This week in Crypto
Bitcoin goes political.
As Bitcoin nudges its way into the political arena with El Salvador making history by becoming the first non-pariah state to accept Bitcoin as legal tender, there is a sense of renewed optimism and bullish sentiment in the market. This is a welcome break from months of sustained bearish news which started with the Elon Musk ego induced market sell off, followed by China mining bans, environmental and sustainability concerns and most recently the media coverage surrounding the fallout of the Colonial Pipeline cyber attack where hackers demanded BTC as payment for the pipeline they had taken hostage. Putting on the tin foil hat, at points in the past 6 weeks it has felt like there has been a coordinated attack on the crypto industry and there has even been the suggestion that the Colonial Pipeline attack was staged to highlight Bitcoin’s use case in nefarious activities. Interestingly, the Bitcoin in this hacking story was eventually seized by US law enforcement as the hackers kept private keys digitally on servers accessible via a court order… very poor opsec for supposedly professional hackers. Unsurprisingly the mainstream media, which seems hellbent on running with a negative bias on the industry, ran with stories that Bitcoin was destined to fail, as the state had proven it can eventually seize ransom money if criminals use Bitcoin. If this was actually the case, it would highlight that El Salvador’s new legal tender is not in fact non confiscatable, a crucial characteristic of the cryptocurrency. In summary, news coverage of the industry remains very poor in basic understanding of crypto and Bitcoin.
Bullish news this past week came in the form of MicroStrategy heading back into the credit markets with an initial $400m of senior secured notes for the purpose of buying more physical Bitcoin to add to the publicly traded company’s already substantial haul. This was the first bond offering for the company which follows the convertible notes issued earlier this year. The offering was increased to $500m after the company received ~$1.6bn in orders for the 6.15% yielding notes, showing that despite the recent sell off and damaging news coverage, Bitcoin linked products remain in very healthy demand within institutional investment circles. CEO Michael Saylor then went one step further this week by filing with the SEC for an equity offering of up to $1bn of common shares, again the proceeds would be used to purchase more Bitcoin for its new subsidiary MacroStrategy which will hold the Bitcoin exposure.
The leading story this week remains the passing of the landmark Bitcoin bill in El Salvador. As the gravity of what President Nayib Bukele has achieved is absorbed by the market, the inevitable push back from the institutional old guard started with the IMF stating the following rather opaque comment.
“Adoption of bitcoin as legal tender raises a number of macroeconomic, financial and legal issues that require very careful analysis,”
The full ramifications of the impact of El Salvador’s move into a decentralized digital economy are yet to play out but needless to say, governments around the world will be forced to now address Bitcoin as a bona fide legal tender which importantly brings into question how Bitcoin is taxed. The much-despised capital gains tax regimes that BTC is subjected to in most countries will now need to be reviewed and hopefully/ potentially revised to bring Bitcoin in line with tax rules aligned typically for FX. This would open the door to companies and individuals that hold FX reserves on balance sheets and in portfolios to use Bitcoin as a medium of exchange without incurring capital gains tax. We anticipate that failure to recognize El Salvador’s new legal tender could have dramatic diplomatic complications for commerce, tourism and El Salvadorian expats living abroad and although there will be push back, led by the US establishment, Bitcoin has entered a new level of adoption which cannot be ignored. This story has a long way to play out and will be fascinating to watch unfold, especially if the fervor of other predominantly LatAm political leaders who have lent support to Bukele’s Bitcoin bill leads to other sovereigns adopting the Bitcoin standard. Critical mass will be important to counter the opposition.
Senator Elizabeth Warren is one such critic and was very vocal last week with her stance on Bitcoin. Although there was no mention of El Salvador’s Bitcoin bill, the timing of the hearing she chaired on digital currencies shouldn’t go unnoticed, and should be seen as a political threat to other countries considering following El Salvador and rejecting USD hegemony.
Warren So, Professor Manand, I know you agree that our banking system is failing to live up to its responsibilities to the American people. But I want to make sure we get this clearly stated, do cryptocurrencies offer a safer alternative to the traditional banking system for consumers?
Professor Manand: No, Senator, absolutely not, the crypto market is rife with consumer abuses. You know in the traditional financial space we have regulations and consumer protections in place. Both don’t apply in the crypto markets so there are companies that offer crypto custody services that have lost customers’ money. There’s a lot of players that manipulate prices which lead ordinary users stuck paying high fees. It’s not a safe place to keep your money or to invest.
Warren But let me ask you, Professor Menand, do you think the environmental costs inflicted by cryptocurrencies like bitcoin are worth whatever potential benefits they provide?
Professor Manand: No. Absolutely not. Especially for countries like the United States where the benefits of crypto are largely illusory. They’re not a better means of payment. They undermine the government’s ability to maintain robust economic growth over time. They circumvent important safeguards that we’ve been talking about that prevent extortion and the environmental costs are very very large.
It is staggering that a Senator such as Warren, who has spent a career fighting the banking system and the inequality that is decimating the American middle class, can take advice from and agree with ‘experts’ that have such an aggressively negative stance on a technology that directly aligns with her political beliefs. Reading between the lines here, this has absolutely nothing to do with the safety of consumers or protecting investors from market abuse and has everything to do with maintaining USD dominance, power and control across the world. If Warren was true to her beliefs, she would take proper advice to understand and recognize that the crypto industry can potentially provide financial freedom from the powerful banks that she has been fighting for decades. Full link to the meeting is here. It is true that Bitcoin may not have obvious use cases in the USA but for El Salvador and remittances via the lightening network, the potential is enormous.
As Bitcoin becomes further embedded in the global financial system, perhaps the classical political system will also be disrupted. The potential result could see political parties and countries that cling onto centralized systems of governance and control where populations are subjected to the decision of the few vs political parties that embrace the era of digital transformation which will include decentralized financial system such as Bitcoin, DeFi and Decentralized Autonomous Organizations ‘DOAs’.
From a markets’ perspective, Bitcoin has rebounded from the range low of $30k and is trading around $39.5k at the time of writing. Momentum indicators on monthly and weekly timeframes are suggesting further downside but downside momentum does appear to be waning as the market absorbs this change in sentiment. Bitcoin dominance has shown considerable strength, as much of the bullish news is focused on the leading cryptocurrency and has currently rebounded to trade at ~46% and looking favorable to capture further share in the coming weeks with 50% being the next resistance. Our view that market cycles are potentially shortening is still held and even if we see a further breakdown below $30k in the coming weeks then we expect dips to be bought up and risk in the medium to long term is in our view upwards towards $100k per BTC.