Hard Money and a Dovish Fed

What you need to know today in crypto and beyond

March 18, 2021

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Top Shelf

Today's must-reads

ETF RISING? VanEck's bitcoin exchange-traded fund (ETF) application for U.S. markets is being formally reviewed by the U.S. Securities and Exchange Commission, which now has 45 days to make an initial decision. There is intense demand for bitcoin ETFs, which give institutional investors exposure to the cryptocurrency, though the U.S. regulator has been hesitant to approve one.

ETHEREUM IMPROVEMENT: Ethermine introduced software that could help Ethereum miners recoup some losses expected from the EIP 1559 protocol change that would cut their fees. Called Maximal Extracted Value (MEV), the software has netted traders and miners some $1.7 million within a 24-hour timespan.

NFT HEIST: Nifty Gateway, a non-fungible token marketplace, issued a statement Monday that a small group of its users experienced "account takeovers." Victims claimed they either had their NFT art stolen or NFTs purchased and then stolen, using their credit card information. The NFTs were then sold again. CoinDesk privacy reporter Ben Powers dives into what the event means for the nascent NFT boom. In short: "not your keys, not your art."

KNOWN QUANTITY? "MetaKovan," the hitherto pseudonymous buyer of the $69.3 million Beeple non-fungible token (NFT) last week, has come out into the open. The investor revealed his true identity as Vignesh Sundaresan via a blog post on the Metapurser website Thursday. Blockchain journalist Amy Castor suspected Sundaresan of being behind the record NFT sale, and raised questions about an existing business relationship between buyer and artist.

– Daniel Kuhn

Sound Bite

Overheard on CoinDesk TV

"I don't know if my colleagues will change their views. ... I hope we will learn from what the Canadians have done. Maybe that will motivate us to move forward."

– SEC Commissioner Hester Peirce, on the possibility of approving a bitcoin exchange-traded fund, in an appearance Thursday on CoinDesk TV's First Mover.

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Introducing 'Coin Toss,' debating the future of money on CoinDesk TV

From the world leader in crypto news and events, the all-new CoinDesk TV covers the rapidly evolving world of digital finance and its role in the global economy.

Hosted by CoinDesk Podcasts Managing Editor Adam B. Levine, "Coin Toss" sets the stage for debate between guests with opposing views on policy and regulation, privacy and data integrity, fraud and crime and more.

Watch "Coin Toss" Wednesdays at 10:30 a.m. ET on YouTube or CoinDesk.com.

Off-Chain Signals

What others are writing....

Mogul Productions, which encourages movie fans to vote on the projects they want made, is getting into the NFT game with artwork inspired by "Star Wars" and Martin Scorsese's "Wolf of Wall Street." (Decrypt)

Bank of America estimates an investment of just $93 million can move bitcoin's price by 1%, such is the sensitivity of the market to large cash inflows. (Bloomberg)

Could Ethereum 2.0, the blockchain's long-awaited upgrade, allow Ethereum to climb above Bitcoin in market share? That's the prediction of Messari analyst Ryan Watkins. (Cointelegraph)

Nathan "Doggface208" Apodaca is creating a non-fungible token of his popular longboarding video. The 22-second clip features Apodaca rolling along and drinking cranberry juice to Fleetwood Mac's "Dreams." Improbably, bidding is set to start on Rarible at $500,000. (Crypto Briefing)

– Ben Schiller

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The Takeaway

Putting the news in perspective

Hard Money and a Dovish Fed?

Yesterday, U.S. Federal Reserve Chair Jerome Powell confirmed the central bank would maintain its easy money accommodations. Interest rates will remain near zero and an asset-buying program will remain in place. The economy will be allowed to run hot. This is despite mounting inflation concerns in financial markets and among a minority of Fed members.

This has some asking, what does it mean for bitcoin? Bitcoin is the world's first decentralized monetary system. It exists as a foil to the U.S. dollar, with a stable issuance rate and a hard capped supply. Its price is wholly dependent on what other people are willing to pay for it. And, over the past year, there are a number of sophisticated investors willing to pay quite a lot for it.

Bitcoin has gained a place within the larger financial firmament. To some extent, it has become an indicator for the economy itself – a way of indirectly measuring inflation worries or the willingness for investors to gamble on risky assets. But bitcoin's place is far from fixed, and there are a number of conflicting views of how a "hard money" will react to a dovish Fed. Here's a quick and dirty rundown.

Bitcoin is often discussed as an alternative store of value, particularly an alternative to gold. This seems to be the predominant view among Wall Street bigwigs and tech companies that came into the crypto economy in recent months. The purest distillation of this idea comes from Michael Saylor, who is directing his internet boom-era tech company, MicroStrategy, to bet big on bitcoin.

"I want something that I could put $425 million into for 100 years," Saylor told CoinDesk in September. In this scenario, bitcoin is a place to park wealth, which would otherwise be eroded in an inflationary environment. Following Powell's address, the U.S. dollar fell while would-be inflation hedges like bitcoin and gold rose.

Currently, "long bitcoin" is the second-most crowded trade in the financial market, according to Bank of America's latest monthly investor survey. But this doesn't indicate that all bitcoin holders are in it for the long haul.

In fact, a separate investor report out from Bank of America cast doubt on the "store of value" belief. Commodity strategist Francisco Blanch wrote that bitcoin's main utility was as a speculative asset. Looking at bitcoin's price history, he found, contrary to popular belief, bitcoin has mostly underperformed as an inflation hedge.

"Looking year by year, we find that bitcoin has been positively correlated with CPI inflation in five out of the nine past years, with the largest correlations in 2014 and 2018 ... However, when looking at correlations with inflation surprises since 2011, we find that bitcoin has among the lowest co-movements, lagging most asset classes such as commodities, TIPS, and EM FX in particular," the report read. (I was unable to find the original document.)

Some believe that bitcoin could grow into its role as an inflation hedge, almost by sheer will. That phenomenon is called the "Tinkerbell Effect," named after the fairy in "Peter Pan," where something may be more likely to occur if enough people believe it will happen.

Still, some think bitcoin's 12-year life is too short to make any solid predictions on how it will perform. Cam Harvey, senior adviser to Research Affiliates and a professor of finance at Duke University, told Bloomberg as much. He also said that even if bitcoin is viewed as a store of value, that couldn't tell you much about the short term. Gold has held its value for millennia, he said, but is prone to wild fluctuations.

Bitcoin, too, is volatile. It's for that reason some investors are loading up on the asset as a way to diversify their portfolios. That's the opinion of Deutsche Bank analyst Marion Laboure, who said bitcoin is not going anywhere but will likely remain unstable (primarily due to shallow liquidity.)

Instead of a gold alternative, Laboure imagines a world where bitcoin trades like Tesla stock. The comparison isn't out of balance, Tesla's sky-high valuation is based on the idea that electric vehicles will become standard. Bitcoin's price at least partially reflects the possibility it becomes a global monetary standard.

Powell has been praised for his ability to cut through "Fedspeak" and give a clear indication of how the regulator will respond to the economy. Whether inflation picks up or not, the policy seems clear. Meanwhile, bitcoin is many things to many people.

– D.K.

What are bitcoin and ether's value propositions for investors?

A new report by CoinDesk Research explains how the two most popular cryptocurrencies by market capitalization behave in the market, how their infrastructure differs, and what on-chain metrics say about them.

Download "Bitcoin + Ether: An Investor's Perspective" from the CoinDesk Research Hub.

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