Vin Narayanan

Crypto Market Musings

Bitcoin broke through the $28,000 barrier (and for one brief moment topped $29,000) on Wednesday after spending about a week trading in the $27,000 range. It’s currently trading at $28,460.27.

Most cryptos rallied behind bitcoin’s big Wednesday surge (more than 5%). Ethereum jumped almost 4%. And Polygon was up almost 6%. Ethereum is currently trading around $1,831.30. Polygon is currently trading around $1.11.

Two factors appear to be driving the market:

1. A lack of liquidity (CoinDesk has a great explainer on why the market is relatively illiquid right now) means small buy or sell orders can trigger big price moves up or down.
2. A return to money printing to bring stability to the global banking system proves out bitcoin’s raison d’être (reason for existence) — the need for an economic system based on sound money.

While it’s nice to NOT be talking about how low bitcoin could fall, I don’t believe we’re out of the danger zone yet. Between inflation and a potential recession, danger is lurking. 

What Vin Is Thinking About

The crypto markets are in a weird place. Last week, the Securities and Exchange Commission (SEC) informed Coinbase (via a Wells Notice) that it would pursue an enforcement action against it. This week, the Commodity Futures Trading Commission (CFTC) announced it was suing Binance. The two most important crypto exchanges in the world are now facing enforcement actions — and the markets just shrugged it off.

The SEC hasn’t outlined its case against Coinbase. The only thing we know about the SEC action is what Coinbase has told us. And what Coinbase has told us fits the SEC these days when it comes to crypto.

“Today, we are disappointed to share that the SEC gave us a ‘Wells Notice’ regarding an unspecified portion of our listed digital assets, our staking service Coinbase Earn, Coinbase Prime, and Coinbase Wallet after a cursory investigation,” Coinbase wrote in a blog entry.

Now, do I believe Coinbase knows more than it’s letting on? Yes. But the SEC doesn’t deserve the benefit of the doubt. The regulatory agency has provided no regulatory clarity or insight for the crypto industry to follow. The truth is that even if Coinbase wanted to register as an exchange, the SEC doesn’t have a way for it to do that.

Meanwhile the CFTC has been fairly clear in its crypto stance. It views bitcoin and Ethereum as commodities. But it wants exchanges to register with it. And the CFTC lawsuit said Binance failed to register with the agency, pursued and accepted American customers, and had inadequate know-your-customer and anti-money-laundering controls. 

Binance responded to the lawsuit in a blog post by writing, in part, “the CFTC filed an unexpected and disappointing civil complaint, despite our working cooperatively with the CFTC for over two years. Upon an initial review, the complaint appears to contain an incomplete recitation of facts, and we do not agree with the characterization of many of the issues alleged in the complaint.”

In most industries, the two biggest and most important players facing regulatory heat would send people running for the hills. In crypto, not so much.

Bitcoin and the crypto markets have rebounded. And instead of pulling out of the market, investors are focusing their anger on the SEC.

And Finally…

MicroStrategy isn’t backing off its bitcoin strategy. It repaid the remaining principal of its $205 million loan from the now-defunct Silvergate Bank and, over the past five weeks, bought $150 million worth of bitcoin. 

Crypto Market Musings

Bitcoin is soaring. It’s up more than 20% over the last 30 days and up about 5% over the last seven days. It’s trading at $27,928.74 as of this writing. Ethereum is up a more modest 10% over the last 30 days and about 1.5% over the last seven days. It’s trading at $1,771.63 as of this writing. 

Unlike other big moves up by bitcoin, this one isn’t lifting the rest of the market with it. Polygon is down more than 19% over the last month and down 7% over the last seven days. Polkadot is down more than 13% over the last month and down about 5% over the last seven days. And Uniswap is down more than 14% over the last 30 days and down almost 4% over the last seven days.

Two things are driving the market. First, people are remembering that crypto — and bitcoin in particular — was created as an alternative to the traditional banking system. And with the traditional banking system in crisis mode, investors are buying bitcoin. The other major factor in bitcoin’s surge is the extremely influential Balaji Srinivasan making a pair of $1 million bets that hyperinflation is on the way and (by extension) bitcoin would hold its value better than the dollar (more on that below). 

Srinivasan is highly respected in the crypto space. And his willingness to bet against the dollar’s future is certainly a major factor in this surge.

What Vin Is Thinking About

The Srinivasan wagers are intriguing — and extremely scary. Srinivasan is the former chief technology officer of Coinbase. He was also a managing partner at Andreessen Horowitz and is an extremely successful angel and crypto investor as well as founder. He’s rich. He’s scary smart. And he does his homework. So if Srinivasan says something is going to happen, you need to pay attention.

But what Srinivasan is betting on is pretty scary. To be clear, Srinivasan didn’t propose these bets. He accepted them. Here’s how it went down.

So Srinivasan is betting that the U.S. will enter hyperinflation within 90 days because of a worsening banking crisis and money printing. (I know I’m oversimplifying his argument. If you want a more detailed explanation of his thoughts, you should follow Srinivasan on Twitter.) 

Hyperinflation refers to rapidly rising inflation — typically more than 50% per month. If this happened, the dollar’s purchasing power would rapidly diminish. Massive economic upheaval would follow. And it would likely result in bitcoin becoming incredibly valuable extremely quickly. 

This is objectively terrible for society. The amount of pain and suffering that hyperinflation would cause is hard to understate. According to Visual Capitalist, the countries with the worst inflation rates last year were Zimbabwe (269%), Lebanon (162%), Venezuela (156%), Syria (139%), Sudan (103%), Argentina (88%), Turkey (85.5%), Sri Lanka (66%), Iran (52.2%), and Suriname (41.4%).

This is a list no country wants to be on. 

I don’t believe Srinivasan is rooting for hyperinflation. He’s also not trying to profit off of future misery or game any system or bet. Instead, he’s ringing the alarm bell and saying that this is a distinct possibility if the country continues on its current path. And he wants everyone to hear the bell.

Here’s how Srinivasan characterizes the bet on Twitter:

I believe Medlock will agree that this is an ideological bet… The hyperbitcoinization bet is obviously not a money making bet. It is purely informational…

To allay any question about my motivations, I publicly commit to never selling any Bitcoin for USD unless legally compelled to do so. While I still respect many individual Americans, I no longer have faith in the US currency or banking system.

And Finally…

If you really want to understand how fragile the semiconductor chip manufacturing industry is — and how the world might not be able to survive without Taiwanese plants producing chips — listen to this podcast. In it, the terrific John Dickerson interviews Chris Miller, author of Chip War: The Fight for the World’s Most Critical Technology. The two discuss just how complex chip manufacturing is, why so much of it happens in southeast Asia and how a war in Taiwan could disrupt chip manufacturing and bring down the global economy.

For people my age, Han Solo telling Luke Skywalker “Great, kid! Don’t get cocky!” after Luke shot down a ship for the first time is a seminal movie moment. As a kid, I didn’t even know what “cocky” meant! But I knew the line was hilarious. I repeated it over and over again — no doubt annoying everyone around me.

I really wish some bank executives had listened to Han Solo. If they had, we might not have had the bank runs we saw over the past several days. And we wouldn’t be worried about crypto’s banking problem.

One of the ironies of the crypto industry is that it needs banking partners. Think about it. Crypto is designed to disrupt money and banking as we know it. But to operate right now, crypto companies need banks. Crypto exchanges need banks to hold onto the cash their customers deposit to buy and sell crypto. Crypto startups need banks to handle payroll, rent, vendors and the many other services needed to run a business. Crypto venture capitalists need banks to hold onto their money so they can invest it. But because the U.S. government has been telling banks to avoid the crypto sector, only a few banks have chosen to work with the crypto sector. Silvergate and Signature were two of those banks. Both banks (along with Silicon Valley Bank) got a little cocky. And now they’re paying the price.

Silvergate was making tons of money being a crypto bank. In fact, it was making so much money banking the crypto sector that it didn’t bother to diversify its client base. Oops. Here’s how the Silvergate bank run played out. First, it took much of the money that had been deposited and parked it in traditionally safe investments like Treasury notes, mortgage-backed securities, and municipal bonds. The goal was to generate some income off of the money that it was just holding onto. There’s nothing wrong with that. And these investments are generally not risky. 

But then the Federal Reserve started raising interest rates to fight off inflation and Silvergate’s assets dropped in value. Uh-oh. Then the FTX debacle combined with a crypto bear market and a tech recession prompted Silvergate customers to withdraw money. And they kept withdrawing. And all of sudden, Silvergate didn’t have enough cash or assets (even if it sold them) to cover the withdrawals. 

If Silvergate had a wide range of clients, the FTX debacle and crypto markets wouldn’t have prompted a bank run. Insurance companies, retail stores and small businesses had no reason to run out and withdraw their money. But because it hadn’t diversified its customer base enough — AND it hadn’t figured out how to manage the Fed rate hikes — a bank run ensued. 

The same thing happened to Silicon Valley Bank (SVB). Most of SVB’s clients were in the tech industry. The tech industry is getting hammered. If SVB had diversified its client base, there likely wouldn’t have been a bank run. But SVB got cocky. It was living the big life as the tech industry boomed. And it didn’t de-risk its customer base.

Signature’s crypto risk was much smaller than Silvergate’s. It had a diverse client base. But the government still closed it because of the potential of “systemic risk.” In many ways, Signature is a victim of circumstances. People became worried about smaller regional banks. That triggered withdrawals. The government didn’t want another bank to go under. That combined with Signature’s small crypto business — which the government is not happy about — prompted the closure.

Signature underestimated how much the government disliked the fact that it had crypto clients — and the rapid spread of the bank runs to a lesser degree. It got a little cocky. And it paid the price.

All of this should serve as a wake-up call to all banks. They can’t afford to get cocky — especially with rates rising and inflation being out of control. They need to actively manage risk and ensure that they’re well capitalized. It’s not a passive activity anymore. And banks need to act accordingly.

Crypto Market Musings

We’re in uncharted territory. There have been other crypto bear markets. But this is the first time that crypto has navigated an economic down cycle. And we’re discovering that crypto — including bitcoin — can’t escape the gravitational pull of macroeconomic headwinds.

The crypto markets fell when we found out that the personal consumption expenditures price index (excluding food and energy) increased 0.6% in January. That increase was higher than what “the experts” were expecting and an indicator that inflation isn’t under control yet. (Editor’s note: Vin will be going off on “experts” and analysts in an upcoming podcast. You have to see this. Also, Warren Buffett agrees with him.)

The crypto markets (and stock markets overseas) rallied when data showed manufacturing in China was rebounding.

This up and down behavior is becoming the norm for crypto in this economic down cycle. And what it appears to show — for now — is that short-term investors are treating crypto like a risk asset while long-term investors have moved into an accumulation phase.

As of this writing, bitcoin is down around 2.6% over the last seven days. Ethereum is down about 1.6% over the same period of time. And Monero is down about 1.1%.

I fully expect this market yo-yo to continue as long as inflation continues to be a problem. And right now, there’s little evidence to suggest that inflation will show a significant downward trend anytime soon.

What Vin Is Thinking About

Crypto is a volatile asset class. A 10% swing in the stock markets is a cause for panic. A 10% swing in crypto prices feels like a normal day at the office. But as volatile as crypto is, bitcoin had an interesting February. It closed the month up just 0.03%. There was plenty of movement in the 28 days of February, but it remained essentially flat. That’s not what people expect from crypto.

Combine February’s essentially flat month with what appears to be low bitcoin liquidity levels in the market (basically, there isn’t much bitcoin available to trade because long-term holders are at an all-time high), and you get very interesting market dynamics.

Any significant trading activity in a low-liquidity market can have an outsized influence on the market. Prices can rise and fall dramatically because of a few transactions rather than general market belief or movement. And it’s difficult for institutional traders to trade without directly influencing the market. This sort of environment is ripe for big daily swings — and possibly some market manipulation. So while I believe bitcoin and ethereum will likely trade either sideways or a little lower over the near term, the trading environment is ripe for a few days of fireworks.

And Finally…

Bitcoin NFTs took off in January. But like all NFTs, they were incredibly popular — until they weren’t. Decrypt has a good story on the two-month roller coaster and Bored Ape creators Yuga Labs deciding to move into this space. But what I find more interesting is how NFTs on the bitcoin blockchain have caused a rift in the normally “conservative” bitcoin community that mostly believes bitcoin should only be about decentralized money. This Forbes piece does a great job of explaining the rift and is definitely worth the read.

Crypto Market Musings

I’m not ready to start singing “Happy Days Are Here Again” (the Annette Hanshaw version, NOT the inferior Carole King or Barbra Streisand versions). But I am starting to hum Bobby McFerrin’s “Don’t Worry Be Happy.”

The Federal Reserve raised its target interest rate by 25 basis points Wednesday. That’s the smallest rate hike since a similar 25 basis point increase last March. And it’s the first sign we’ve seen that the Fed believes inflation is headed in the right direction.

The modest rate hike came, as I had predicted, with hawkish talk about how the Fed would be willing to take more aggressive action again if inflation doesn’t slow down quickly enough. That’s a smart move. Data needs to dictate the Fed’s decisions. And if inflation looks like it’s becoming problematic again, it needs the flexibility to raise rates more aggressively.

But investors and traders ignored the warning and acted as if the Fed would be more interested in jump-starting the economy than keeping inflation in check. Since Wednesday, the S&P 500 is up 2.5%, the Nasdaq Composite is up 5.3%, the Russell 2000 is up 3.6%, and bitcoin is up 3.1%. 

As long as inflation continues to trend downward, the markets will gradually rebound. But if the Fed gets any signals or data that inflation is on the rise — or could be on the rise — it will raise rates. That will slow down the economy. And the markets will go down as well.

Bitcoin (and crypto) will likely move up or down based on the inflation data. So as long as inflation continues to fall, investors should be in decent shape.

What Vin Is Thinking About

Inflation is a lot like COVID. It’s a persistent enemy. Just when you think you’ve got it under control, it comes back with a vengeance and knocks you down again. The U.S. learned this lesson the hard way in the late ‘70s and early ‘80s. 

Inflation was out of control back then. It was so bad that more than 50% of the country said inflation was the biggest problem in the country according to a Gallup poll. By comparison, only 15% of people in January told Gallup that inflation was the biggest problem facing the country.

This was the second time in a decade that Americans faced double-digit inflation rates. So the Fed declared war on inflation. A recession hit. Mortgage rates topped 16%. (You can see the spike in the chart below.) Unemployment topped 7%. And when it looked like things were under control, the Fed began easing rates.

But despite the Fed’s strong action, inflation proved to be stubborn. The New York Times‘ outline on the events is illustrative.

The effective Fed funds rate reached 19.39 percent in April 1980, only to fall to 11 percent in May and 9 percent in July. The Fed had to reverse course in September. By January 1981, with inflation surging, the Fed funds rate was again above 19 percent.

The Fed’s rate hikes had devastating consequences. Another recession began. Unemployment rates soared to 10% and mortgage rates climbed to 19%.

Eventually, the Fed’s rate hikes worked. Inflation fell, leading to one of the longest periods of growth in American history. There have been some hiccups along the way, but it can be argued that roots of the incredibly strong economy we’ve seen for almost 40 years now can be traced back to the Fed’s rate hikes in the early ‘80s. 

Right now, the Fed funds rate ranges from 4.5% to 4.75%. But the last thing the Fed wants to do is lower rates too quickly and see inflation return like it did in 1980. If the Fed has to choose between preventing a recession or curbing inflation, it will opt to fight inflation.

That’s why inflation holds the key to how the economy and markets will perform this year. If inflation is under control, investor confidence will return. If inflation surges again, the Fed will raise rates again, the markets will likely tumble — and a recession becomes a near certainty.

And Finally…

People can play Doom on the bitcoin blockchain now. You won’t find me doing it. I played Doom in college when it first came out, before most people had even heard of it. The game has a special place in my heart. And I don’t want to ruin it. But if you’re interested in playing Doom on the bitcoin network, have at it. And let me know how it goes on Twitter (@vinistic).