🧘‍♂️ALERT: Big Crypto Mystery

Market Meditations | January 11, 2022

All Answers Revealed

Dear Meditators

Everywhere you turn, someone has something to say about inflation and how it impacts crypto. A lot of us think we understand what they are talking about. Test yourself by seeing how many of these questions you can answer:

  • What is the Federal Reserve and Why Does it Exist? 

  • What Is Inflation and How is it Impacted By Interest Rates? 

  • How Does Inflation Impact Crypto Prices? 

If you struggled to answer any of these questions (or even all of them! oops) then today’s Market Meditation is for you. 

If this newsletter helps you, be sure to share it on Twitter and tag us @MrktMeditations. Many people struggle with this topic and you can help them. 

⏰ In A Rush?

Our Market Meditations are longer format educational segments. Each letter features a Market Meditation which will deep dive and analyse a relevant crypto event, theme or tool. 

? Economics 101: Federal Reserve, Inflation & Crypto

The Federal Reserve System (FRS), often called simply the Fed, is the central bank of the United States. The reason the Fed exists is to fulfil its dual mandate. In other words, it has 2 primary goals or permissions: 

  1. Stable Prices. 

  2. Maximum Employment.

Sounds complicated but just means ensuring that the prices you pay for goods and services remain relatively stable over time and that everyone who wants a job in the U.S. economy can find one.

So, what tools does the Fed have at its disposal to achieve these 2 goals? It mainly comes down to controlling the interest rate. This is achieved through ‘money printing’. 

  • Print more money -> reduce interest rates

? TIP: ‘money printing’ is a bit misleading. There is no giant printer that the Fed uses to print dollar bills. Rather, if the Fed wants to inject $1 billion into the economy, it can simply buy $1 billion worth of Treasury bonds in the market by creating $1 billion of new money. The reason printing money reduces interest rates is because if the Fed buys bonds, prices are pushed higher and interest rates decrease.

Interest rates are made much more confusing than they need to be. Consider them to mean the cost of borrowing money and the benefit of saving money. You pay interest on your debts and you earn interest on your savings. 

It follows therefore that when interest rates are lower, it makes more sense to borrow money. It’s cheaper to borrow and there is less reward for saving. If more people are able to borrow money, the result is that consumers have more money to spend.

  • Print more money -> reduce interest rates -> more spending

This causes the economy to grow and inflation to increase. 

  • Print more money -> reduce interest rates -> more spending -> more inflation 

? TIP: as the demand for a particular good or service increases, the available supply decreases. When fewer items are available, consumers are willing to pay more to obtain the item. These are typical supply and demand dynamics. 

Inside The Mind of Institutional Investors

If you have understood so far, congratulations. You can now enter the mind of an institutional investor. This next step is critical for understanding how inflation impacts crypto. 

At the forefront of an institutional investor’s mind is exactly what we just worked through together. Print more money -> reduce interest rates -> more spending -> inflation. 

Institutional investors are forward thinking. As soon as the Fed announces they are printing more money, they fast forward to more inflation. It then becomes a question of hedging inflation risk. 

Know any good inflation hedges? Crypto and gold are examples.  

When it looks like inflation is set to pick up, institutional investors will turn to inflation hedge assets. This is what we saw in March 2020. 

⛳️ CASE STUDY: In March 2020, the World Health Organisation moved to declare COVID-19 an official pandemic. Unlike the 2008 Financial Recession, the Fed was quick to move. Interest rates were cut dramatically and quickly. Now you understand the dynamic of cutting interest rates (investors foreseeing more upcoming inflation) it is unsurprising that crypto demand picked up significantly from March 2020 onwards. 

Fast forward to today. The situation is now the reverse. It appears as though the economy is growing, employment is growing and generally, we are heading towards excess inflation. Meaning, rather than taking steps to increase the rate of growth in the economy, the Fed needs to figure out a way to suppress it. 

? TIP: the Fed’s acceptable inflation rate is around 2% or a bit lower. 

To suppress inflation, the Fed can use it’s other tool: increasing (rather than decreasing) interest rates. That’s what we are seeing today, with the recent forecast that there will be 4 interest rate hikes in 2022. So, mapping it out: 

  • Print less money -> increase interest rates -> less spending -> less inflation

And of course, less inflation means less need for inflation hedges which is why we might see inflation hedge assets like gold and crypto taking a hit. 

⚡️ Be Careful

Hopefully by now you have a grasp of the theory of what inflation is and how it impacts crypto. At this point, it feels prudent to point out that this is not an exact science. The arrows have been used to explain the theory, not to suggest that these things actually happen in that exact order. Rather, consider inflation dynamics as one piece of a puzzle where the overall picture is the future trajectory of crypto prices. 

To understand and start putting together other pieces of the puzzle, consider subscribing to the Market Meditations newsletter. We regularly take complex and complicated topics and break them down for our readers. The journey to financial freedom does not have to be difficult.

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? Not Nice To SEC You!

The SEC has just fined the trading platform tZERO for allegedly failing to properly declare information. But how much do they owe?

  1. $1,000,000

  2. $900,000

  3. $800,000

? On the Flip Site

Product. Competitor. Aggregator. 

It’s a familiar process, whether in crypto or other business. 

We’ve seen aggregators for exchanges, insurance and now…NFTs. Let’s take a look at a new one that has just raised $6.5 million in a seed round:

  • Flip plans to be an NFT marketplace aggregator – a sort of one-stop shop to find NFTs across multiple platforms and keep track of your portfolio.

  • Opensea currently dominates the NFT market but competition is expected to intensify as Coinbase, FTX and others launch their own platforms

  • The company, Flip Metrics, was founded by superstars Sam Hotchkiss and Jennifer Jacobs, and some other dude who goes by the name Ledger Status.

  • The seed round was led by Distributed Global and Chapter One, as well as a number of well-known Crypto Twitter celebrities, including PplPleasr, KeyboardMonkey, Larry Cermak and Gainzy.

  • At present they don’t plan to launch a token, citing regulatory risk and no established use case.

  • Right now the team is growing and the product is still being built, but there are plans to start releasing apps from Q1 this year. 

Regular readers may also remember we covered Samsung’s intended launch of an NFT marketplace in their smart TVs this year, so Flip’s social backers will be relying on networking to kick it off. For more information visit their Twitter page.

3. $800,000

That’s right! The SEC has fined tZERO $800,000 for allegedly failing to disclose key information such as sharing order information with its affiliate in Singapore, Blue Oceans Technologies. And not filing an amendment to Form ATS when it started disclosing that information, which is a legal requirement.  

Along with the fine a settlement agreement was reached. This agreement includes:

  • A cease and desist order from the SEC. 

  • Barring tZERO from breaking any further regulations.

  • And even tZERO neither admitting nor denying any allegations brought up (hence the “allegedly” wording earlier).

  • The SEC and tZERO have agreed to all elements of this proposal. 

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??‍♂️✍️ Stories in this newsletter were written by Isambard FA, Nick T., Max P., Kimia K., Ellen B. and Koroush AK. Graphics were produced by Ellen B.

Not financial or tax advice. The content in this newsletter is for informational purposes only. Nothing in this email is intended to serve as financial advice. We are not financial advisors. Every investment and trading move involves risk. Do your own research when making a decision. See our important security disclaimers here.

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