Binance & The Biden Bounce
Good Monday and Happy Valentine’s Day!
I’m back to talk about inflation, as my concern has been confirmed: the Biden Bounce has arrived! The US Consumer Price Index, which measures the annual inflation rate in the United States, now stands at 7.5%; US inflation hasn’t been this high in 40 years. According to the Bank of England, annual inflation in the UK is also on pace to rise over 7% sometime in the spring. These inflation rates place the US and UK amidst countries such as Algeria (8.6%) and Gambia (7.6%). In this case, I’ll refrain from offering my opinion in an attempt to avoid wrongful accusations of my person. Instead, I’ll just leave you with the statistics. Do whatever you want with the information.
Inflation however isn’t always bad news. In fact, a certain level of inflation is healthy for the growth of economies. Whether inflation >7% is anywhere near healthy is however questionable, and I’m surprised that central banks are so slow to adjust interest rates (I’ve already ranted about this last week). Since it’s Valentine’s Day, I’ll refrain from ranting and instead offer some food for thought.
With inflation running high, we need to think about how to properly hedge, i.e., offset potential losses due to inflation by investing in assets that do well when inflation is running high. Historically, gold has been viewed as a suitable inflation hedge (although plenty of studies disagree). More recently, an interesting debate has emerged around whether cryptocurrencies provide adequate hedging instruments against inflation. As you can imagine, many crypto fanatics believe they do, while many crypto opponents believe they don’t. Then, there are people (including myself) who have absolutely no clue. In my opinion, the debate is completely redundant and just once I’d like to hear someone say: Who knows, we’ll see. Cryptocurrencies are crazy volatile anyway, how could we possibly pretend to fully grasp the relationship between crypto and inflation. If you think I’m an idiot, and you can clearly explain why cryptocurrencies are (not) adequate inflation hedges, please don’t hesitate to reach out to sebastian@lithium.ventures.
Here’s where I’m coming from. Admittedly, one could attempt a Time Series Analysis to establish whether a relationship between crypto price movements and inflation has existed in the past. I won’t even attempt for the following reasons:
(a) I probably wouldn’t find a statistically significant relationship.
(b) The analysis, in all its complexity, is extremely time-consuming.
(c) Most importantly, the time frame of observation is too short. Let’s give it another five to twenty years before attempting to understand whether a relationship between inflation and crypto prices exists.
But, here’s the big caveat: Even if we were to observe the relationship between inflation and crypto price movements over thirty years, Time Series Analysis can only help us predict a future relationship to some extent. This is really important, and I hope to drill this into your head. Past trends never predict the future. I’ve seen countless people pick investments because certain assets had been appreciating in value over extended periods in the past, i.e., if something has made money in the past, it will continue to make money in the future. Even if trends have existed for thousands of years, we have no assurance that they will continue tomorrow. We can even take this concept a step further. Many scientific “facts”, which we have “proven” hundreds of years ago, are quite possibly wrong. This is because most of the time we are not actually able to prove that something is true; we merely accept something to be true because we fail to prove that it is not.
Anyway, enough philosophy for today.
Let’s have a look at a different interesting development. Last week, cryptocurrency exchange Binance announced that it will purchase a $200m stake in Forbes, the American business magazine for “professionals.” The deal values Forbes at $630m, and the $200m capital injection will support Forbes in its ambitions to go public via special purpose acquisition company (SPAC) Magnum Opus Acquisition Limited. Don’t worry if you’ve never heard of a SPAC; they are a fairly new method of circumventing the traditional IPO process to go public (here’s an article that explains SPACs quite well).
Funny enough, in October 2020, Forbes published an article titled Leaked ‘Tai Chi’ document Reveals Binance’s Elaborate Scheme To Evade Bitcoin Regulators. Not shortly after, Binance sued Forbes for defamation. Then, in February 2021, Binance dropped the lawsuit due to “undisclosed reasons.” My guess is that Binance and Forbes had already come to an acquisition agreement at the time, and the timeline checks out: An acquisition of this size typically takes anywhere from six months to over a year. Anyway, kudos to Binance — buying the press is one way to avoid bad press. And don’t even suggest that Binance will not be significantly involved in Forbes’ operations. According to the Financial Times, “two top Binance executives being appointed as directors on the Forbes board.” Also, shortly after the announcement, the following happened:
Although the whole thing seems sketchy af, in a weird way, I really like the deal. The crypto space is currently facing an uphill battle, with public mistrust being one of its biggest hurdles. Binance will undoubtedly use its media influence to get away with some shady stuff, but any negative attention that Binance attracts will likely be associated with the crypto space as a whole. Maybe, hiding one foul apple to show that not the entire basket is rotten isn’t all bad. Then again, we’d also need to hope that Binance’s interests align with our interest in healthy growth and development of the crypto space—call me a pessimist, but that seems a tad naive. Something about the size of companies like Binance and Coinbase is unsettling, especially in a space that is supposed to work towards decentralisation. We have also seen plenty of companies exhibit extremely concerning practices in the past and present, once they reach a certain size. Then again, perhaps I should be a bit less cynical and consider that the past might not predict the future.
Thanks for reading,
Team Lithium x Seb
