«Volatility Supercycle» — Arthur Hayes’ New Essay. A Quick Recap

Arthur Hayes, a prominent figure in the cryptocurrency space, recently published an intriguing essay titled “Volatility Supercycle,” where he analyzed his predictions made over the past year. In this insightful piece, Hayes dives deep into his forecasts concerning the US financial markets and their impact on the cryptocurrency landscape, providing a transparent evaluation of his prediction success rate.

November 2023: “Bad Girl” Essay

In his November 2023 essay, “Bad Girl,” Hayes predicted that US Treasury Secretary Janet Yellen would issue more T-bills to release funds from the Federal Reserve’s Reverse Repo Program (RRP). His expectation was that this would increase market liquidity and boost risk assets by March 2024, coinciding with the end of the Bank Term Funding Program (BTFP).
From November 2023 to March 2024, the RRP balance shrank by 59%, Bitcoin surged by 77%, the S&P 500 index climbed 21%, and gold appreciated by 5%. This prediction was spot-on, earning Hayes a win in the accuracy column.

March 2024: “Yellen or Talkin?” Essay

In March 2024, Hayes speculated in his “Yellen or Talkin?” essay that the BTFP would not be extended due to its inflationary risks and that access to the discount window would suffice to prevent another banking crisis in the US. However, the expiration of the BTFP did not significantly impact the markets, and Hayes had to close a small position in Bitcoin put options at a loss. This forecast went into the loss column.

April 2024: “The Heat” Essay

In his April 2024 essay, “The Heat,” Hayes predicted that the US tax season would lead to a decline in cryptocurrency prices due to the withdrawal of dollar liquidity from the markets. He advised against buying digital assets between April 15 and May 1. During this period, the RRP balance rose by 33%, Bitcoin fell by 9%, the S&P 500 dipped by 1%, and gold dropped by 3%. This accurate prediction earned Hayes another win.

May 2024: “Mayday” Essay

In May 2024, Hayes published “Mayday,” where he predicted Bitcoin would hit a local low of $58,600, stabilize above $60,000, and trade between $60,000 and $70,000 until August. However, Bitcoin reached a low of $54,000 on August 5 due to the unwinding of the yen carry trade, and the trading range was $54,000-$71,000. This misprediction added two losses to Hayes’ record.

June and July 2024: “Shikata Ga Nai” Essay

In mid-2024, Hayes discussed the US dollar-yen exchange rate’s significance in “Shikata Ga Nai.” He predicted the Bank of Japan would not raise rates to avoid jeopardizing the banking system. Contrary to his forecast, the Bank of Japan hiked rates by 0.15% on July 31, triggering a yen carry trade collapse. This erroneous prediction resulted in another loss.

August 2024: “Sugar Rush” Essay

In August 2024, two significant events occurred: the US Treasury’s quarterly refinancing announcement and the “Powell Pivot” at Jackson Hole. In “Sugar Rush,” Hayes predicted renewed T-bill issuance by the US Treasury would provide market liquidity. However, his forecast that the Federal Reserve would not cut rates proved wrong, as the Fed confirmed a rate cut in September. This misstep added another loss to his tally. Hayes still believes RRP growth will slightly drain liquidity due to falling T-bill yields amid expectations of further Fed rate cuts.

September 2024: “Bullrun… Delayed” Essay

In September 2024, Hayes anticipated a negative market reaction if the Federal Reserve cut rates in his essay “Bullrun… Delayed.” He forecasted that narrowing the interest rate gap between the Federal Reserve and the Bank of Japan would strengthen the yen and collapse the carry trade, causing global market downturns. While the rate gap did narrow, the yen weakened against the dollar, and risk markets performed well, resulting in another incorrect prediction.

Overall Evaluation

Hayes’ analysis of his forecasts revealed two correct predictions and six incorrect ones, yielding a 25% success rate. Despite the modest success rate, Hayes continues to profit, underscoring the unpredictable nature of financial markets and the importance of continuous learning and adaptation in trading strategies. This self-reflective approach demonstrates his commitment to improving his forecasting accuracy and his resilience in the face of market volatility.