Last week we spoke about a cryptocurrency price and blockchain-related factors that contribute to it.
Today we would like to continue exploring crypto price formation, this time taking into account exterior factors: what events are likely to influence the price, and how.
Crypto is a very new phenomenon, and most regulators still struggle to find the right approach, while the nascent crypto lobby is trying to stand up against well-established and deep-pocketed industries that fear disruption.
Some countries have, however, already decided on their position towards crypto, and their decisions have certainly influenced its price.
China banning crypto or El Salvador making Bitcoin legal tender – the change in even one country’s mood can mean a lot for the crypto price.
This week brought rather good news: Iran is to authorize crypto for international trade, Polynesian island of Tonga considers making Bitcoin legal tender, and the Mayor of Rio de Janeiro wants to allocate 1% of the city’s treasury to Bitcoin and enact a series on incentives to attract crypto businesses.
In countries as important as the US, torn between federal crypto-sceptics and state-level crypto enthusiasts, it is important to keep tabs on the legislation relative to crypto. Last year’s addition of crypto provisions to Biden’s Infrastructure Bill can have negative repercussions: when/if the law is enacted, many industry actors (notably in DeFi) will find themselves in an impossible position where they won’t be able to comply with the new reporting obligations.
Central Banks and monetary policy
Central Banks are the natural enemies of Bitcoin. They are also the reason it exists: a decentralized independent money as opposed to the money supply managed by one deeply political institution.
Central Banks influence the country’s economy with its two main tools: interest rates and open market operations (put simply, Central Bank creating new money to buy state or companies bonds).
The lower the rates, the lower the value of the currency, the more incentive economic players have to invest, and vice versa.
Open market operations are supposed to inject cash into the economy and once again stimulate economic actors to invest. This is, however, very controversial practice, as it allows CB to create new money and then decide to whom they would like to give it (the notion “zombie company”, an inefficient company kept afloat only with the CB’s money, is just one of the signs of this controversy). The value of the already existing currency is of course being diluted in the process.
Lowering interest rates and creating money is often described as CB’s dovish 🕊️ behavior, while raising rates and reducing bond buys are called hawkish 🦅.
In the short term Central Banks’ policy affects the economy mostly as intended: people invest more and more into risky assets and ventures when they have more cash, and they are more careful when the cash becomes less easy.
For the moment crypto prices tend to follow the behaviour of risk-on assets: since the Fed hinted that they might raise interest rates and start tapering (reduce bond-buying programs) in December, crypto markets, together with stocks, have reacted pessimistically.
In the medium and long terms, however, Central Banks’ policy has great implications for the economy, and they are much less obvious and straightforward than they sound.
Economy and finance
Inflation is one of such consequences, and despite Central Bankers’ logic-defying assurances that it wouldn’t happen, well… it happened of course. With trillions of dollars and euros created out of thin air, how could it not?
This week the US Bureau of Labor Statistics published newly calculated CPI (consumer price index), showing a 7% inflation – the highest rate in almost 40 years. Eurozone’s official inflation is now of 5%, the highest on record.
Major currencies loosing their buying power, and Central Bankers’ confusing attitude (deny inflation - call it “transitory”- take back the word “transitory” - blame it all on the supply chains…) is a bullish sign for Bitcoin, a scarce asset that will never exceed 21M.
Apart from the inflation, most economic troubles tend to influence crypto price negatively in the short term, as all risk-on assets. The “Covid crash” of 2020 is an example.
Traditional finance has a big influence on crypto prices too, mostly because it wields huge amounts that quite naturally influence the markets. A great number of investment funds now have some amount of crypto in their portfolios, but, as most legislators are still being crypto-sceptical, these funds are often limited to accredited investors only.
In order to allow a larger public invest into an asset without buying, financial products like ETFs (exchange-traded funds) are a popular vehicle. Last year was marked by the launch of the first crypto ETF in Canada, then Brazil, and finally the much-expected launch in the US. The American ETFs only track crypto futures though, and physically-backed ETFs are still not authorized – an event to follow in 2022.
Companies and personalities
2021 was marked by numerous public and private companies buying crypto for their treasuries, which influenced its price not only “mechanically” (more buyers -> price goes up), but also by increasing crypto awareness. Elon Musk endorsing crypto and Tesla announcing that it had bought Bitcoin and will accept it as payment for cars have driven prices up almost immediately. Similarly, Tesla announcing that it would halt accepting Bitcoin has swayed the markets in the opposite direction.
This week Tesla announced that it will accept Dogecoin (which has become somewhat of a pet project of Elon Musk, pun intended 😂) for some of its merchandise (not cars), pushing DOGE price up 25%.
Such “influencer” announcements are usually short termed though, and the price tends to roll back if the first hype isn’t supported by the market. Thus, Doge price returning to the pre-announcement level after a couple of days is symptomatic.
There is also another way the companies can influence crypto prices, and that is by including crypto into their offer. When we are speaking about PayPal integrating crypto, or Twitter enabling Bitcoin tips, or VISA testing crypto features, we speak about millions of people and businesses who get crypto exposure – and that is bullish for its price.
It is important to understand the external factors influencing crypto price, however, in the end of the day, what matters most are the people who use crypto. The markets can sway either way, but the core functions of crypto do not depend on them, so keep your eyes on the bigger picture 😊
NFTs and Metaverse
This week’s biggest NFT success belongs to Phanta Bears - a series of collectibles launched by Jay Chou, a Taiwanese singer and actor with millions of fans, and Ezek, an inspiring entertainment metaverse platform. The collection had a phenomenal launch, selling out in 40 min and reaching $51M of trading volume in just one week.
The bears are not just collectibles though: each NFT unlocks varying levels of access to the Ezek Club, allowing to attend virtual concerts and movie streamings, receive physical goodies, etc.
NFT projects become more and more specific, and that’s a good news for those who could be still struggling to understand the value of the “internet jpegs”.
Despite the encouraging news from Iran, Tonga and Rio, Bitcoin price failed to react and traded sideways this week, ending at a $42’700 level.
Like the stock market, Bitcoin is now subject to macro (economic) fears that came with the Fed showing signs of hawkish behaviour. Investment products based on Bitcoin continue seeing outflows, but people who actually hold Bitcoin itself are not giving ground easily, holding Bitcoin above $40k.
Ethereum price gained 4% this week, landing at $3’275.
A trend worth mentioning is that despite the fears of a larger aconomic downturn, the NFTs trading is as active as ever… and most NFTs are still issued on Ethereum. It is also the key platform for the DeFi and many crypto games, which may explain its better resistance to the negative market sentiment.
Quote of the week
"There is very high stakes game theory at play here, whereby if Bitcoin adoption increases, the countries that secure some bitcoin today will be better off competitively than their peers"
Chris Kuiper and Jack Neureuter, analysts at Fidelity, one of the largest asset managers in the world with over $5Tr in AUM