Credit. What’s the role of credit in a cycle? Leverage is inherently countercyclical. Think of a home mortgage. You take a loan to live in a house today, smoothing against your future income. Leverage drops as asset rises in price and vice versa. When debt ratios are rising during an economic expansion, it is individuals or companies proactively seeking more risk. This is the case throughout most of the post-WWII experience in the United States. The correlation of nominal GDP and private credit-to-GDP ratios was 94% from 1947 to 2008. But the financial crisis brought austerity to the system. Since then, the correlation fell to 1%. Even the sharp jump in credit-to-GDP during the pandemic is now almost entirely reversed. With rates on the rise, there are plenty of challenges in the corporate sector. Bond spreads are flashing “yellow,” and only two high yield deals were priced in May. But even in the corporate sector, debt has been largely termed out, with the share of short-term financing near its all-time lows. The global debt challenge – 348% of GDP in the first quarter – is tied more toward governments, and that changes the dynamic materially. Austerity is a policy when debt is in the native currency, not something forced upon by the market. The most natural valve for the market to express its dislike of a policy path is a weaker exchange rate. Higher interest rates necessitate fiscal restraint, which may not be the desired political pathway. This is the structural hurdle for the US dollar and is one key component of digital asset demand. However, like traditional markets, leverage in digital assets disrupts price patterns. Today, speculative leverage has mainly been washed away, evident in the flat forward curve. But strains in bitcoin mining are notable. Not only were bitcoin miners planning to expand production capacity substantially, but rising cash needs mean that bitcoin holdings may need to be sold as part of a deleveraging. After all, miner revenue is down to 12c per terahash, a trillion “hash” calculations per second, from 40c at the peak last year. Leverage turns any investment position into a trading position. The ‘land grab’ for bitcoin was popular on the way up, with miners and investors alike using leverage to hold as much as possible against the fixed forward supply. On a downturn, those dynamics work in reverse. Speculators are largely cleansed. Miners are under strain to sell. This is a key dynamic in the period ahead.