FMF: BITCOIN’S GOLDEN CROSS?, DEVELOPING NATIONS & CRYPTO, CHINA’S CRISIS
The 5-minute newsletter on the important stuff in finance — reporting what’s going on, and why.
Let’s see what’s going on this week:
- Will the West Adopt the Worst Aspects of China’s System?
- Central Bankers Worry El Salvador Will Spark a Trend
- Chinese Real Estate Giant Closer to Bankruptcy
- Bitcoin’s Golden Cross or Death Cross?
- Developing Nations Seek Financial Freedom in Bitcoin
CBDC — The Monetary Battle to End an Era
- China’s digital government money — CBDC — has now been used by 139 million citizens (roughly 10% of China’s population). (link)
- United States and the European Union try to catch up with China, with the US leaning toward stablecoin regulation while the EU leans toward CBDC — Central Bank Digital Currency. (link)
Not All Digital Assets Are Created Equal
China is the world’s leader in technocratic grid control. Since 2007, it started implementing Social Credit System (SoCS), affecting over 73% of businesses presently. The biggest part of that system, if not the ultimate, is to control the flow of money.
After all, the bloodline of any society is its economy, and the bloodline of economy is its infrastructure. The core of that new infrastructure is CBDC. With such a programmable money, governments can push, curtail, surveil, cut-off, and shape behavior based on their desirability.
Companies as extension of top-down governmental policies in China via SoCS.
The digital era makes this easier to achieve than ever before. When money becomes digital, it is a part of the grid, instead of a physical item to be used at one’s discretion. For the US and EU, the question is then, do they create their own CBDC — or on-ramp blockchain-based money?
Both economic powers signal they want CBDCs. Stablecoins may be digital money pegged to fiat currency, but they lack the programmability and the unmatched surveillance power that a CBDC could offer. It is quite telling that EU central bankers see this issue as a priority, saying: “[we] have to act while the current system is still in place — and to act now”.
Indeed, as inflation continues to hit new highs, decentralized cryptocurrencies are at their heels.
Central Bankers Lash Out at Bitcoin
- As fiat currencies continue to feel the effects of inflation, central bankers across the world see a looming threat in El Salvador’s Bitcoin adoption. They use the same rhetoric as if Bitcoin had just launched. (link)
- US inflation is overshooting Federal Reserve forecasts. Will the USD be trustworthy enough to continue serving as the go-to peg for stablecoins? (link)
Inflation May Spur Stablecoins to Seek Alternative Pegs
It is difficult to image the power held in the Federal Reserve’s hands. It can print more money in one year than in two centuries and it can (almost single-handedly) keep the stock market afloat. Yet, the hundreds of economists it employs keep getting forecasts wrong.
“We do not seek inflation that substantially exceeds 2 percent, nor do we seek inflation above 2 percent for a prolonged period,” — Jerome Powell in a March 24 letter.
The Fed Chair Jerome Powell admitted that soaring consumer prices caught the Fed off guard, yet he dismisses such a trend as ‘transitory’. Even if it doesn’t turn out to be transitory, the Fed’s toolset can make it so. This leaves the market in a conundrum.
The market seems to act as if the Fed’s immense power overshadows its errors. However, what happens when the Fed has reached its power ceiling? What if, when it tries to fight inflation, it causes the bubble to pop?
If one were to evaluate USD as any other altcoin, the prospects are looking grim, favoring Bitcoin instead. The fate of the dollar is tied to the Fed’s interventions and its tax enforcement. Still, these two pillars have intrinsic value of their own. The only question is, for how long can they last if 27% of Americans already want BTC as legal tender?
Evergrande — Chinese Repeat of 2008 Bank Bailouts?
- Evergrande, the second-largest real estate developer in China, is looking at bankruptcy that could affect $1 trillion worth of assets. (link)
- As the Evergrande liquidity crisis increases, S&P downgrades the company to “CC”, putting it at default risk. (link)
Real Estate Bubble Comes Full Circle
One of the consequences of heightened centralization is that not all plans come to fruition. And China has no shortage of massive, expensive plans, as testified by its numerous ghost cities.
Kangbashi In China, birthed with a $161 billion investment, image credit: Qilai Shen/Getty
In the wake of the 2008 global financial crisis, China’s provinces tried to stimulate the economy by building these sparsely uninhabited cities. Of course, to do so, they had to incur massive debts. One of the companies tasked with these projects was Evergrande.
Going along with debt spree, the real estate developer leveraged its operations. In 2017, the first signs of trouble began, with the company promising to reduce the leverage to 70% to June 2020, from its nearly 4x leverage of 240% in 2017.
Needless to say, the deleveraging wasn’t successful. Amid looming protests and a ripple effect on the entire Chinese economy, its central bank would likely have to intervene. If this rings a bell, the original crisis that started the Chinese debt splurge resulted in the bank bailouts from the US subprime mortgage crisis.
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Bitcoin’s Golden Cross Ahead?
- Golden cross, a technical pattern indicating a major rally, points to a Bitcoin price surge. However, Bitcoin’s historic volatility may puncture it as an illusion. (link)
- Interactive Brokers Group starts offering trading and custody for top cryptocurrencies, bringing in new wealthy clientele with an average account size of $250,000 — over 70 times larger than that of Robinhood. (link)
Bitcoin Is a Long-Term Investment
As noted last week, September is historically the absolute worst month for Bitcoin performance, having negative yields for the last 7 years, except for low single-digit increases in 2015 and 2016. Bitcoin’s falling 10-day moving average may indicate a continuation of this trend.
BTC chart from 2019 to 2020, with crosses marked — image courtesy of TradingView.
Moreover, this particular golden cross is marked by very low trading volume, further amplifying the September curse. With that said, nobody really knows whether there will be a fakeout, one way or the other.
What we do know is that Bitcoin whales are aplenty. If they want another buy-the-dip opportunity, they could erect a massive sell wall, triggering a downward cascade. On the other hand, bullish Bitcoin news keep rolling in.
Billionaire veteran investors and firms such as New York Mets owner Steve Cohen, Brevan Howard ($20B AUM), and various pension and investment funds are all looking for a piece of the Bitcoin pie. In the end, we may very well see a death cross instead of a golden cross. However, with so much big moneyed interest involved, we would likely see a resurrection shortly thereafter.
Developing Nations at the Forefront of Crypto Adoption
- After officially adopting Bitcoin as legal tender, El Salvador is further looking to boost its economy by exempting Bitcoin holders from taxation. Would moving there be a wise move? (link)
- Although relatively small in crypto market share, Africa tops all other regions in terms of P2P transaction volume. (link)
Developed Nations Stall with Crypto, as Others Pick Up the Slack
We may be on the precipice of something revolutionary, far-reaching, and unstoppable. Developed, large nations saturated with regulation and bureaucracy are naturally resistant to a new monetary system. In contrast, smaller developing nations have no such resistance walls.
Without the entrenched infrastructure, who is then to say that a smartphone app in the form of a crypto wallet couldn’t completely supplant central banking? Citizens of Kenya, Nigeria, and other nations can clearly see their currencies decreasing in value — while Bitcoin does the opposite.
Performance of Nigerian Naira (NGN) and Kenyan Shilling (KES) vs Bitcoin over 5 years, source: TradingView.
Despite the attempts to curtail crypto use in Africa, all have failed, with Africa’s crypto value growth showing a 1,200% increase over the last year. Look at Nigeria, for example. After a government ban was implemented, crypto trading activity actually increased. With countries like El Salvador embracing BTC as legal tender — what will citizens in countries like Nigeria demand?
As a moderately tropical nation, El Salvador further entices investments with its low cost of living and even cheaper housing. Meanwhile, in the US, regulators continue to threaten ‘shadowy super coders’, as BlackRock buys up whole neighborhoods, and the dream of owning a home in the West keeps retreating.
Tweets of the Week
“If you are not immersed within this space, don’t expect to understand where it’s going. What happened last week might already be out of date, and what happens tomorrow might be something that’s never happened before. There couldn’t be a more important time to be paying attention.”
“There is no version of reality where crypto does not consume every facet of technology.
We are extremely early.”
“NOT ONLY has the Big Mac gone from $0.50 to $8 from 1980–2020….
But it’s lost 40% of its size too
“2% transitory inflation” ”
“Cryptocurrency enthusiasts: you likely know @AMCTheatres
has announced we will accept Bitcoin for online ticket and concession payments by year-end 2021. I can confirm today that when we do so, we also expect that we similarly will accept Ethereum, Litecoin and Bitcoin Cash.”
“Germany overtakes USA for most #Bitcoin nodes.”
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