Epic short squeeze on Bitcoin begins

28.07.21 03:13 AM By Stormrake

Welcome to the Stormrake Monthly Australian crypto market & education update.
For sophisticated investors who want to expand their crypto knowledge.
Written by Michael Milmeister with research from the Stormrake Team

* Those betting on Bitcoin to crash have been wiped out in 24hrs of carnage. Betting against Bitcoin is a dangerous game.

Summary:

If you are a busy investor that doesn't have time to read this whole newsletter here is a brief summary:

* B itcoin briefly slid below $30,000USD this month before staging a spectacular bounce to $40,000.
* $1 Billion USD in short positions were liquidated in 24hrs (and 700M of that in an hour) in a massive short squeeze reversing the long squeeze from June.
* Australia has embarrassed itself with a Tassie boy (Nugget's News - Alex Saunders) accused of borrowing and scamming money for betting on high margin products.
* Chinese crypto mining bans have been enforced with the network handling the hashrate drop well and decentralisation improving.
*I MF is unhappy with countries choosing to make Bitcoin their official currency
* Inflation rears its ugly head as predicted by our newsletter.

or read below for all the detail.

Short Squeeze as Inflation kicks up.

While Corona has ravaged the world in health effects or the economic and social effects of lockdowns, some governments have used it as a smokescreen for pushing through legislation while the population isn't looking. Vladimir Putin is now officially in charge until death, banning term limits on the presidency. Xi is also now president for life and has used the corona to completely destroy dissent to oppressive new laws in Hong Kong where protests have been squashed under stay at home mandates (I highly recommend an Australian book "The Last Correspondent" which I just finished). Now you might say it's not the same in the Western world but alas, our government has also been busy. Busy printing money. Australia has dramatically increased the money supply and so has the US. We have shown these graphs before and the devaluation of our money is significant.

* This is US Money supply from the official FRED site. The data feed has been discontinued from Feb21 - Must be too embarrassing.

But why does it impact me you say? Isn't it great that the government is "propping up" the economy?

Well, there are consequences of every policy decision. Printing money can lead to inflation. We hadn't seen it yet because the underlying economy was so sluggish and we have been measuring against other currencies in countries that have also been printing money.

But inevitably the chickens come home to roost and I can hear the clucking.

US Inflation (Monthly- Annualised):

* Official Inflation has risen in the US rapidly

Asset inflation is another thing altogether. Shares are going up but not if you adjust for the level of money printing. And now we have negative real earnings on equities for the first time since just after WW2:

As inflation increases, your dividends are not replacing value lost through purchasing power reduction. Even scarier than that is equities could get rerated based on a much higher inflation rate meaning prices could drop.

What's that all lead to? Well, if inflation is high and some asset classes have low net return then - the only way to grow your wealth is to invest in an asset class that exceeds the level of inflation. I think you know where this is going:

The short squeeze we saw this week could be nothing compared to what happens if investors start switching large parts of their portfolio from equities to Bitcoin. Bitcoin is up 250% year on year and 7,000% over the last 5 so inflation isn't really a threat but rather an opportunity. In a world where there are lots of dollars but a finite supply of Bitcoin I know where I would park my funds. Bitcoin is a wild ride with plenty of ups and downs but I'd rather a Party boat than a sinking ship.

Let's get into the report:

Video of the Month

A look at how one small town in one small country is able to change their payments from dollars to Bitcoin and how it can be scalable using the lightning network (explained in the education section below) and be made simple using Strike.

Markets

Bitcoin is currently trading around $39,250 USD up around 20% since our June report but still significantly lower than the ATH of almost $65,000 USD 3 months ago. Bitcoin has outperformed the other currencies recently sending Bitcoin dominance up nearing 50%.

* Top 8 Coins by Market Cap thanks to Coin Gecko

In the NEWS

1. IMF warns countries to avoid the Bitcoin Standard

What will the International Monetary Fund's (IMF's) role be if the world's nations adopt the Bitcoin Standard? Nothing. So, it is no surprise that the IMF has issued a statement advising countries to avoid adopting Bitcoin as its legal tender. El Salvador, the first country to do this in the world is ready for an IMF reaction and is already able to raise its own funds in Bitcoin.

2. Alex Saunders (Nugget's News) accused of fraud and failure

Tassie boy and youtuber Alex Saunders has been accused of having a gambling like addiction to leveraged trading and borrowing money from everyone he knows to bet on the market. Fraud is a strong possibility with Alex raising money for a new token offering - money that may well be already gone. Unfortunately there is no answer from the man himself as he has gone silent. Not a good look.

3. China mining bans decentralise Bitcoin

The Chinese mining ban, which has nothing to do with the environment and everything to do with the country being able to power its industry without Australian coal (Trade War) has had interesting effects.
1) The network has adjusted, bringing difficulty down and block times are ok.
2) The old question over Bitcoins true decentralisation has been answered. No longer does China hold the lion's share of Bitcoin mining, making the network even more decentralised and helping secure the value held.

Education - Lightning fast bitcoin transactions

Last episode, we shared the news that El Salvador is implementing bitcoin as a legal currency, and in order to achieve this, they’ll be utilising bitcoin’s lightning network, which has lately been growing at a tremendous rate.

Lightning network capacity

Source: https://bitcoinvisuals.com/ln-capacity

So, for today’s piece, let’s dive into lightning in a little more detail.

Lightning is a “layer 2” protocol as it uses a different network to transmit bitcoin value. To achieve this, bitcoin is locked into a channel on the base chain. (Think of this similar to escrow, or leaving your car parked by the valet). These channels are assembled into a network, so that value can traverse the network with near zero cost and instant speed. To use the valet analogy, lightning is akin to sending your valet token via messages on your phone except that any fraction of the escrowed bitcoin can be transacted.

Not only does this bring speed and low fees, but it also increases privacy because lightning transactions only need to be revealed to the network participants involved. Furthermore, by separating bitcoin as an “asset” to bitcoin as a “network”, other use cases become achievable such as instant, cheap, global remittances that achieve final settlement faster than any other method by orders of magnitude. For example Strike uses the lightning network to achieve cheap and instant global FX remittances.

Was all this too technical? Don’t worry. Apps will make all the technicalities disappear and users won’t need to care about how it works any more than how SMTP (email) works. Based on the surge in lightning channel capacity (see above chart), we expect many more lightning products, apps and solutions to be announced soon.

Lightning is here, it’s real, and it’s awesome.

Want to try it for yourself? Install Muun wallet on your phone, send me a lightning invoice to doug@stormrake.com and I’ll send you some sats!

Stock to Flow Valuation:

Current Long-Term Stock to Flow (S2F) Price: $93,721 USD vs Current Price - $39,250 USD. Market price is still the lowest, as compared to trend we have ever seen, suggesting that Bitcoin is hugely undervalued today. The S2F model also shows an increasing price to $103,000 USD. According to the efficient markets hypothesis, a rational investor would buy today and wait for the $103,000 USD price to materialise if you trusted the model. That’s why we rate Bitcoin as a BUY

Monthly Memes

Early Adopters are rewarded for holding a scarce asset.

Until next month, Happy Investing!

Stormrake Team

custody@stormrake.com

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