This week in crypto. June 7 – 13: fears of inflation and Bitcoin as a hedge
Weekly news
Inflation fears on the rise
As the Fed’s balance sheet reaches $8 trillion, the fears of inflation resurge.
In just 13 years the amount of money created by the Fed increased 8-fold in an unprecedented experiment, supported, among others, by the so-called Modern Monetary Theory. Developed in the 90s, this theory calls for ever increasing government spending, ensuring that countries can sustain huge deficits without cause for concern. Politicians find it extremely attractive, for it allows to print money infinitely and give it to the electorate. And who doesn’t like free money?
The important thing to remember is that this is but a theory. First deployed on a large scale after the 2008 crisis, then leaping after the Covid outbreak in 2020, the money-printing machine has been unleashed for only 13 years. And 13 years is not enough to throw the US (and the rest of the world that uses dollars) into this monetary experiment with, in our opinion, more than dubious bases.
Official US numbers quite conveniently don’t reflect the whole truth. Compared to the official 3.8% inflation, the yearly increases in the US housing prices (+11%) or commodities (+30%) paint a more credible picture. Moreover, President Biden’s $6 Tr stimulus proposal is likely to send the dollar’s buying power even lower and end up hurting everyone who still holds it.
While the Fed Chair continues assuring that the situation is under control, many voice their concerns. This week Deutsche Bank published a report saying that the US might be headed for one of its worst inflationary periods in history. A Texan senator and ex-candidate for the Republican presidential nomination Ted Cruz went further and stated that “part of the reason we’re seeing people go to Bitcoin is because we’re on the verge on an inflation crisis”.
El Salvador to show the way
Some countries have a clear vision of how to protect themselves from a possible dollar collapse. This week the Salvadoran Assembly passed the Bitcoin law by supermajority of votes, making it the country’s official currency along with the dollar.
This bold move was not only widely celebrated in the crypto community, but also inspired other countries. Congressmen from Paraguay and Mexico expressed their intentions to pass more crypto-friendly laws. The NFL star of Nigerian ancestry Russel Okung wrote an inspiring letter to the government of Nigeria asking to consider a Bitcoin standard.
Such examples are likely to multiply, especially in the light of this week’s interview with ex-president Trump: "I don't like it [Bitcoin] because it's another currency competing against the dollar. Essentially, it’s a currency competing against the dollar. I want the dollar to be the currency of the world." Ironically, it’s precisely because Bitcoin is a currency competing against the dollar and because not everyone wants the dollar to be the currency of the world, that Bitcoin adoption will continue growing.
Markets
Bitcoin
Bitcoin traded sideways this week, ending around $39k on Sunday night - traditionally the most decisive time of the week.
While traders seem to have exhausted their imagination trying to predict the future, crypto enthusiasts stay true to their beliefs. Microstrategy, the first public company to buy Bitcoin for its treasury, issued $500 M of bonds to buy some more Bitcoin. The 6.125% notes due in 2028 were largely oversubscribed: the company received around $1.6 Bn in orders, mostly from hedge funds desperate for high yields in the low-rates economy.
On the tech side, Bitcoin’s biggest protocol upgrade in 4 years – the Taproot - has been confirmed by over 90% of the miners, assuring activation in November. The upgrade will replace ECDSA signatures with Schnorr, saving blocks storage space and making cheaper complex transactions like Multisig and Layer 2 pegs.
Bitcoin is decentralized, and it's often hard for everyone to agree on important decisions concerning its protocol. Segwit implementation in 2017 was a good example of how difficult Bitcoin governance is. Back then, the update implementation stalled for 9 months before a User Activated Soft Fork was forced on the miners, and a part of the community unsatisfied with the update forked off Bitcoin a whole new blockchain called Bitcoin Cash. Compared to this experience Taproot confirmation in a special “Speedy trial” mode was incredibly smooth.
Ethereum
Ethereum is down -11% this week, ending at around $2500.
Quote of the week
“We’re seeing inflation, which we’re seeing lumber going up, homes going up, oil going up, gasoline going up, energy going up, commodities going up. And I think people are going to Bitcoin as a hedge against that” , Ted Cruz, US Senator for Texas