Efficient Frontier
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Efficient Frontier

Inflation for beginners and central bankers

Special inflation coverage, news on institutional accumulation of crypto and an comprehensive overview of the sleepy summer Bitcoin markets

Published on Substack July 19

Inflation has been in the news lately, as mainstream outlets have reported high year-over-year inflation figures, officially 5.39%, and 13.38% according to the 1990-based Alternate basket.


The crypto crowd associates price rises with monetary inflation, which is blamed on QE, ‘helicopter money’ and the 0% reserve banking system resulting from the Covid-19 crisis.

The new store of value? Last week a rare Super Mario 64 vintage computer game sold at auction for a record $1.56 million

In the public discourse price increases are associated with supply chain disruptions due to the Covid-19 crisis, the blockage in the Suez Canal and the Colonial pipeline showdown.

It’s interesting to look at the correlation between search trends for Inflation, Gasoline shortage and Evergreen. Source: Google trends

Meet M2!

We would like to focus more one money supply creation rather than the short-term crises we have been experiencing:

M2 is the amount of fiat currency in the economy, which comprises of physical currency and all bank deposits. Bank loans as well as central bank money supply expansion create a rise in the amount of currency that is available, as seen in the M2 figures.

M2 has continued to grow sustainably for the last 10 years around the world

The inflation discussion usually focuses on the US dollar but the ‘race to the bottom’ is a multi-decade global phenomenon. According to data from tradingeconomics.com, the total amount of local currency (M2 — representing bank deposits and cash) in the European Union, China, Japan and many other sovereign nations has been skyrocketing.

Over the last 10 year the amount of US dollars in the United States has grown by 120%, while the Chinese Yuan has multiplied by a staggering 330%. Lagging behind are the European Euro with 75%, and the Japanese Yen which grew by ‘only’ 46% since 2011.

The 10 year M2 expansion in the US dollar seems to fit well with the inflation calculated in ShadowStats alternate index

But don’t let this figure for the JPY distract you. Since 1960 the number of JPY in the Japanese banking system has increased by 138 times, or 13,800%, while American dollars in the US have grown by 72X or 7,200%% since 1959.

It is important to recognize that M2 in Japan and the EU have increased less than in the US and China over the last decade due to how money supply is created. Put simply (and naively), the central banks adjust the discount rate and reserve ratio for the commercial banks (the means by which money supply increases in a fractional banking system). The commercial banks then lend more and cause increases in money supply. Because the Chinese and American economies are strong, banks lend more capital to the market, resulting in more money supply entering the wider economy.

Which way is up?

Adjusting asset prices to the growth in M2 shows a different picture of reality:

S&P adjusted to M2 growth
Orange:Gold price in USD Blue: Gold price adjusted to M2

When we look at the price of gold compared to the M2 expansion, it looks much less volatile. Perhaps we should start comparing Bitcoin’s price to commodities such as gold.

“You then get yourself into this really gigantic mess that nobody politically wants to be responsible for by implementing sound monetary policy.” said economist Tuur Demeester. “It’s starting to get weird because we have so much dollar inflation, right? So, what does it even mean to dream of a $300,000 Bitcoin two years or three years down the road? How much inflation are we going to have had by then? 50%?”

Markets wrap

The 1 trillion club

Despite some fund outflows, anecdotal news stories show institutional investors are interested in crypto market and show signs of quiet accumulation.

  • American investment management giant Capital Group with $2.3 trillion AUM buy a 12% stake in MicroStrategy
  • Bank of America, with $1.7 trillion in AUM to launch Crypto research team
  • Fidelity, with $10.4 trillion AUM, is planning to hire 100 more people for its crypto business to service the growing needs of institutional investors
  • Oppenheimer and Goldman Sachs publish price targets for Coinbase stock
The drop in institutional size (above 1,000) Bitcoin on-chain accounts is showing signs of stabilizing. Source:Glassnode

Bitcoin’s sleepy summer

For the last two weeks Bitcoin has consolidated between $36,600 to $31,700. This concludes two months of a tightening trading range and decreasing volatility. Trading leverage remains low, indicated by low futures funding rates and basis, as directional traders await a breakout from this range.

Average Bitcoin funding rate for the pereptual contract

Binance futures contract basis, which reached a staggering 41% yearly premium on April 14th, has been in low single digits for two months and perpetual contract funding rates have been low to negative.

According to CryptoCompare, over June spot volumes decreased by 42.7% while total derivative volumes decreased 40.7% .Last weekend saw a new yearly low in Bitcoin trading volume.

Interestingly, despite the drop in active trading volume, open interest has remained stable over this recent period, showing the same amount of capital betting in the market

One of the clearest signals that the first phase of this market cool-down has ended is the closing gap between the institutional associated CME futures and the retail oriented off-shore exchanges. Retail excitement has been completely washed out of the market.



A new unlock of GrayScale’s GBTC shares is expected to take place in the coming weeks, leading to discussion of its possible effects on Bitcoin’s price. Unlike an ETF, GBTC’s shares are impossible to quickly arbitrage with BTC.

Due to GBTC’s unknown futures as it applies for an ETF status, few entities are able to estimate the value of the GBTC’s shares.

Despite this discussion, GBTC’s premium is known to reflect market sentiment, rather than predict it. “The fact that the market is so focused on something like this just shows the lack of real catalysts or market moving events right now,” wrote QCP.

News & links

Despite the market cooling down, news hasn’t slowed down at all:

Going mainstream

News which would be exciting even just one year ago, is becoming increasingly commonplace:


Regulators and law keepers around the world are scrambling to regulate the formerly wild-west market

  • Binance issued a warning by the UK’s financial regulator, blocked by UK banks
  • ByBit to shift to full KYC
  • Russia implementing law to allow confiscation of illegally obtained cryptocurrency
  • EU to implement rules enforcing information collection on cryptocurrency transfers from exchanges

Illegal activity

  • Secret mining farm inside a power station shut down by Ukrainian police
  • Ransomware criminals demand a total of $70 million from 200 American firms recently compromised
  • Former Bithumb exchange chairman arrested for $100M fraud
  • True Crime podcast investigates the disappearance of QuadrigaCX CEO (the Canadian cryptocurrency exchange)
  • UK seized $400 million in cryptocurrency and arrest woman suspected of money laundering

Markets and more

  • Circle to go public in SPAC deal
  • Mr. Robot: World Economic Forum prepare for worldwide cyber attack
  • Exchange Mercado Bitcoin Becomes Brazil’s First Crypto Unicorn With Softbank Round
  • Smart contract auditing firm Certik raised $37 million
  • ShapeShift exchange to shut down and shift to decentralized organization
  • The Myths of the DAO:Does a real decentralized DAOs exist?
  • Arthur Hayze’s new blog explains why leverage in crypto creates less systematic risk

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