The bull market of DeFi cryptocurrency is like the 1980s in Japan.
During that time, Japan’s growth was so great that the value of its land was four times that of the United States. From 1970 to 1990, the Japanese market as measured by the Nikkei Index (Nikkei) rose by 1520%. The price of the Imperial Palace in Tokyo is higher than that of the entire California.
I have been in a full-blown asset mania for a whole decade.
This is the type of market that crypto investors are eagerly looking forward to. Those who are positioned in this type of market will definitely enjoy the upcoming growth.
Want to know what is driving this growth in Japan, and how it will leave a mark on encryption technology, please continue to read.
Window guidance
It boils down to a four-letter word. DEBT
That’s it, this is the secret.
The growth of the Japanese market is driven by unprecedented credit expansion. It has become so impressive that new borrowers have no place to spend money, which leads to speculative asset purchases. This is the catalyst for Japan’s biggest asset bubble.
Here, credit expansion is just a fancy way of saying new currency or debt. And they are interchangeable in most cases. The new currency is literally created by banks using collateral to issue loans.
From 1970 to 1990, this kind of money creation expanded the money supply of M2 yen by 939%.
The Bank of Japan is a puppet master. Their control method is Window guidance. Window guidance is a mechanism in which the central bank guides lending banks through quotas. This ensures that the bank will issue a certain amount of loans, which in turn will promote economic growth.
Another method used by the Bank of Japan is low interest rates. This gives borrowers more encouragement and allows them to bear more debts.
This environment of encouraging borrowing and low interest rates continued until the turn of the decade, when credit creation ceased. Around this time, the Bank of Japan raised interest rates, leading to a series of bankruptcies and market sell-offs.
The Bank of Japan signals that the carnival is over. The ensuing downturn led to what is now known as the lost decade of Japan.
If the combination of window guidance and low interest rates is allowed to continue, I don’t know what will happen. But it is obvious that the forcible issuance of bonds forces funds into riskier assets. This is why the value of land is out of control.
So why do I mention window guidance, interest rates, and debt…and the asset bubble that came out of it?
Because cryptocurrency has just tasted the sweetness of debt’s impact on the market.
The upward momentum of cryptocurrency
“DAI” in Chinese means capital that is lent or provided for loans.
For encryption technology, DAI is a debt-backed stablecoin and also the “rocket fuel” for DeFi’s recent development. When borrowers lock their encrypted collateral on the Maker protocol in a vault called CDP (Collateral Debt Position), the creation of DAI occurs. Once locked, the agreement will mint DAI.
This is an act of creating tokens on the blockchain. It was this seemingly simple process that triggered the DeFi movement overnight in June.
Although DAI exists, it never seems to take off. From 2019 to mid-2020, the DAI in circulation fluctuated and did not grow much higher than the current market value of 123.88 million on June 28. On this day, the size of the crypto market is $261 billion.
On June 29, Compound changed the world of encryption forever. This marks that encryption technology has directly opened a page in the era of “Japanese Window Guidance”.
Compound incentivizes its users to deposit DAI on its platform as collateral for loans. In exchange, Compound rewards borrowers with its newly minted COMP Token. Then, the borrower will turn around and sell the Token in exchange for 70-100% of the debt. This is stuffing free money into the borrower’s wallet. Encourage more borrowing.
To participate in this profitable income, users must cast DAI on Maker. At the time, ETH had a very attractive borrowing rate (called a stability fee), which was close to 0% (it is still the case today). It means that the quasi-central bank of decentralized cryptocurrency is encouraging users to bear more and more debts.
And they did take on more debt.
DAI in circulation has increased by 633% in just three months.
The fact that debt pushes up the market is no longer a secret.
In these three months, the total market value of cryptocurrencies has expanded by nearly 50% to more than $382 billion. Ethereum, the network where DAI is located, rose 115%.
This is the impact of window guidance and interest rates on the market-after the market rebounded from Black Thursday in March. Remember, in June, most experts said that cryptocurrencies were overbought. According to data from skew.com, most of the funding interest rates of BTC perpetual contracts were negative at the end of June, which shows us that market sentiment is also bearish. This big change surprised most people.
The only group that is not surprised is the group with plans in this market.
Olaf Carlson-Wee from Polychain Capital is commendable for everything here. He had a great influence in creating COMP as a way to channel or attract liquidity.
Olaf and Polychain also contributed to Maker. So what we are witnessing now is how the interaction between the protocols is greater than the sum of its parts.
This combination of powerful agreement interactions, debt creation, and low interest rates has served as rocket fuel for the market. And we have reason to believe that this is just the beginning.
As George Soros said, “When I see a bubble forming, I will rush in to buy and add fuel to the fire.” When we see more debt creation happening on the blockchain, the market will go higher.
How high is it?
At the time of our release, the supply of DAI was only 56 million short of reaching 1 billion. The total market value of cryptocurrencies has just exceeded 400 billion US dollars. DAI is just a drop in the bucket.
According to data from Standard & Poor’s Market Intelligence, the outstanding amount of leveraged loans from U.S. agencies in 2018 exceeded $1 trillion. The outstanding value of the U.S. mortgage industry is $11 trillion. The U.S. Treasury bond is $27 trillion.
And DAI has not reached 1 billion.
In the next few years, cryptocurrencies will gain a greater share of these various forms of debt. After considering some of these totals, Nikkei’s 1520% growth in 20 years seems to be a starting point, not a destination for the crypto market.
