Mad Hedge Bitcoin Letter
March 15, 2022
Fiat Lux
Featured Trade:
(CRYPTO GETS A PASS FOR NOW)
(BTC), (MICA)
Posts
Europe has to be considered the King of regulation. They boast the highest tax regimes of the developed world, and I am not referring to loophole countries like Cyprus.
Why does that matter?
The EU went after and still goes after big tech with a vengeance.
Alphabet and Facebook have been on the receiving ends of many billions of dollars in fines and more will head their way in the future.
Tech fines don’t matter in terms of the health of crypto but don’t think that the Europeans are any different when they set their sights on digital currency.
If they see it, they will try to tax it to oblivion.
Just look at Belgium which charges a robust 11.3% in annual property taxes and Spain which registers right behind them at 8%.
The Europeans don’t discriminate and love to tax everything.
So it wasn’t out of the ordinary that The Markets in Crypto Assets (MiCA) legislation included a clause pledging to make crypto assets traded or issued within the bloc ‘subject to minimum environmental sustainability standards’.
Even if this wasn’t a direct tax on crypto, the design of the legislation would amount to a de facto ban on crypto assets because there is nothing environmentally sustainable about mining crypto.
In fact, mining crypto is terrible for the environment and requires large sums of energy to produce digital coins.
That energy is usually dirty energy in the form of fossil fuels.
An element of this has to do with spiking energy costs which has been induced by Russia’s Vladimir Putin’s war on Ukraine.
Many countries have experienced a doubling of energy prices and for the supply left over, do we as a society want to allocate energy to crypto mining when apartment is going dark?
Energy and inflation have become the modern-day battlefield for politicians duking it out and dragging crypto into this game is overwhelmingly negative for crypto.
Crypto has experienced poor price action lately and this adds fuel to the fire.
Banning crypto in Europe would be cataclysmic to the currency after China slammed the door shut on it.
The EU’s Economic and Monetary Affairs Committee voted on a final draft of the Markets in Crypto-assets (MiCA) which included a clause pledging to make crypto assets traded or issued within the bloc “subject to minimum environmental sustainability standards.” A final tally of the committee’s voting showed the proposed clause was defeated with 23 votes in favor, 30 against and six abstentions.
Demand for Bitcoin (BTC) and other tokens has pushed up their carbon footprint significantly in the last year. Data from the Cambridge Centre for Alternative Finance put Bitcoin’s estimated power consumption at an annual rate of 138 terawatt-hours in early 2022, more than the size of a country like Norway.
Miners, much like car drivers, aren’t interested in unreliable renewable energy.
Intermittent supply of energy would cripple a crypto miners’ business much like if a truck driver would rely on sparse electric refill stations to drive cross country.
Although many have boiled down this decision to a landmark victory, I don’t believe this is the end of the regulation circus that is Europe.
If exorbitant energy prices are here to stay, Europe might not have any other choice but to go after crypto for another source of revenue.
And if crypto mining is taxed using sustainability criteria, it will cause many miners to shut down and the crypto industry itself will be shut down because they won’t pass the clean energy criteria needed to operate.
High energy prices have many unintended consequences are crypto could be another martyr to it.
Let’s hope the crypto regulation is pushed out into the long term so the industry has time to develop its foundation and obviously that won’t be possible if the mining business gets killed.
Can the Europeans singlehandedly crash the crypto industry?
No, but it doesn’t help the adoption rate for an emerging industry making it that much harder to mature.
America’s pro-business climate has been a godsend to multinational corporations, and it will be the same way for crypto if it is allowed to develop in America.
Mad Hedge Bitcoin Letter
March 10, 2022
Fiat Lux
Featured Trade:
(WASHINGTON GETS SERIOUS ABOUT CRYPTO)
(BTC), (FB)
U.S. President Joe Biden signing a crypto executive order is more bark than bite.
It doesn’t mean that anything really will happen, especially in the short term.
Optics are quite important for the current American administration, and I believe this is another instance.
Throw the crypto fanatics a bone and hype it up like a transformational moment when it’s not.
If you live in a world of hard outcomes, then this isn’t one of them.
Granted, it’s a step in the right direction, but no meaningful legislation has been enacted yet and I highly doubt that anything concrete gets done before the next administration.
I won’t get into the business of hyping up this announcement of “establishing a framework” for the digital gold because it echoes the direction they were supposed to go with big tech.
Big tech was supposed to get regulated to the utmost, but nothing ever came of it.
The only tech firm that blew up was Meta or Facebook (FB), but that was more about self-inflicted wounds than anything else.
Big tech is largely unscathed from the historical behavior, and nothing has changed in terms of the handling of personal data and its integrity.
Turning a blind eye than rather dealing with issues has been sort of the consensus for anything really controversial with big business.
I don’t believe the administration will lift a finger and plan to treat crypto as politicking even to please optics.
This will create a situation where they can straddle positions on both sides so they can claim innocence if something goes wrong with crypto or take the credit if crypto develops.
The reports will dish up buzz words like “historic” and “unprecedented.”
The order was finally signed Wednesday. It calls on federal agencies to take a unified approach to regulation and oversight of digital assets, according to a White House fact sheet.
A unified approach could also mean that nobody does anything together so we will need to see more substance out of Washington.
The Biden administration is calling on the Treasury to assess and develop policy recommendations on crypto.
Even if recommendations can be decided upon, it doesn’t mean that it will be net positive for Bitcoin’s price.
Last month, U.S. officials seized $3.6 billion worth of bitcoin — their biggest seizure of cryptocurrencies ever — related to the 2016 hack of crypto exchange Bitfinex.
Following Russia’s invasion of Ukraine, authorities are now also concerned about the possible use of crypto in helping sanctioned Russian individuals and companies evade the restrictions.
There is illegal activity that the government wants to stamp out and writing the rules makes it easier to do that.
The Biden administration also wants to explore a digital version of the dollar which is copying the Chinese playbook.
Much of the policy is strategizing relative to what China and Russia are doing and he fell short of saying that the US will create a digital dollar.
Again, it’s more of the optics of saying the government need “urgency” on research and development of a potential digital dollar which doesn’t really mean anything.
The Federal Reserve last year began work on exploring the potential issuance of a digital dollar. The central bank released a long-awaited report detailing the pros and cons of such virtual money but didn’t take a position yet on whether it thinks the U.S. should issue one.
These announcements are a far cry from real policy moves.
It’s great that more resources will be thrown at the asset class but research and urgency don’t mean much in terms of hard victories.
Short-term, this Eastern European crisis has been a massive shot across the bow for Bitcoin fanatics because it has proven that during a possible nuclear war, nobody will buy Bitcoin.
After the dead cat bounce, there was another draconian sell-off this morning in Bitcoin with the asset down 7%, again, diving below $40,000.
The bad price action was created by the 7.9% CPI print and Bitcoin was supposed to be an inflation hedge, but the price action suggests it performs poorly as an inflation hedge.
The jury is out but Bitcoin has failed some major tests this year and it will be a hard slog for the rest of the year.
Sell the rallies until the backdrop and variables change for the better.
Mad Hedge Bitcoin Letter
March 8, 2022
Fiat Lux
Featured Trade:
(STAGFLATION COMES TO THE FORE)
(BTC)
It’s been well documented that we are in the midst of worsening inflation pressures and damaging growth prospects.
This is what many call a stagflationary shock, essentially making things worse on all economic fronts at once.
I do believe if we don’t get a decisive change of events in terms of the macro picture in the medium term, this could be negative for the prospects of Bitcoin appreciation for the rest of 2022.
Bitcoin performs best when inflation is moderate yet rising and growth is humming along.
The expanding pie means there is more capital to allocate towards more speculative investments which this European war has proven Bitcoin is.
When the threat of nuclear war presents itself, investors flee speculative assets like growth tech and reign back risk to choose assets such as gold, US dollar, and other hard commodities.
It’s really a shame because we were right on course for a splendid pandemic recovery and all major Western economies were experiencing boomflation — strong growth with high inflation.
Unfortunately, removing the growth part of the equation out of the mix, will the incremental investor want to dive into Bitcoin or allocate their assets to a different sector?
Most likely no.
Unless Bitcoin strengthens itself and presents itself as more appetizing during cataclysmic times, its hard to see investors betting the ranch in Bitcoin right now.
Much of the consensus before the military conflict was that investors were greenlighting 5% of their portfolio into crypto and other alternative investments.
A stagflation scenario would put a serious wrench in that consensus.
The near-term winner has certainly been hard commodities like precious metals evident by nickels' 90% spike in one day.
Even more problematic, stagflation isn’t the kind of economic disruption that can be fixed with a cheeky use of fiscal or monetary policy.
It's all pain with no upside, and what investor likes that?
The invasion sent commodity prices surging and global stock markets and bond yields plunging.
The median American in this environment is going to be more worried about paying more for gas or their spaghetti than investing in Bitcoin.
But financial market prices don't tell the full story. They remain highly volatile, as geopolitics has scared a lot of investors from the markets altogether which is another worry for not only Bitcoin but which is why we are seeing massive selloffs in the overall market.
In times of absolute strain, there is no incremental investor demand for speculative assets and people with money are more likely to buy a 5-bedroom house to bunker down and ride this thing out.
Higher energy prices — already evident in commodity markets — directly feed into higher inflation, but the risks are more sprawling and hard-to-calculate than that implies.
The concept of higher energy prices also will cause the costs of mining Bitcoin to skyrocket because mining is extremely energy-intensive.
This energy spike will be terrible for Bitcoin mining companies who are reliant on the world’s energy markets for their source of energy.
They have no way to circumvent this as their biggest input is energy.
Let’s not assume everyone stops mining, but let’s say the largest miners who have dedicated warehouses full of miners stop mining.
This would cause the network to come to a screeching halt, no blocks would be found until the block difficulty readjusts.
This happens every 2 weeks. Bitcoin’s mining algorithm is about guessing random numbers and hoping you get lucky. The mining difficulty indicates the threshold of a valid magic number. Any number less than the given difficulty is a valid block. Any number larger than the given difficulty is considered an invalid block by Bitcoin’s mining algorithm.
If all large miners were to stop mining, the mining difficulty would decrease (the magic number that determines block validity would actually increase), which means miners can now find a number larger than when large miners were mining and have the block be valid.
Essentially, this is negative for the development of Bitcoin because we would start to see the Bitcoin infrastructure erode.
This is at a time when investors are already questioning the use case of it during the threat of nuclear war or a 3rd world war.
Bitcoin needs all the help it can get and stagflation and miners dropping like flies triggering a collapse of infrastructure won’t help convince the incremental investors that Bitcoin is the place to put real money.
Sell the rallies if we get one.
Mad Hedge Bitcoin Letter
March 3, 2022
Fiat Lux
Featured Trade:
(ANOTHER SOVEREIGN COUNTRY CONSIDERS BITCOIN)
(BTC), (FOMO), ($USDMXN)
The Bitcoin adoption rate is picking up steam as other Central American countries indicate that it’s a good idea to ditch their fiat currency for Bitcoin.
I don’t blame them.
Look at their currency charts – it's straight out of a nightmare.
The Mexican Peso for instance has gone from 10 Pesos to $1 to now 20.7 pesos to $1 today.
Not a good deal if you’re holding pesos in the bank.
Much of the same phenomenon is echoed around the region.
Recently, Indira Kempis, a senator from the state of Nuevo Leon in Mexico, wants to make her country the second in the world to adopt Bitcoin as legal tender, even though it will be hard to get over the line.
She praised Bitcoin's attributes as an inclusive currency that benefits the unbanked. She said she has been consulting with people knowledgeable in the asset, and now she wants to use her political influence to promote the usability of Bitcoin in all of Mexico.
And trust me – there are a lot of Mexicans in Mexico without access to the financial system and this would be the way to cure the problem.
If the price of Bitcoin keeps rising long-term, many of these poorer Central American countries will regret not following down the same path as El Salvador.
So there is a little bit of Fear of Missing Out (FOMO) with out-of-the-box legislators believing it’s a panacea to their financial woes.
Following El Salvador President Nayib Bukele's announcement that Bitcoin would be adopted as legal tender in his country, the congresswoman was one of a group of politicians whose interest has been piqued.
This would be major news if legislators could coalesce around these crypto ideas.
On another bullish side note, major crypto exchanges are adding more services to Mexico as Coinbase Global (COIN) said it is launching a pilot program to allow cryptocurrency recipients in Mexico to cash out their funds in pesos, a move aimed at shaking up the $700 billion global remittance market.
If COIN can penetrate the Mexican remittance market, this would be extremely bearish for Western Union (WU).
Crypto recipients in Mexico can now generate a redemption code on their Coinbase app that can be used to receive cash at 37,000 retail and convenience stores across Mexico.
The service will be free of charge through March 31, after which customers will be charged a "nominal fee that’s still 25-50% cheaper" than traditional international payment options.
Even Mexico’s third-richest billionaire, Ricardo Salinas Pliego, is pushing the adoption of Bitcoin in Mexico.
Salinas is the founder and chairman of Grupo Salinas, a group of companies with interests in telecommunications, media, financial services, and retail stores.
He tweeted:
You have to buy bitcoin (keep buying when the price is low), then just hold your BTC, forget about selling … Trust me you’re going to thank me later.
Bitcoin is on sale right now as it retraces from its highs of $65,000 as US Fed Chair Jerome Powell indicated we are at the beginning of a Fed tightening cycle.
Bitcoin has found some stability in the $40,000 range and ironically, tech stocks have been more volatile than crypto lately.
One of the gripes of Bitcoin was that it fluctuates too much, but as this asset matures, volatility will gradually subside.
Bitcoin is now a short-term buy at these levels as the foreign war has forced capital into crypto.
Long term, imagine if all of Central and South America adopted Bitcoin as their national currency.
They might finally be able to balance their annual budgets.
Mad Hedge Bitcoin Letter
March 1, 2022
Fiat Lux
Featured Trade:
(WAR IS THE MAIN CATALYST)
(BTC), (TINA)
Crypto has been going wild the last few days as There Is No Alternative (TINA) takes effect.
Russia’s financial system has been crippled and shut off to the outside world.
Bitcoin has shot up to the number one means of storing wealth.
Russians are buying bitcoin in droves as bank runs and systemic risk inundate the financial system.
The Russian Ruble has been crushed the past few days and Russian citizens have been trying to get rid of any rubles they have.
In this scenario, Bitcoin absolutely makes perfect sense.
The Russian Ruble now stands at 116 Rubles for $1 and the US dollar and Swiss Franc have benefited from this flight to safety.
Over the weekend, the U.S. and its allies stepped up draconian measures against Russia, intending to stop its banks from accessing SWIFT, the messaging network underpinning global financial transactions.
The European Union banned all transactions with the Russian central bank in a bid to prevent it from selling overseas assets to support its banks.
Without the source of funds, Russia is unable to properly finance its military for the long haul and it could mean that this war could drag out to a long-term event.
That event is extremely positive for the US dollar and for assets that are shut out from the traditional global financial system.
Debate has been raging over whether bitcoin, which is not owned or issued by a single authority like a central bank, could be used by Russia to evade sanctions.
There is a high probability that the Russian government will also turn to Bitcoin to maneuver around the sanctions.
However, it’s debatable whether the crypto networks can handle that type of volume.
The liquidity simply isn’t sufficient.
The new measures will also target the National Wealth Fund of the Russian Federation and the Ministry of Finance of the Russian Federation.
A secret Chinese research paper circulating around comes to a conclusion that this war could fracture the global financial system making the US dollar less attractive in the long haul and concluding the US economy will be a big economic loser with the expenses adding up.
The Bank of Russia, the nation’s central bank, stepped in to stanch the ruble’s swoon by more than doubling the country’s benchmark interest rate to 20% from 9.5%.
The hike in rates is designed to tempt savers to keep cash in Russian banks since the West and its allies have moved to isolate Moscow’s biggest lenders from international markets.
Even the Russian stock market has been closed because of these events.
As the Russian military drives a convoy to the edge of Kiev, this is really looking ugly, and sadly, on a human level, it is tragic, but this event is bullish for Bitcoin.
The inflationary effects were thought of being a tailwind for Bitcoin, but it appears as if the world has had to dive deep into a massive kinetic war to kindle that Bitcoin pixie dust once again.
I am bullish Bitcoin if the fighting continues.
