July 17, 2022

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Welcome to Crypto Long & Short!

The U.S. The Bureau of Labor Statistics released the consumer price index (CPI), the "inflation number," for June this week. So macro trends are this week's featured flavor since CPI wasn't exactly pretty. From the press release:

"Over the last 12 months, the all items index increased 9.1 percent before seasonal adjustment."

So if you're an American who didn't get a 9.1% pay raise last year (which most didn't), then everything is more expensive. If you dig into what made up that 9.1%, the really important stuff (read: food, energy) outpaced it. Food prices rose 10.4%, Energy prices were up 41.6%.

Of course, that means gold, the classic inflation hedge asset, should be going up. Except it didn't? And bitcoin … did. Also the euro is a dollar stablecoin now. What gives?

That (and maybe more …) below.

– George Kaloudis

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The Briefing

I'll spend a lot of this newsletter on a soapbox because inflation really annoys me. But also because as a son of a Greek immigrant, I find the euro really annoying. And gold as a monetary asset never really made sense to me. Plus, I really like Bitcoin.

Since a lot of things have been said about all of these things recently, there's a lot for me to latch onto and get worked up about.

So it goes.

No, inflation is not 'good for you' and no, we don't 'need it'

"Inflation is good for you." Google it. Real-life articles have been published that claim this.

And they're serious.

Inflation is good for you because it favors debtors. That makes sense. If you have a $100,000 loan, that $100,000 doesn't adjust as things get more expensive. It's still $100,000. So if that $100,000 is a fixed-rate, 30-year mortgage, then your debt burden is lessened.

Assuming of course that your wages increased enough to make up for the fact that burritos are more expensive. For the record, wages largely didn't increase enough in the U.S.. So while inflation might be good for your mortgage burden, does it make up for the additional 40% you're paying at the gas pump or the additional 10% for burritos?

"We need inflation." Google that too. Plenty of articles.

All serious.

The basic gist of the argument for needing inflation is that a deflationary currency – one that increases in value over time rather than decreases – will lead to excess saving (or "hoarding") and lack of spending in the economy given the time value of money (TVM). TVM is the core tenet of finance. A "dollar today is worth more than a dollar tomorrow" given the earning potential of that dollar.

Except.

That's a whiteboard world. In the real world, there's nothing wrong with saving. Also, and this should be shocking to absolutely nobody, people buy things because they either a) need them or b) want them. While they may be doing a TVM calculation implicitly, no one is pulling out a HP-12C to decide if they do want guac on their burrito.

Is anything an inflation hedge?

There's a really good theoretical argument for the fixed-rate 30-year mortgage mentioned in the previous section as an effective inflation hedge (but don't give Wall Street any ideas … again). But normally gold is touted as the ultimate inflation hedge. Gold has been money for millennia and it's relatively rare. And it's difficult to produce more gold. So in times of high inflation, we expect gold to increase commensurately.

Except now we have gold 2.0 in bitcoin. Here's how both have fared since the June CPI was announced.

Bitcoin vs. gold performance since Wednesday (TradingView)

Bitcoin told gold: "Look at me, I am the captain now."

I know this is a very short, cherry-picked time period, but it's pretty profound. Bitcoin is finally doing that thing you'd expect it to do as gold 2.0. Maybe bitcoin can be an inflation hedge after all.

Introducing crypto's newest dollar stablecoin: the euro

Last week, for the first time in 20 years, the euro hit parity with the U.S. dollar. CoinDesk's Omkar Godbole wrote a great article about what that might mean for crypto markets. In that article, Genesis Global Trading's Noelle Acheson (my former boss) was quoted saying that bitcoin has been "negatively correlated with the dollar index the past couple of years."

So far this year, this trend has held up. The dollar index has performed extraordinarily well (up 12.3%), the euro compared with the dollar hasn't (-10.8%) and not-to-be-upstaged bitcoin has done even worse (-56.1%).

DXY looks strong in 2022 (TradingView)

Setting aside both crypto and my negative bias against the euro and its troika (who so graciously bailed out Cyprus, Ireland, Portugal and Greece) for a moment, it'll be interesting to see what the European Central Bank (ECB) will do in the face of a weakening euro, looming gas shortages, increasing energy prices and a impending recession. Hard times in the eurozone might beget hard times elsewhere.

For all of Fed Chairman Jerome Powell's woes, at least he isn't ECB President Christine Lagarde.

What does this have to do with bitcoin and crypto?

Thankfully (unthankfully?) it's 2022. And in 2022 bitcoin is a real macro asset. So all of the things that happen in the broader economy affect bitcoin. The Hard Times in crypto that I wrote about the last few weeks may become Harder Times if things in the economy get worse.

Sure, bitcoin could be a way to opt out of the current financial system and get away from inflation and poorly run monetary unions. But for now, they're tied together.

Takeaways

Celsius Network files for Chapter 11 bankruptcy.

TAKEAWAY: Celsius Network, the troubled crypto lender that is facing liquidity problems, filed for Chapter 11 bankruptcy protection in the U.S. Bankruptcy Court for the Southern District of New York on Wednesday. Celsius' co-founder and CEO, Alex Mashinsky, said, "I am confident that when we look back at the history of Celsius, we will see this as a defining moment, where acting with resolve and confidence served the community and strengthened the future of the company." Read more here.

Michael Barr was confirmed as vice chairman for supervision at the Federal Reserve.

TAKEAWAY: Michael Barr, a former Ripple adviser and a key Treasury Department official during the Obama administration, won Senate confirmation on Wednesday to be the leading U.S. banking watchdog, one of the most important U.S. regulatory roles. Despite outranking Barr, the Fed's Powell has publicly indicated that he'll defer to the vice chair on financial oversight matters. Read more here.

The Blockchain and Crypto Assets Council (BACC), India's only crypto lobbyist group, was disbanded.

TAKEAWAY: The BACC, the only advocacy body representing the interests of India's crypto industry, has been disbanded by its parent organization, the Internet and Mobile Association of India (IAMAI). The IAMAI said in a statement, "The association was forced to take the decision in light of the fact that a resolution of the regulatory environment for the industry is still very uncertain and that the association would like to utilize its limited resources for other emerging digital sectors…" Read more here.

The U.K. Court will allow legal documents to be served via NFTs.

TAKEAWAY: The High Court of England and Wales has allowed Fabrizio D'Aloia, founder of Italy-based online gambling company Microgame, to file a lawsuit against anonymous people through a non-fungible token (NFT) drop. Joanna Bailey, an associate lawyer from Giambrone & Partners LLP who worked on the case, said, "This is so important because it shows the court's willingness to adapt to new technologies and embrace the blockchain and actually step in to help consumers where previous legislation and regulators simply could not do that." Read more here.

Crypto miner CleanSpark bought 1,061 bitcoin mining rigs.

TAKEAWAY: While the move only adds 93 petahash per second (PH/s) to CleanSpark's 2.3 exahash per second (EH/s) hashrate, it is indicative of how the miner has been able to scoop up discounted opportunities amid a bear market. The Las Vegas-based company bought the Whatsminer M30S machines "at a substantially discounted price compared to the spot market price from just a few months ago," according to a statement emailed to CoinDesk. Read more here.

– Sage D. Young

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