The Rake Review: March 2022

Welcome to the Stormrake Monthly Australian crypto market & education update.
For sophisticated investors who want to expand their crypto knowledge.



Summary:

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

* European war continues with both sides looking to Bitcoin for help
* Terra turns to Bitcoin for a reserve asset
* Israel's Largest Bank to offer Crypto 
* World's largest ever Bitcoin gathering in Miami next month
* Inflation rages on in the US while Australia releases Budget and Bitcoin leads the market upwards.

or Read below for all the detail.
 

The world is more uncertain while Bitcoin marches on...

March is almost over and what a crazy month it was in world history. At least that’s what kids will be saying 20 years from now when they read about the post 2019 period.

We quote Hemingway this month which seems apt as the War in Europe intensifies and inflation is at 40 year highs in the US. Meanwhile, there is not a shred of truth to be found in any political speak. 

The Rake Review predicted high inflation since its inception even when official inflation was zero, bonds had a historic rally and negative yields were possible. Why? Because the governments of the world were artificially avoiding consecutive recessions through massive monetary stimulus. Money Printing, artificially low rates, government spending and tax cuts are all inflationary. At least they were when I studied economics. 

This month however, Joe Biden told us “I’m sick of this stuff … The American people think the reason for inflation is the government spending more money. Simply. Not. True." 

This comment makes it to our memes section at the bottom of the newsletter due its sheer lunacy. Government spending is inflationary and is the main reason that prices are skyrocketing. Unfortunately, this is another comment in a series of bold lies. Nancy Pelosi told us this month that government spending is “Reducing the national debt” . The US government is now blaming Putin for something that started a year before the war in Europe.

If we take it back to the start of this inflation cycle, here is what the government was saying:

1. Inflation is not happening (Deny)
2. Inflation is “transitory” (Deny the seriousness)
3. Inflation is not transitory but evil corporations are to blame (Shift Blame)
4. Inflation is Putin’s fault (Shift blame to bigger villain)

In reality, inflation is complicated because it's always a combination of factors.  Covid-19 supply chains need to take at least some of the blame. There is no doubt higher transport costs and supply shortages are contributing to inflation. Here is a graph of stock of cars in the US:
 

In reality, the war will also have an impact on the cost of metals and oil. Here is the nickel price in London the other day. 


 

It has since come back down but markets are reacting to some shortages. On the global scale, Russia + Ukraine economy is not significant enough to account for a huge spike in US inflation. In fact, the war and COVID-19 is just the cherry on top. The seeds of inflation were sowed long before through historic monetary stimulus.

Regular readers have seen this graph before - it shows the staggering money printing that the US has done over the COVID-19 period.

Now you might say, “I’m Australian, things are great here. Our government knows that spending is inflationary.” Well, this month saw the early release of budget papers (or should I say election promises). We expected that while the RBA/FED hikes rates and reduces spending power to fight inflation, the government might offer stimulus, but even we didn’t expect this:

“Josh Frydenberg and Scott Morrison’s latest budget trolley is bulging with a fiscal blueprint that’s long on spending and very, very short on who will foot the final bill.” - Shane Wright (SMH)

They are actually going to give cash handouts to lower and middle income earners. No joke, we are fighting inflation by giving more money out! That’s not all though, there are billions of dollars in extra spending to win your vote. Here is a breakdown according to NAB.

Frydenberg said inflation was forecast to fall to 3.5% next fiscal year and to 2.5% in 2023-24 which is very hard to swallow. Either way we have a situation where there is stimulus at the same time as contractionary monetary policies. “Give with one hand and take with the other”. “Or is it better to say “Rob Peter to pay Paul” - often the stimulus isn’t going to the person that is paying extra mortgage repayments.

Where to from here? Well, inflation or recession has to happen. One of them at least. If Stagflation occurs where we continue to see rising inflation at the same time as job losses and economic decline, governments could go all the way to price controls. And if that happens you will see shortages because no one will produce products that are priced below cost. That’s a bit gloomy but how do you control inflation while avoiding an economic crash? I wouldn’t want to be the RBA governor.



 

But Bitcoin is flying!

Yes it is. This month we’ve seen a plethora of positive news from Terra picking up Bitcoin (discussed later), to institutions, banks and governments rolling into Bitcoin. 

This video shows Putin telling the world that the USD control over world money is over 

Russian USD reserves were frozen (confiscated) when the war began. While you might be supportive of Russia being slapped, this is an action that could eventually spell the end of USD hegemony. In the speech above, Putin says as much. No longer will Russia hold US reserves or trade in USD. China et al will be paying close attention and making a choice on whether to stay with the established order or work towards the next one. Saudi Arabia has already agreed to sell oil to China in Yuan (previously only USD was allowed). Would you hold money in a Bank that previously confiscated your holdings?



Seems like it's almost time to make a call on the Greenback as a global reserve currency?

Will the next one be a national currency at all? Or will it be a decentralised, digital, unconfiscatable currency that's not under anyone's sole control?

Markets

Prices are up across the board this month. Bitcoin is back up with a total market capitalization pushing $900 Billion USD. ETH is flying back above $3000 currently trading $3390 USD. Solana and Cardano swapped places both doubling in a month in price. Watch out for LUNA (9th) which could break into the top 8 next month. 

* Top 8 Coins by Market Cap thanks to Coin Gecko

In the NEWS

1. Luna changes policy to back value using BTC reserves. 

2. Israel's largest Bank offers crypto

3. Ethereum merge approaching?

Education: Using Bitcoin as a Reserve Asset

Here at Stormrake, we fully expect central banks to eventually adopt Bitcoin as a reserve asset and to see interesting politics and games occur when central banks vie to acquire more bitcoin than competing countries. 

 

And we’re starting to see a glimpse of this with the Terra (LUNA) platform in the process of buying $10B USD worth of Bitcoin. Thus far they have purchased $1.32B USD worth and this has been a significant factor in the recent Bitcoin price appreciation.

 

Why is Terra buying bitcoin?
 

Terra is using Bitcoin as a reserve asset for their “UST” stable coin and the very act of doing this, decreases the available supply of Bitcoin while increasing the price. It’s a flywheel. Terra buys Bitcoin causing Bitcoin to appreciate in price causing Terra reserves to have higher value. 

If one project is able to move the price this much, imagine how much nation states could move it. See Pierre Rochard’s Speculative Attack for how this might play out.
 

What is a Stablecoin & how does it work?
 

A stablecoin is a synthetic digital asset that takes advantage of some of the digital benefits of crypto while maintaining a peg to a traditional fiat currency. Most of them are pegged to a unit of account that many people are familiar with, the USD. The method of the peg differs by project but essentially there are three categories.

1. The issuing entity holds (or claims to hold) 1:1 dollars in a traditional bank.  (e.g. USDT - Tether)
2. The issuing entity holds collateral in a different form that exceeds the pegged value.  (e.g. DAI)
3. An algorithmic process that inflates/deflates the supply to remain parity to the peg.  (e.g. AMPL)

 

What do we think of Terra?
 

Personally, I’d prefer to hold Bitcoin but I have to admit that Terra’s strategy is a novel and effective way to peg real value into a crypto project. There is no such thing as a free lunch so we’re not comfortable that Terra’s Anchor project is offering 19.48% interest on deposits with a 3.86% borrow rate. Play at your own risk. 
 

Stock to Flow Valuation:

After the biggest deviation from the Stock to Flow we have ever seen, this month sees an upward blip and it seems the market price is on track to meet the modelled expectations in the next few months. 

Monthly Memes
 

 

Bitcoin is the new Bitcoin

The changing face of the official lie:

Until next month, Happy Investing!

Stormrake Team

custody@stormrake.com

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