FIVE MINUTE FINANCE: FED HAWK RAMS BTC, ETHEREUM’S MERGE TO POS, BITCOIN CONFERENCE
The 5-minute newsletter on the important stuff in finance — explaining what’s going on, and why.
Let’s see what’s going on this week:
- Fed To Double its Interest Rate Hike
- What Does it Mean to Really Stake Bitcoin?
- Ethereum’s Green Merge
- Great Crypto Adoption News from Miami’s Conference
- Dr. Pippa Shines the Light On Global Governance
Hawkish Fed Foils Bitcoin’s Rise as It Goes Under $45k Key Breakout Level
- Fed Plans “Rapid” Balance Sheet Reduction and Interest Hike as US Inflation Hits 7.9% (link)
- Observers Cautious for Bitcoin as US Inflation-Adjusted Bond Yield Hits 2-Year High (link)
The Fed Enters The Limbo Zone and Pulls Everyone With It
To best understand the world economy is to view it as being carried on the backs of central banks. This has become even more acute since the C19 event, triggering an unprecedented money supply increase that propped up the equity market. In turn, the free market doesn’t exist as such on an institutional macroeconomic level.
Instead, it resides inside a central banking balloon. Because of this tight dependence they created, central banks are now in a limbo state. The Fed’s injection of trillions of dollars triggered inflation to grow to 7.9%, but staved off recession. However, to squash inflation, which was originally targeted at mere 2%, the Fed would have to conduct a more rapid, 50 basis point (bps) or 0.5%, interest rate hikes. This is double from last month’s 0.25%, thus becoming “hawkish”.
The equity market fears this Fed hawk because it grew in the near-zero interest rate environment, when the borrowing was cheap. Therefore, any talk of interest rate hikes spooks a wide range of markets. They heighten borrowing costs for credit cards, mortgages, corporate loans, auto loans etc.
This is why Deutsche Bank economist Matthew Luzzetti warns that interest rate hikes will likely lead to recession, although a mild one with up to 5% unemployment until 2024. Ironically, this is precisely what the Fed tried to avoid in the first place. That’s some ouroboros policy-making, isn’t it?
In the meantime, Bitcoin still acts as a risk asset because institutional investors holding it view it as such. Furthermore, both inflation and interest rate risk affect the 10-year Treasury yield.
The U.S.10-year Treasury yield adjusted for inflation inversely correlated with Bitcoin last November. Image credit: fred.stlousfed.org
Because the 10-year Treasury Note represents the US government’s debt obligation, which is risk-free, investors tend to exit riskier assets, such as tech stocks or Bitcoin. When asked when the 10-year Treasury is about to become problematic for risk assets, Bloomberg Senior Editor John Authers basically said, ‘it should have already happened.’
In the end, all of this caused a panicky equity market, which pushed Bitcoin and altcoins down from their rally. Nonetheless, Bitcoin has a bullish chart of its own — reserve risk.
Bitcoin: Reserve Risk. Image credit: glassnode
As you can see from the chart, the traditional long-term holder confidence, represented by falling BTC supply, and low BTC price equals low reserve risk. Regardless of temporary fluctuation, this should be compounded by inflation pressure as it draws wealth into haven assets like precious metals and Bitcoin.
Where is the Place for Bitcoin Mining in the New World Monetary Order (NWMO)?
- BTC Buying Spree Continues: Mining Difficulty Eclipses ATH, Illiquid Supply Tips 63% (link)
- Why Bitcoin Mining Is a Matter of National Security (link)
Green Bitcoin Mining Farms as Monetary Oil Fields
As forecasted in the last newsletter, Russian sanctions viciously boomeranged. Not only did the Russian ruble equalize to the level before the Ukraine conflict, but the Russian treasury is about to be topped with an extra $321 billion from oil and gas windfall. At the same time, some EU countries are set to pay Russians in rubles for their energy products, the bloodline of any economy..
This just goes to show that holding the resource card is all that matters in the end. Likewise, holding a stake in a borderless and decentralized cryptocurrency like Bitcoin is not a matter of holding Bitcoin itself, but participating in securing its network through mining.
This is the resource that will gain prominence as SWIFT erodes its global relevance. Both Bitcoin mining difficulty and the network’s hashrate surpassed ATHs, indicating a new era of digital money reserve..
Single-apartment miners are left in the dust for corporatized mining farms, squeezing every bit of electricity for optimal hash rate-to-cost ratio. However, because these big operations are so visible, they must be allowed to flourish.
Bitmain with its Antminer series dominates the cryptocurrency mining market. Image credit: CoinShares Research.
China made a clear cut with miners ahead of its Digital Yuan launch, making the US as Bitcoin’s largest hash power holder. Although one nation’s hash rate dominance doesn’t preclude others from taking advantage of its network, it does ensure that its transactions get added to a blockchain in a timely manner.
In other words, is the public interest best served by Bitcoin miners in North America or North Korea? Just as Zoltan Pozsar, the Former Federal Reserve and U.S. Treasury Department official, said, the NWMO is in the works. It is about replacing “inside money” (government bonds) with “outside money” (gold, Bitcoin, commodities) to back fiat currencies.
The Russian ruble is in the middle of this transition as a commodity-backed currency. If more nations leave the petro-dollar ecosystem, with what will the dollar be backed? With its $30 trillion national debt?
The Merge: As Ethereum Becomes More Energy Efficient, Can it Flip Bitcoin?
- Ethereum’s 3,000+ dApps Prepare for “the Merge” in Crypto’s Y2K Moment (link)
- Put/Call Ratio of ETH Options Peaks, Suggests Bitcoin Can Outperform Ethereum in Near Future (link)
Ethereum: The Infrastructure for Finance 2.0 Goes Green
Just as Bitcoin propelled the concept of digital assets, so did Ethereum push the concept of decentralized finance (DeFi) with its more flexible smart contracts. While Bitcoin has its own upgrade Lightning Network that makes transactions super cheap and fast, Ethereum is about to traverse a major milestone that is about to change the DeFi space.
The so-called Merge is Ethereum’s docking of its old proof-of-work network with the new one, the proof-of-stake Beacon Chain. In anticipation, Beacon Chain is already filled with staked ETH to the brim, at 10.69 million ETH ($34.3 billion). “Staking” instead of “working” means that Ethereum will use economic validators instead of computational miners.
As a result, Ethereum’s network is poised to go completely green by reducing its energy consumption by 99.98%, according to the Ethereum Foundation.
Image credit: Ethereum Foundation
You might have noticed one of hundreds of headlines greatly concerned about BTC/ETH energy usage, as they pick a country for comparison to shock the reader. While 76% of Bitcoin’s energy already comes from renewables, Ethereum’s PoS transition will puncture that particular concern balloon.
This is especially important for environmental, social, and governance (ESG) investors, which will be everyone as time goes by. Although this framework is not imposed by any government, it is imposed by something much more influential — BlackRock with its $10 trillion AuM spread across the globe.
In anticipation of Ethereum’s Merge, its put to call ratio outpaced Bitcoin’s at 0.55, meaning the mood of the market is bullish, but Bitcoin sentiment is even more bullish.
Open Interest Put/Call ratio. Image credit: The Block
Call option buyers believe the asset will rise, while putters can adopt the same bullish exposure, at a price below the current market price. The lower the ratio, the more optimistic is the sentiment.
Bitcoin gained some substantial tailwinds in the last few months, with both MicroStrategy’s newly acquired 4,167 bitcoins and Terra’s over 35,000 bitcoins to bolster its global payment ecosystem. While Ethereum is poised to open the investor floodgates with PoS transition, it will only happen if there are no major bugs and code exploits. Hence, the slight bit of reservation in favor of Bitcoin.
A Lesson in How NOT to Do Stablecoins
- WAVES CEO Blames Hedge Fund for Stablecoin USDN Losing 20%, Community Divided (link)
- Checkout.com and Worldpay Acknowledge eCommerce Demand for Crypto and Stablecoins (link)
Bitcoin Conference Bears Crypto Fruits but WAVES Not So Much
Crypto adoption is steaming ahead faster than usual. At Thursday’s Bitcoin 2022 conference in Miami, Jack Mallers, Strike CEO, announced a string of partnerships for Bitcoin’s Lightning Network. Just as Arbitrum helps scale up Ethereum with cheap and fast transactions, Lighting Network does the same for Bitcoin.
Among the new LN boarders is NCR, the world’s largest point-of-sale (POS) supplier. Likewise, Shopify’s global network of merchants is to enter the lightning fast Bitcoin ecosystem alongside Blackhawk Network, one of the biggest payment providers. If that is not bullish enough for you, Checkout.com, at the same conference, issued a report on crypto adoption.
Source: Demystifying Crypto: Shedding light on the adoption of digital currencies for payments in 2022 report.
With a strong adoption wind behind the crypto sails, payment processor Worldpay announced its partnership with Circle to use USDC stablecoin for borderless payments. This is another big milestone as stablecoins are critical for crypto adoption. They act as both cryptocurrencies and CBDC but without being either programmable or volatile.
However, the algorithmic stablecoin that is least likely to receive such adoption is Neutrino (USDN), which has turned into a major embarrassment for the crypto space. After losing its peg to the dollar by as much as 30%, Sasha Ivanov, the head of Waves platform that hosts USDN, accused FTX CEO, Sam Bankman-Fried, of manipulating the market.
Sam supposedly did this by borrowing from a DeFi protocol, Vires Finance, to short WAVES alongside launching FUD campaigns to make it a self-fulfilling prophecy. In return, Sam dismissed the allegations as a conspiracy theory. Whatever the case may be, shorted WAVES collapsed its algorithmic stablecoin USDN because its dollar peg depends on WAVES token price.
The proposed remedy is to introduce a 0.1% liquidation rate for investors borrowing WAVES and USDN at Vires Finance. That is awfully specific and granular for a project that is supposed to offer a global payment system. Imagine if every such instance for other DeFi platforms needs a similar patch up. That sounds neither universal nor stable. Luckily, Terra’s UST algorithmic stablecoin has already cornered this niche.
When Push Comes To Shove, EU Tends to Fold Over
- Europe Debates CBDC’s Privacy Threat as Digital Yuan Expands to 23 Cities in China (link)
- No Minimum Exemption for Crypto — EU Votes to Track all Transactions as Privacy Concerns Mount (link)
What Kind of Money Is Needed for the World Government?
A major event happened at the end of March. What has been whispered for decades was said aloud. At the annual World Government Summit 2022 in Dubai, we finally have some official clarification on how the New World Monetary Order (NWMO) will look like. Dr. Pippa Malmgren took the stage to explain:
“We are about to abandon the traditional system of money and accounting, and introduce a new one. And the new one, the new accounting is what we call blockchain…It means having an almost perfect record of every single transaction that happens in the economy.”
World Government Summit 2022. Even Harrison Ford of Indiana Jones and Star Wars fame was a speaker at the World Government Summit in 2019. Source: YouTube
You might be wondering who is Dr. Pippa? Not only did she serve as the Special Assistant for economy to the former President George W. Bush, but her father served as senior aide to US Presidents John F. Kennedy, Lyndon B. Johnson, Richard Nixon, and Gerald Ford.
Moreover, Dr. Pippa was named a Global Leader for Tomorrow by the World Economic Forum (WEF). In turn, it would be difficult to find any major corporation or bank that is not a WEF member. You see, the words that start with “W” and “G” are becoming the staple for this century’s state of affairs.
Digital Identity and Global Governance is the staple of the World Economic Forum’s agenda. Image credit: World Economic Forum Strategic Intelligence
Therefore, it might no longer be meaningful to separate entities that go by different names. Case in point, the European Union (EU) may be called that but it is a subsector of the wider network. Not a month after South Korea adopted stringent travel rule for crypto transactions, set by the Financial Action Task Force (FATF), the EU did the same.
Under the new EU proposal put into legislative motion, all blockchain transactions must be tracked and the parties’ identities revealed. Meaning, that if you were to send cryptocurrency from a self-hosted wallet like Trezor to Coinbase, the exchange would have to know and verify the identity of both parties, even if the sender is not a Coinbase client.
Moreover, there is no minimum limit for transactions for the rule to be applied, which is even more stringent than the recent South Korean implementation. To top it off, it looks like the Digital Euro, a Central Bank Digital Currency (CBDC), is following in the Digital Yuan’s footsteps. A degree of privacy abandonment is involved, which can be toggled on and off, depending on the circumstances.
This is the essence of Dr. Pippa’ new blockchain accounting. It is not merely a programmable money, but a tool for never-before-seen oversight of every human activity. Conversely, if every human activity can be translated into economic activity, the programmable money can tweak it.
Time will tell what fruits will that tweaking deliver.
Tweets of the Week
BREAKING: You can now pay for your McDonald’s with Strike with dollars.
Or with any lightning wallet using bitcoin and make your meal a taxable event.
The US Bond market is now down 8.7% from its high in August 2020, the largest correction we’ve seen in the last 25 years. The 10-Year Treasury yield has moved from 0.55% up to 2.54% during this time.
Charting via @ycharts
BREAKING: US TREASURY SECRETARY YELLEN #BITCOIN AND CRYPTO REGULATION SHOULD SUPPORT RESPONSIBLE INNOVATION
In the last few weeks the following cities have adopted #bitcoin (in some form)
- La Molina, Peru
- Lugano, Switzerland
- Prospera, Honduras
- Chandler, Arizona, USA
- Portsmouth, New Hampshire, USA
ESG in one chart.
Crude oil to the moon, oil rig count doesn’t follow.