This week in crypto. New monetary order in the making, Cryptopunks' future and more
New monetary order in the making
We believe we are living a transitory time between the old monetary order and the new one. The most interesting thing though is that the new one is not yet decided, and we all can participate in writing history.
Bretton Woods
After the gold standard was temporarily abandoned to print money for the two world wars, the Bretton Woods agreement of 1944 reinstalled it as a way to help the world economies heal. The problem with Bretton Woods was that all responsibility for maintaining the gold standard fell on the US, who held the biggest gold reserves (and also bought some afterwards) and promised to other countries, who pegged their currencies to the dollar, that dollar will always be redeemable against gold.
This promise was broken by President Nixon in 1971, effectively signing the end of the Bretton-Woods system. From now on the money wasn’t tied to any commodity, and its value was basically reduced to the goodwill the issuing country had. The money became fiat, or “by decree”. Dollar stayed the dominant fiat currency: every country had some of its reserves in dollars following the Bretton-Woods agreement, and it was the easiest way to commerce internationally.
Read more on the History of the Gold Standard.
Fiat money
With the world economy tightly connected to the US dollar, the US Federal Reserve’s decisions gained a worldwide importance. For almost four decades new dollars had been created at a rather steady and cautious pace, but the 2008 economic crisis gave birth to the new type of monetary response – overprinting.
Fed balance sheet is a good indicator of the money created out of thin air, as the Fed creates it to buy state and corporate bonds to stimulate the economy. The Fed balance sheet had multiplied by 4.5 in 6 years after the subprime crisis, and by 2.25 in 2 years after the Covid one.
Unlike the supporters of the modern monetary theory, which appeared to justify such massive monetary creation, we at D.Center do not believe that a Central Bank can print as much money as it wishes. Everything has a price, and the price for the short-term economy stimulus may well be the loss of dollar’s buying price, and even of its credibility on the international arena in a longer term.
This week the US bureau of labour statistics published February’s inflation rate of 7.9% - the highest since 1982. Next month can be even worse, when the increased energy costs due to the war in Ukraine will be counted in. One might say that the demise of the dollar’s dominance has started, but to whose profit ?
Alternative monetary systems
Euro is substantially similar to the dollar, when it comes to the ECB’s propensity to print new money.
A recent report by a Credit Suisse analyst suggests that in the unfolding crisis of commodities the Chinese renminbi can be emerging as an alternative money, for it is backed by a basket of commodities, and notably gold, which China has been hoarding for many years already. Combine this with the many efforts the Chinese government deploys to promote the use of the digital yuan, its CBDC, and one could have a viable alternative to the dollar, especially taking into account how fast a CBDC settlement can be. However, e-CNY is still a fiat currency in a fancier suit and carries all the political risks of its issuer country (not to mention high risks of being used as a surveillance tool by the Communist Party).
We at D.Center would love to see another alternative emerge – the Bitcoin standard. Bitcoin is governed by the logic of its code and unlike fiat it is provably scarce. It is fast and borderless, and most importantly – it is independent, which is a very valuable quality in the increasingly polarized world.
Bitcoin in the time of war
The war in Ukraine showed once again the inherent dangers of a central authority:
When G7 countries seized Russia’s foreign reserves held in foreign banks, Russian Central Bank effectively lost control of over a half of its foreign reserves (totalling $640Bn), although it can still access the 13% of the reserves held in yuan, and its gold,
With many Russian banks being cut off from SWIFT, the Russians outside Russia found themselves losing control of their holdings, and those inside – unable to transact with many foreign countries,
Other payment providers, such as VISA, Mastercard, PayPal,Apple Pay and Western Union, have also exited the country, disrupting numerous commercial flows,
A rapidly devaluating rouble is difficult to convert into a foreign currency due to the limitations the Russian and the international banks have imposed.
Of course, these measures have been provoked by Russia itself when it attacked Ukraine, but they nonetheless show how reliant a whole country can be on centrally managed banking/payment systems. Russia’s situation can sound the alarm for many other countries, and Bitcoin can be one of the means of ensuring their monetary independence.
Moreover, due to its scarcity it does a very good job of storing value: while gold, a millennia-old store of value, rose +30% since the Covid market crash two year ago, Bitcoin price rose +350%.
We are yet to see all the consequences of the Russian-Ukrainian war, both political and economic. What is sure though is that the world is not going to be the same, and it depends on us whether it will be managed by some new arrangement of fiat currencies (or their CBDC versions), or an independent money. We of course prefer the second option.
NFTs and Metaverse
The NFT event of the week was undoubtedly the acquisition of IP rights to the Cryptopunks and Meebits collections by the Yuga Labs.
Larva Labs, creators of the Cryptopunks and Meebits, and Yuga Labs, creators of Bored Ape Yacht Club, have often been compared, to the clear benefit of the latter. The difference in community and project management, as well as Larva Labs’ reluctance to grant IP rights to NFT owners, led to BAYC flipping the Cryptopunks last December, becoming the most successful NFT series of all times, despite its young age.
Poor handling of the V1 Punks controversy last month added to the Larva Labs’s troubles: it is being accused of missing the essence of the Web3 ethos, which is unforgiveable for the company handling a collection of 8-bit jpegs with high symbolic value, traded north of $200k.
Larva Labs selling their Punks and their Meebits (a collection of 20’000 3D voxel characters tradeable at no-fees custom marketplace and usable in any game or virtual world that supports the rigging of humanoid avatars for animation) was a smart move.
Yuga Labs have already announced that the legal process to grant these NFTs’ owners IP rights has started. Its next moves will be watched carefully, as Yuga Labs is setting the gold standards of NFT project management.
The sales of Cryptopunks rose $18.8 million in the 24 hours since the announcement, marking a 1,219% increase over the previous day.
Markets
Bitcoin
Bitcoin traded sideways this week, ending at the same $39k level it started.
The price movement so far does not show the increadible potential Bitcoin has in the future monetary order, mostly because of the short-term factors like the general risk-off attitude and the fear of harmful crypto regulations, which now weigh more than the long-term considerations.
The European MiCA regulation did not make things easier this week. Its controversial PoW-related provisions were back just days before the EU Parliament vote, which is scheduled today, March 14th. If MiCA is passed as is, the PoW-based cryptoassets like Bitcoin or Ethereum would be de facto banned from being “issued, offered or admitted to trading” in the EU. Which would effectively sign the end of the crypto industry in the Union.
Today’s MiCA vote, as well as the ensuing trilogue between the EU Commission, Council and the Parliament are very important.
Across the globe, however, the hopes are high, as South Korea elects a crypto-friendly President who vowed to “deregulate” the crypto industry.
US President Biden too signed an executive order deemed positive for the crypto industry, although some people think it’s just a Trojan horse for the dollar CBDC.
Ethereum
Ethereum price did not move much this week, and stayed at the $2’600 level.
Its falling fees signal the decreasing demand, caused by the cooling down of the NFT fever and the emergence of efficient competitors like Solana (notably in the NFT space) and Terra (rising star of the DeFi).
Quote of the week
“After this war is over, “money” will never be the same again… …and Bitcoin (if it still exists then) will probably benefit from all this.”
Credit Suisse analyst Zoltan Pozsar