mixed track record. At times it has appeared to be a drag on the price, such as when ICE debuted its new futures contract in September. And the price peak around $19,000 in December 2017 occurred just as CME and Cboe Global Markets Inc. launched futures on the world’s largest cryptocurrency.

Bitcoin is near its highest levels since mid-November

Separately, Bitcoin’s intrinsic value has been rising, but remains below the market price following a significant divergence in the middle of last year, the report said. JPMorgan calculates intrinsic value by treating Bitcoin as a commodity and looking at the marginal cost of production including computational power employed and cost of electricity.

relates to JPMorgan Sees ‘High Anticipation’ for CME Bitcoin Options Launch

“The market price has declined by nearly 40% from its peak while the intrinsic value has risen by around 10%,” Panigirtzoglou wrote. But “the gap has not yet fully closed, suggesting some downside risk remains.”

Via Bloomberg

Former U.S. Treasury Secretary Lawrence H. Summers dismisses Ben Bernanke’s optimism for central bankers

Former Treasury Secretary Lawrence Summers dismissed the optimism of former Federal Reserve Chairman Ben Bernanke, who recently said the central bank could likely fight off the next recession despite the low level of interest rates.

Bernanke’s speech was “a kind of last hurrah for the central bankers,” Summers said in a taping of Bloomberg Television’s “Wall Street Week” with David Westin, which will debut Friday at 6 p.m. in New York.

“He argued that monetary policy will be able to do it the next time,” Summers said. “I think that’s pretty unlikely given that in recessions we usually cut interest rates by 5 percentage points and interest rates today are below 2%.”

The Fed’s target range for its benchmark policy rate is currently at 1.5%-1.75%.

Speaking Jan. 4 at the annual meeting of the American Economic Association in San Diego, Bernanke said crisis-era policies of large-scale bond purchases, known as quantitative easing, and commitments to keep rates low for a very extended period via forward guidance, could be used effectively again if rates drop to zero. Combined, they packed the equivalent of 3 percentage points of additional rate cuts, Bernanke estimated.

Summers disagreed.

“I just don’t believe QE and that stuff is worth anything like another 3 percentage points,” he said. “We’re going to have to rely on putting money in people’s pockets, on direct government spending.”

Also at the AEA conference, Summers presented a paper written with ex-International Monetary Fund chief economist Olivier Blanchard saying governments should put in place “semi-automatic stabilizers,” or policies that would automatically increase government spending — perhaps through temporary tax cuts or credits — once certain economic measures like unemployment passed agreed thresholds.

Summers also said investors shouldn’t expect the kind of returns they enjoyed over the past decade, especially from the stock market.

“Because interest rates are much lower and maybe risk premiums are the same as they always are, returns going forward are going to be substantially lower than they have been over the last decade,” he said.

Video (via Bloomberg)

Microsoft Research: Migrating to Quantum-safe Crypto

Via Microsoft.com

A non-trivial quantum computer would break the public key cryptography in use today. They might be at least a decade away, but nothing prevents adversaries to record and store selected internet traffic today for later quantum-assisted decryption. It is therefore prudent to start the migration to quantum-safe cryptography.

NIST is well underway in its post-quantum standardization process. Adoption of these quantum-safe alternatives will however depend on the progress in integrating them into internet standards and systems. We describe how TLS and SSH can be adapted to use post-quantum cryptography. We examine various design considerations and report on our experiences in adding post-quantum and hybrid key exchange and authentication to these protocols. We describe the Open Quantum Safe project, which enables developers and researchers to experiment with post-quantum cryptography in various languages, applications, and protocols, including via our forks of OpenSSL and OpenSSH.

Finally, we report on the performance of this new cryptography, and demonstrate conventional and post-quantum hybrid TLS 1.3 and SSH connections.

Watch Video >>

V. Buterin: scalable data chains without committees

Vitalik Buterin (Jan 5):

Between STARKed data availability roots 7 and Kate commitments (plus some not-yet-published techniques for computing N reveals of a deg-N polynomial in O(N * log(N)) time), we have the possibility of fraud-proof-free data availability checking schemes.

Fraud-proof-free data availability checking schemes have the advantage that they preserve many more of the properties of traditional non-sharded blockchains: if a block is accepted by a client at time T, it will continue to be accepted at any time after T, there’s no possibility that a fraud proof will invalidate it after the fact. This opens the door to the following possibility: what if we have a sharded blockchain without committees, where the only mechanism for verifying data is data availability checks?

Here is one possible design:

  • There exists a base chain, similar to an ethereum-like non-scalable blockchain. Anyone can post transactions to it, etc.
  • Users have the ability to pay a fee to send a special type of transaction, which contains a data commitment (think: STARKed data availability root, or a Kate commitment) to some data D.
  • When including a data-commitment-carrying transaction, block proposers/miners first do a data availability check (ie. sample eg. 30 random coordinates) to verify that the data is available. They would need to do this through an anonymizing network to avoid an attacker satisfying only their checks and not anyone else’s.
  • When verifying a block for any purpose (as a client or a block proposer/miner), for any data-commitment-carrying transaction you would do a data availability check. You would only accept a block for which every availability check passed.

These are the entire rules of the system; particularly, there are no committees, proofs of custody, etc. We lean on data availability sampling fully and absolutely for security.

Why do this?

  • It’s extremely simple, in fact it’s arguably as simple as a sharded system can be. It provides consensus on a chain and on the fact that the data in that chain is available, which can be used as a base layer to build systems like rollup on top of.
  • It’s secure; there’s always some risk that a small number of block producers and users get tricked by some unavailable data by random chance, but with overwhelming probability the rest of the network will not be tricked, and so will reject any blocks containing commitments to that unavailable data.
  • It does not have 2/3 online assumptions that committee-based systems do

Why possibly not do this? A few reasons:

  • We might strongly desire to scale computation and not just data, doing computation at layer 1 rather than layer 2, so as to avoid layer 2 relying on synchrony assumptions
  • Committees have important side benefits, so we may need committees anyway. Particularly, (i) a Casper FFG chain already need thousands of validators per slot to send messages to reach finality, so we may as well dual-use those signatures, and (ii) there’s stability benefits to having a randomly selected ~128 validators that are guaranteed to have actually downloaded and stored the data.

That said, this certainly is possible as a construction.

Via Ethresear.ch

Chip-to-chip quantum teleportation and multi-photon entanglement in silicon

Via Nature.com

Integrated optics provides a versatile platform for quantum information processing and transceiving with photons1,2,3,4,5,6,7,8. The implementation of quantum protocols requires the capability to generate multiple high-quality single photons and process photons with multiple high-fidelity operators9,10,11. However, previous experimental demonstrations were faced by major challenges in realizing sufficiently high-quality multi-photon sources and multi-qubit operators in a single integrated system4,5,6,7,8, and fully chip-based implementations of multi-qubit quantum tasks remain a significant challenge1,2,3. Here, we report the demonstration of chip-to-chip quantum teleportation and genuine multipartite entanglement, the core functionalities in quantum technologies, on silicon-photonic circuitry. Four single photons with high purity and indistinguishablity are produced in an array of microresonator sources, without requiring any spectral filtering. Up to four qubits are processed in a reprogrammable linear-optic quantum circuit that facilitates Bell projection and fusion operation. The generation, processing, transceiving and measurement of multi-photon multi-qubit states are all achieved in micrometre-scale silicon chips, fabricated by the complementary metal–oxide–semiconductor process. Our work lays the groundwork for large-scale integrated photonic quantum technologies for communications and computations.

Helicopter Money Is Here

What is Helicopter Money?

A daring new approach to solving the economic slump is gaining popularity in official circles. Helicopter money refers to money figuratively “dropped from the sky”, or freshly created cash used to fund infrastructure projects or put directly into the hands of citizens. Rather than being thrown from the sky, helicopter money might mean every citizen being credited with, say, $500 from the central bank straight into their current account.

Why should You Care?

The Fed’s charter prohibits it from directly purchasing bonds or bills issued by the US Treasury: that process is also known as monetization and various Fed chairs have repeatedly testified under oath to Congress that the Fed does not do it. Of course, the alternative is what is known as “Helicopter Money”, when the central bank directly purchases bonds issued by the Treasury and forms the backbone of the MMT monetary cult.

But what if there is at a several day interval between Treasury issuance and subsequent purchase? Well, that’s perfectly legal, and it’s something the Fed has done not only during QE1, QE2 and QE3, but is continuing to do now as part of its “QE4/NOT QE.” 

Here’s how.

On December 16, the US Treasury sold $36 billion in T-Bills with a 182-day term, maturing on June 18, 2020, with CUSIP SV2. And, as shown in the Treasury Direct snapshot below, of the total $34.3 billion in competitive purchases, Dealers acquired $23.7 billion.

What happened next?

For the answer we go to the Fed’s POMO page, which shows which specific T-Bill CUSIPs were purchased by its markets desk on any given POMO day when Dealers sell up to $7.5 billion in Bills to the Fed.

Exhibit 1: on December 19, just three days after the above T-Bill was issued and on the very day the issue settled (Dec 19), Dealers flipped the same Bills they bought from the Treasury back to the Fed for an unknown markup. Specifically, of the $7.5BN in total POMO, the SV2 CUSIP which had been issued earlier that week, represented the biggest bond “put” to the Fed, amounting to $3.9 billion, more than half of the total POMO on that day, and by far the most of any CUSIP sold to the NY Fed’s markets desk on that day.

But wait, there’s more.

Exhibit 2: during the next POMO conducted the very next day, or December 20, and just four days after the issuance of T-Bill SV2, which as a reminder saw $23.7 billion in Dealer purchase, those same Dealers flipped more of the same Bills they “bought” from the Treasury back to the Fed. Why? To once again pocket the unspecific markup the Fed generously provided to them just because they are Dealers. Of the $7.5BN in total POMO held on Dec 20, the SV2 CUSIP once again represented the single biggest bond “put” to the Fed, amounting to $1.6 billion, the most of any CUSIP sold to the NY Fed’s markets desk on that day.

So what is going on? Well, for all those saying the US may soon unleash helicopter money, and/or MMT, we have some ‘news’: helicopter money is already here, and the Fed is now actively monetizing debt the Treasury sold just days earlier using Dealers as a conduit… a “conduit” which is generously rewarded by the Fed’s market desk with its marked up purchase price.

In other words, the Fed is already conducting Helicopter Money (and MMT) in all but name. As shown above, the Fed monetized T-Bills that were issued just three days earlier – and just because it is circumventing the one hurdle that prevents it from directly purchasing securities sold outright by the Treasury, the Fed is providing the Dealers that made this legal debt circle-jerk possible with millions in profits, even as the outcome is identical if merely offset by a few days. 

Perhaps during Fed Chair Powell’s next Congressional hearings, someone actually has the guts to ask the only question that matters: why is the Fed now monetizing US debt, and pretending it isn’t doing so just because it grants Dealers a 3-day “holding” period, for which it then rewards them generously?

Via ZeroHedge